The rules on transfer price documentation are applicable for cross-border transactions between associated companies. The term ‘transaction’ is given a broad interpretation and covers, for example, the sale and purchase of tangible and intangible goods, services, renting and leasing, cost-sharing, and also any kind of financing measure.

A Finnish company and a foreign company will be considered to be associated if one company controls the other company or if both companies are controlled by a third party.

In this context, one company is considered to control the other company if it (directly or indirectly):

In addition to associated companies, the documentation obligations also apply to a foreign company’s transactions with its Finnish branch or permanent establishment.

The formal obligations relating to transfer pricing documentation apply only to large companies. Small and medium-sized companies are exempt from these obligations. A company including its associated companies is considered a large company if it:

In calculating these thresholds, associated companies must also be taken into account. In this respect, the turnover, assets and employees of controlling or controlled companies always have to be added in full to the corresponding figures for the Finnish company. If one company does not control the other but holds at least 25% of the capital or voting rights in it, the figures of one company will be added to those of the other company in proportion to the share of capital or voting rights (whichever is bigger).

As a result, small or medium-sized Finnish subsidiaries may also be obliged to submit a formal transfer pricing document if they belong to a larger group.

The written transfer pricing documentation must comprise the following items:

In addition, if the volume of transactions between the companies exceeds €500,000 during the tax year, the following information must also be provided:

The above-listed items are minimum requirements which are intended to provide the tax authorities with sufficient information in order to decide whether a closer inspection of the company’s transfer pricing is necessary. The tax authorities can, and in many cases will, request additional clarification of particular issues. In order to avoid receiving extensive additional inquiries, the initial documentation should not necessarily be limited to the bare essentials but should provide a comprehensive overview of the transactions carried out between the companies concerned and the transfer pricing method applied.

There is no general deadline for preparing the documentation. Upon request, the company has to submit the documentation to the tax authorities within 60 days. However, the documentation concerning a particular tax year has to be submitted at the earliest 6 months after the end of the tax year.

It is nevertheless strongly advisable to retain up-to date documentation, which can be used as the basis for the bookkeeping of the Finnish company and its associated companies throughout the tax year. Within international enterprises, only back-to-back bookkeeping which is simultaneously applied by all group members ensures that any deductions based on transfer pricing will be taken into consideration for the tax year concerned and that certain amounts will not be taxed for the Finnish company and the foreign associate(s). In Finland it is, for example, not permissible to make an adjustment to the company’s accounts profit resulting from the application of the arm’s length principle merely in the tax return, but such adjustment has to be based on corresponding entries in the bookkeeping for the relevant tax year.

Finnish tax law provides for specific documentation-related penalties for non-compliance with the obligations relating to transfer pricing documentation. The maximum penalty is €25,000.

However, the consequences of tax adjustments that can be made if it later transpires (for example, in connection with a tax audit) that the company has not applied transfer pricing in accordance with the arm’s length principle in its dealings with associated companies can be economically more damaging than the specific documentation-related penalties that might be imposed.

If according to the arm’s lengths principle the income of the Finnish branch or subsidiary would have been higher than the amount declared in the tax returns, the tax authority will first of all assess additional complementary tax. This usually means that tax on a certain stream of income will be paid twice in different countries, since the income stream in question will usually have been declared as taxable income by the foreign (parent) company. Whether the foreign company has the right to request retrospective tax adjustment in its country of residence depends on the applicable national provisions and on whether the applicable time limit has already passed.

Furthermore, the tax authorities may impose a punitive tax increase of up to 30% of the undeclared income. The punitive tax increase is applicable regardless of whether the company actually has to pay tax. If a company has generated a negative result in a certain tax year, the application of the arm’s length principle may not always change that fact but may sometimes only result in the losses being smaller than originally declared. In this case, no (regular) income tax has to be paid but the tax authorities can nevertheless levy punitive tax on the difference between the declared and actual loss.

In addition, default interest (currently 11.5%) is added if the tax has to be adjusted retrospectively due to initially incomplete or incorrect information being given by the tax payer.

The obligation to prepare transfer pricing documentation is not a Finnish peculiarity since many other European countries demand comparable documentation to varying extents. In order to standardise the documentation on the pricing of cross-border intra-group transactions that multinational enterprises must provide to the tax authorities, the EU Commission has adopted a Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (EUTPD). The EUTPD consists of two parts:

1) one so-called ‘masterfile’, which contains standardised information relevant for all EU members of the group (such as a general description of the business and the business strategy, a general description of the transactions involving associated enterprises in the EU and the enterprise's transfer pricing policy);

2) for each Member State involved, country-specific documentation containing information relevant to that country only (such as volume of transactions with that country, contractual agreements and particular transfer pricing methods used).

The Code is not binding on Member States and the application of the EUTPD approach is optional for enterprises. However, in Finland for example, the underlying principles have been taken into consideration in the national tax legislation. Therefore, transfer pricing documentation prepared in accordance with the EUTPD approach will usually also satisfy the national Finnish requirements.