Transfer pricing in Kosovo

What transfer pricing is

When two independent companies trade with each other, the price is set by opposing interests: the seller wants as much as possible, the buyer offers as little as possible. When two related companies trade — a parent with its branch, or two companies with the same owner — that pressure does not exist. The price can be set freely, and profit can be shifted from one country to another along with it.

This is precisely why Article 28 of Law No. 06/L-105 on Corporate Income Tax requires the price between related parties to be the one that would have been reached between independent parties — the open market value, or as it is known internationally, the arm's length principle. If the price deviates, taxable profit in Kosovo is adjusted as though the transaction had been carried out at a market price.

A concrete example

An SH.P.K. (LLC) in Kosovo buys goods from its parent company abroad at a price of 100 units, while the same goods, in the same quantity, are available on the market for 70 units. The difference of 30 units is not a real cost — it is profit shifted out of Kosovo, and the Kosovar company pays less tax. On audit, TAK can adjust the price to market value and re-tax the difference.

The same logic applies when money leaves as a service rather than as goods: a management fee paid to a sister company abroad, a royalty for the group's brand or software, or interest on an intra-group loan. TAK's question remains the same: would an independent party have paid this amount, for the same service, on the same terms? The answer has to be documented, not assumed.

Who is affected by the transfer pricing rules

Every taxpayer in Kosovo that takes part in controlled transactions is affected, meaning any transaction with a related party — regardless of the size of the business and regardless of whether the other party is abroad or inside Kosovo.

Related parties are those between whom there is a relationship of control or common ownership — through shares, voting rights, common management or decisive influence over business decisions. The typical cases in Kosovo are these:

• A branch or subsidiary of a regional group, with the parent in Albania, Turkey, Switzerland, Germany or elsewhere in the region.
• Two or more companies in Kosovo with the same owner, or with owners from the same family, invoicing one another.
• Loans between related companies — at a very high rate of interest, at a very low rate, or with no interest at all.
• Management fees and shared head-office costs.
• Licences, trademarks, software and royalties paid to the parent company.
• Intra-group services: accounting, IT, marketing, human resources, technical support.
• The sale or transfer of equipment, real estate and other assets between related companies.

If even a single invoice of this kind exists in your books, you have controlled transactions — and with them, the obligation set out below.

The obligation: the documentation must be ready in advance

Paragraph 5 of Article 28 is clear: all taxpayers that take part in controlled transactions are obliged to prepare transfer pricing documentation. This documentation is not filed automatically with the annual return — it is submitted only at TAK's request.

Here lies the risk that many businesses underestimate. The request usually arrives during a tax audit, with a short deadline for submission. A serious transfer pricing analysis takes weeks of work — gathering data, functional analysis and searching for comparable transactions — and that work cannot be done within such a deadline.

So the practical rule is this: the documentation is prepared for the tax year, not for the audit. Without it, the taxpayer is left without an argument — the profit adjustment is made on TAK's own assessment, with interest and penalties on the difference.

Transfer pricing methods under Article 28

The law recognises five methods — three traditional transaction methods and two profit methods. There is no universal method: the one chosen is the one that suits the nature of the transaction and the data actually available.

The choice of method is not a matter of preference. Under the law, it is made by taking into account the strengths and weaknesses of each method, the nature of the controlled transaction — determined through an analysis of the functions, assets and risks assumed by each party — the availability of reliable information and the degree of comparability. The reasoning behind the choice is a mandatory part of the documentation. Further details of implementation are governed by a sub-legal act of the Minister.

What we do

We build the file from the ground up and keep it up to date, so that a request from TAK does not catch you unprepared.

• Identifying controlled transactions — we go through the accounting records and the ownership structure to establish the related parties and the flows between them.
• Functional analysis — we document what functions each party performs, what assets it uses and which risks it actually bears.
• Selecting and justifying the method — we choose the most appropriate of the five methods and set out the reasoning in writing, as the law requires.
• Searching for comparable data — we gather prices, margins and indicators from transactions and independent companies, as a point of reference.
• Drafting the documentation — a file structured in line with international practice, with the general part for the group (master file) and the local part for the Kosovar company (local file).
• Support during a TAK audit — we prepare the response, accompany you through the correspondence and defend the methodology applied.
• Adjustments and double taxation — where another country makes an adjustment that leads to double taxation and an agreement with Kosovo is in place, we prepare the request for a corresponding adjustment.
• Intra-group pricing policy — we help you set the price correctly from the outset, so that an adjustment never becomes necessary.

The work is carried out mainly online, with a shared file and periodic meetings, just as with accounting. If the company is also subject to an audit of the financial statements, the file is prepared in parallel using the same data.