Kosovo has aligned its transfer pricing regulations with the international standards developed under the OECD Transfer Pricing Guidelines (OECD Guidelines). Currently, the transfer pricing regulations are incorporated in the Corporate Income Tax Law (CITL) and Administrative Instruction MoF No.2/2017 On Transfer Pricing.
Arm’s Length Principle
In Kosovo, the arm’s length principle is implemented through Article 28, paragraph 2 of the ITL. It confirms that transactions between related parties are to be conducted under the same conditions as if they were between independent entities. If two companies set conditions in their financial or commercial dealings that are different from what independent companies would agree to, and this leads to one of them earning less profit, the lost profit can be added back to the company’s income and taxed accordingly.
Related Party Definition
In Kosovo, related parties are people or entities that have a special relationship that can influence the outcome of their business transactions. This includes situations where individuals are business partners, company directors, or in an employer-employee relationship. It also covers cases where one person owns or controls 50% or more of another company, or where both are controlled by the same third party. Relatives up to the third degree and companies that are part of the same multinational group are also considered related.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Kosovo are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
In Kosovo, the transfer pricing methods are in alignment with the OECD Guidelines; however, the law provides a hierarchy among them, with CUP, RPM, and CPM being preferred. By selection of the method is based on the “most appropriate” principle, based on factors such as the method’s strengths and weaknesses, how well it fits the nature of the transaction, the availability of reliable data, and the level of comparability between related and unrelated transactions.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Kosovo follows the OECD Guidelines and applies the comparability analysis outlined in Chapter III, as regulated in Circular 29/2013. This means the Kosovar tax authority focuses on determining the fair market value in related-party transactions, these transactions are compared to similar ones between independent parties.
The Tax Administration in Kosovo prefers using domestic comparables for transfer pricing analysis. If domestic data isn’t available, foreign comparables can be used, but differences in geography and other factors will be taken into consideration. The interquartile range is applied to determine the arm’s length range, and adjustments may be made to the median unless proven otherwise. Comparability adjustments are allowed only if they improve reliability and consider factors like accounting differences, capital structure, functions, and geographic markets.
Documentation Requirements
Transfer pricing documentation requirements in Kosovo include local criteria, rather than the OECD three-layer structure.
Taxpayers involved in related-party transactions of €300,000 or more must prepare transfer pricing documentation. This must be submitted to the tax authority within 30 days upon request. The documentation should include a summary of the taxpayer’s business, group structure, details of related-party transactions, the chosen transfer pricing method, and a comparability and economic analysis. It should also show how the arm’s length principle has been applied, and include any relevant agreements or adjustments. Documentation that follows the EU Code of Conduct on Transfer Pricing is accepted as meeting Kosovo’s requirements.
Kosovo has still not formally incorporated the CbC reporting as part of the transfer pricing documentation.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Kosovo does not have formal legislation implementing Advance Rulings and pricing agreements.
Mutual Agreement Program (MAP) is available under Kosovo’s tax treaties and can be requested by taxpayers if they believe they are being taxed in a way that violates the provisions of a double tax agreement (DTA). The MAP allows tax authorities from Kosovo and the relevant treaty partner countries to resolve the issue through mutual consultation. This process follows OECD standards and provides taxpayers with a way to avoid or eliminate double taxation resulting from cross-border disputes.
Penalties
Kosovo does not have special penalties for transfer pricing, so general tax penalties apply to related-party transactions as well. If a taxpayer fails to submit, prepare, or provide the required transfer pricing documentation, penalties depend on the business’s turnover. Additionally, if the “notice of controlled transactions” is not filed on time or contains errors, a fixed penalty of €125 may apply.
Taxation at a Glance
Taxes in Kosovo are levied at the national level, and they include the personal income tax, corporate income tax, value-added tax, and excise tax. Sources for the taxation policies include the Law on Corporate Income Tax, Personal Income Tax, and Law on Tax Administration and Procedures.
The official name of the Kosovar tax authority is the Tax Administration of Kosovo, and it is responsible for the administration, enforcement, and collection of taxes. The official currency is the Euro (EUR).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 10% |
VAT | 18% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 10% |
Withholding tax on royalties to non-residents | 10% |
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