Controlled Transactions Report | Why the arm’s length principle also applies to transactions between Latvian companies

There is a persistent belief among entrepreneurs that transfer pricing regulations primarily apply to international transactions, while transactions between Latvian companies are perceived as low-risk from the outset. Although there is some basis for this view, in practice it often leads to an incomplete understanding of the arm’s length principle and erroneous conclusions regarding the scope of obligations.

It is true that the focus of classic transfer pricing regulation is on international transactions between related parties, where there is a risk of profit shifting to other tax jurisdictions. However, this does not mean that transactions between Latvian group companies are free from requirements regarding the justification of prices.

Transfer pricing and the arm’s length principle: one goal, different instruments

In cross-border transactions, the legislator provides for detailed transfer pricing documentation requirements, including the submission of a controlled transactions report in a structured data format. In this case, the SRS (State Revenue Service) receives comparable, analyzable data on prices, profit levels, methods used, and the tested party, which allows for comparative analysis at a systemic level.

In contrast, for transactions between Latvian companies, the main regulatory pillar is the market price or arm’s length principle. This means that prices in domestic transactions cannot be arbitrary—they must correspond to what unrelated companies would apply under similar circumstances. This requirement is not just “on paper” but is practically applicable, and failure to comply can create tax risks even if all parties to the transaction are Latvian taxpayers.

Regulatory framework for domestic transactions

The obligation to justify the compliance of transactions with market prices stems from Cabinet Regulation No. 677, “Regulations for the Application of the Provisions of the Corporate Income Tax Law.” These stipulate that a taxpayer must be able to prove the market value of transactions regardless of the country of residence of the transaction partner.

In practice, this means that even in cases where a company is not obliged to prepare transfer pricing documentation in its classic sense, the obligation remains to prepare an economic justification explaining the logic of price formation and its compliance with market conditions. It is not the obligation that changes, but rather the form and degree of detail of the required information.

Why transactions between Latvian companies no longer automatically mean low tax risk

For a long time, the dominant approach in practice was that domestic transactions were not a priority for control because the total tax base in the country does not change. However, the perspective of the tax administration is gradually shifting. The SRS is increasingly focusing on whether profits within a group are distributed according to the actual economic contribution of each company.

If profits are concentrated in one Latvian group company while another incurs losses or minimal returns, the SRS may reasonably analyze whether this situation is consistent with market conditions. Here, the decisive factor is not whether the transaction is international, but whether the logic of price formation is economically justified.

What this means in practice – the era of structured data

This issue becomes particularly relevant given the overall trend toward the use of structured data in tax administration. In the field of transfer pricing, this is already clearly visible—the controlled transactions report provides the SRS with access to structured, comparable data that can be analyzed automatically.

A similar trend is gradually emerging in domestic transactions. The introduction of electronic invoicing will mean that transactions between Latvian companies will also increasingly be available in a structured format. This, in turn, significantly reduces the “gray area” where pricing logic could previously go unnoticed and increases the risk that discrepancies will be identified without a specific additional request from the SRS.

In these circumstances, it is no longer enough to assume that “so far, no one has asked.” In the case of both transfer pricing and domestic transactions, the ability to explain the logic of price formation in a timely manner, before questions are asked, is becoming increasingly important.

Practical conclusion for companies

Transactions between Latvian group companies do not require the same formal transfer pricing documentation as international transactions, but they do require a clear, logical, and economically sound approach to pricing. This is precisely where a professional outside perspective is most often needed—to understand what level of justification is sufficient and defensible in a given situation.

Timely evaluation of transactions allows companies not only to mitigate tax risks but also to organize internal settlements so that they correspond to both business reality and the ever-increasing data analytics capabilities in tax administration.