Transfer pricing is a method of setting prices in transactions between members of a group of companies or other interdependent entities used to reduce the tax burden. The transfer price is the price set in transactions between these companies as a result of such pricing.

The transfer price is the price set in business transactions between different departments of a single company or between members of a single group of companies. The activity of setting prices between such companies is called transfer pricing. Transfer prices allow you to redistribute the total profit of a group of individuals in favour of individuals located in states with lower taxes. This is the simplest and most common scheme for minimizing taxes paid.

Price is a crucial component when determining the income taxable base. Non-integrated market participants (counterparties) are at a certain distance from each other (at arm’s length) and make transactions among themselves at prices formed under the influence of the market. This is the essence of the ‘arm’s length’ principle.

Transfer pricing is the setting of transfer prices that are different from market pricing, for deals between interdependent persons, which usually belonging to the same holding (group of companies).