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Transfer pricing aspects of intragroup service transactions

published on 15 July 2025 | reading time approx. 20 minutes

Intragroup services – services provided to or received from related parties – are among the most scrutinized areas in transfer pricing audits conducted by tax authorities. Companies that fail to respond credibly and comprehensively to tax authority inquiries regarding intragroup services often face (even substantial) corporate income tax adjustments and penalties.

To mitigate these risks, it is important to understand the main issues and implement appropriate solutions

1. Failure to substantiate the benefit received by the company – Group companies often fail to substantiate the necessity of intragroup services for their business activities during tax authority audits. This is particularly common in the case of general support services, such as management, consultation or business support services. If the company is not able to justify the benefit received, the tax authority may classify the services as non-deductible expenses, thereby increasing the company’s taxable base. In some cases, even the full amount of service charge may be added to the taxable income, resulting in a more significant correction than a typical transfer pricing adjustment.

Solution: Document how the service provided benefits your company and why it is necessary for the company’s operations and/or efficiency. This could include cost savings, access to unique sales channels, improved service quality and efficiency, etc. When documenting the benefits received, it is important to rely on reliable and verifiable information.

2. Incomplete or non-existent intragroup service contracts – Companies often enter intragroup service contracts that are too superficial, lacking essential details (or in some cases they do not conclude contracts at all). This can lead to ambiguities regarding the specifics of service provision, attracting additional scrutiny from tax authorities.

Solution: Ensure that intragroup service agreement includes all key terms, such as - cost allocation principles, purpose and functions of the services, clear pricing methodology and calculation of service fees, etc.

3. Inadequate supporting documentation – although many companies will only be able to provide an invoice or at best a mutually signed contract, this is often insufficient to confirm that the service has actually been rendered. Similar to the failure to substantiate the benefit received, failing to prove that the service was actually rendered may lead the tax administration to classify the costs as non-deductible and include them in the corporate income tax base.

Solution: Keep an audit trail of emails and messages (also from other communication platforms), timesheets of employees involved in the service provision, cost estimates, deliverables and referrals made in the context of the intragroup services, etc. as evidence of actual provision.

4. Service charges are not aligned with the arm’s length principle – either the service charge received is too high or too low. In either case, the tax authority may conclude that the company has artificially reduced its taxable base, in which case it can perform a transfer pricing adjustment (increasing the taxable base and charging corporate income tax on the adjustment, respectively).

Solution: Ensure that service charges reflect reasonable cost allocation principles and that the remuneration is consistent with the nature of the service (and is in line with the price that an independent party would charge for similar services).

In recent years, the number of court cases concerning intragroup service transactions in Latvia has significantly increased. Failure to properly address the transfer pricing aspects of such transactions exposes companies to significant tax, financial and reputational risks. Proper planning, documentation and ongoing compliance are essential.

If you need support, feel free to contact our transfer pricing and tax specialists. We provide support with

drafting intragroup service agreements;
preparing legal documentation;
preparing transfer pricing documentation;
determining arm's length remuneration, profit margins and mark-ups;
advising on tax and transfer pricing compliance matters.

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