Transfer prices broadly refers to all the terms and conditions that apply to transactions between affiliates established in different countries. In a narrower sense, these are the internal prices that related companies invoice to each other when exchanging services and goods. Depending on the complexity of the organizational structure of companies, some companies only have internal customers, while others buy their resources inside and outside the group and distribute end products to the external market (outside the group).
For this reason, taxpayers who have affiliates that pay income taxes at different rates are exempt from tax (for whatever reason) or have affiliates that pay taxes in other tax jurisdictions (at potentially lower rates), can consolidate more net income by transferring the income tax liability to a company that does not pay it or pays it at a lower rate.
However, there are legal provisions under which the Tax Administration has the legal basis to ensure that every Croatian taxpayer has paid as much corporate income tax in Croatia as he would have paid if he had had relationships with unrelated entities exclusively. The provisions of the law on corporate income tax define that business relationships between related parties will be recognized only if the taxpayer has available transfer prices study and, at the request of the tax inspector, submits this study. For this reason, it is recommended that a study be carried out before the conclusion of the price of services or related goods towards the affiliates, and that the invoicing be carried out in accordance with the market prices determined according to the study.