Why Transfer Pricing Is a Core Issue for Gambling Holdings
A gambling business typically operates through a holding structure: one company holds the permit, another provides the technology platform, a third runs marketing, and a fourth manages the retail network of cash desks. Between these companies, contracts for services, licences, broadcasting rights and brand use are concluded daily, and it is precisely these intra-group transactions that the transfer pricing regime of Articles 126, 127, 128 and 129 of the Georgian Tax Code targets. Where the price between group companies differs from the price independent parties would have agreed, the tax authority gains a lawful basis to adjust taxable profit. For a gambling holding, whose margins attract heightened attention, this is not a theoretical risk but a standing compliance agenda.
This page explains how the concept of related persons is determined, what the arm’s length principle requires, which methods exist for pricing international controlled transactions, and how documentation should be organised so that the group can present a justification when the authority issues a request.
Related Persons and the Scope of Controlled Transactions
Under Article 126 of the Tax Code, two persons are related if one person participates directly or indirectly in the management, control or capital of the other, or if the same persons participate directly or indirectly in the management, control or capital of two persons. A person is deemed to participate in the management, control or capital of an enterprise if it directly or indirectly owns more than 50 percent of the enterprise or practically exercises control over the entrepreneurial decisions of the enterprise. Persons who are not related are independent.
The decisive emphasis is the following: any transaction between related persons is controlled, while any transaction between independent persons is independent. This means that inside a holding there is no “minor” or “technical” deal — both a management fee and the service charge of a gaming platform are controlled transactions and must be priced on arm’s length terms where they are international in character. The article also defines margin as a profitability coefficient computed from indicators such as purchases, sales, expenses and assets, and the condition of a transaction as the financial or other indicator used when applying an assessment method.
The Arm’s Length Principle for International Controlled Transactions
Under Article 127, where a Georgian enterprise carries out one or more financial or commercial transactions with a related enterprise that is not a Georgian enterprise, each such enterprise determines its taxable profit in accordance with the arm’s length principle. Taxable profit is compliant where the conditions of the transaction do not differ from the conditions that independent enterprises would have agreed in a comparable situation when conducting comparable transactions.
Where the established conditions do not conform to the arm’s length principle, any amount of profit that would have arisen for any of the enterprises had the conditions conformed — but did not arise because of the non-conformity — may be included in that enterprise’s taxable profit and taxed accordingly. In assessing comparability, material differences must be taken into account, and a reasonably exact correction of the financial indicator of the independent transaction may be made to eliminate their effect. The article also extends to transactions with residents of preferential-tax countries regardless of whether the parties are related, and such a transaction is treated as controlled; the same regime applies to an enterprise’s transactions with its own permanent establishment. The criteria upon whose satisfaction a transaction price is treated as a market price are determined by the Minister of Finance of Georgia.
Assessment Methods and Their Selection
Article 128 provides for five methods of assessing international controlled transactions. The first is the comparable uncontrolled price method, under which the price set on goods and services transferred in a controlled transaction is compared with the price of a comparable independent transaction. The second is the resale price method, comparing the margin obtained on reselling purchased goods with the margin of comparable independent resales. The third is the cost plus method, which compares the mark-up applied to directly and indirectly incurred costs in the controlled transaction with the mark-up of a comparable independent transaction.
The fourth is the transactional net margin method: the net profit margin received by an enterprise in relation to a relevant indicator — expenses, sales or assets — is compared with the net margin of a comparable independent transaction in relation to the same indicator. The fifth is the profit split method, under which each participating enterprise is attributed the share of profit or loss that an independent enterprise would presumably have received in a comparable independent transaction. The Code is clear that the price conforming to the arm’s length principle is determined by the method most appropriate to the circumstances of the specific transaction — so the choice of method is itself a matter of justification, not a formality.
Documentation, Corresponding Adjustments and Audit
Under Article 129, upon a request of the tax authority the taxpayer is obliged to explain on what basis it considers the profit received to be compliant with the arm’s length principle, and is entitled to submit sufficient information and analysis to support that explanation and to demonstrate the conformity of its transactions with related persons. Intra-group reporting exists precisely for this moment: it shows who receives what service from whom, at what price, and why that price is a market price.
The special provisions also regulate cross-border corrections: where the tax authority of another country has made an adjustment as a result of which profit already taxed in Georgia was taxed in that country, and a double taxation treaty exists with that country, the Georgian tax authority — upon the request of the taxpayer — verifies whether the adjustment conforms to the arm’s length principle and, if it does, makes the corresponding correction of the tax amount. The rules on applying the methods, the list of documents, information sources on market prices and other procedural matters are determined by an order of the Minister of Finance, and the decision to examine international controlled transactions is taken by the Head of the Revenue Service.
Frequently Asked Questions
When are holding companies treated as related persons?
When one person participates directly or indirectly in the management, control or capital of another — including through ownership of more than 50 percent or practical control over entrepreneurial decisions — or when the same persons participate in both enterprises. Any transaction between such persons is controlled.
Which method should be used for an intra-group transaction?
The Tax Code recognises the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods. The price is determined by the method most appropriate to the specific transaction, so the choice must be justified in the documentation.
What happens if a group company’s profit is adjusted abroad?
Where a double taxation treaty exists and the same profit was already taxed in Georgia, the Georgian authority, at the taxpayer’s request, verifies the foreign adjustment against the arm’s length principle and, where it conforms, makes a corresponding correction.
Who decides to start an examination of controlled transactions?
The decision is taken by the Head of the Revenue Service, while the procedural rules — methods, document lists, deadlines — are established by order of the Minister of Finance.
How We Help on Legal.ge
We will build the transfer pricing model for your holding’s intra-group contracts, select the most appropriate assessment method and prepare documentation that can be submitted to the tax authority to demonstrate the arm’s length character of your prices. We also assist with foreign adjustments and with preparing for an examination. Contact us on Legal.ge for an assessment of your group structure.