Overview of transfer pricing entities

For transfer pricing purposes, one of the most important things is to define entities/companies based on their characterisation. Entities can be categorised according to the activity they carry out and within that activity, what functions they have and what risks they bear. The number of functions and the amount of risk of an entity is an indication on the basis of which the entity should be remunerated for the activity it performs.

This material provides the most basic overview of the various manufacturing companies as well as the various distribution/sales companies. The division and definition of companies is for information purposes only and there are overlaps in the different types of companies in real business. These overlaps should also be taken into account by the tax administrator when assessing individual companies in the context of transfer pricing control .

Companies can be divided into two basic groups, namely manufacturers and distributors.

Manufacturers

Fully-fledged manufacturer

• The Company owns intangible assets such as. patents, industrial know-how and designs
• The Company purchases goods and semi-finished goods on its own account and holds stocks of both raw and finished goods and bears the associated risks
• The Company is subject to risks associated with the sale of goods
• The company invests in innovation, machinery and equipment
• The company is therefore entitled to the profit earned, less compensation for routine functions

Contract manufacturer

• The company owns the plant and machinery and employs the workforce
• Produces goods for the parent company
• The Company does not have risks associated with holding or selling finished products; these risks are transferred to the principal
• The company bears the risk associated with the storage of the products until they are taken over by the principal
• The company is entitled to profit compensation
• The principal guarantees the purchase of all goods produced, if not he should be obliged to indemnify for the damage so incurred

Manufacturer “work in wages”

• The legal title to the material is held by the principal throughout the production process
• The principal buys materials and goods, even though these materials and goods go physically directly to the company
• The principal bears all risks associated with the storage and sale of the goods
• The company is entitled to compensation for the work carried out

Distributors

Full-fledged distributor

• A full-fledged distributor sells products wholesale or retail
• It buys these products, holds them as stock and then sells them to customers
• These activities may also involve marketing and promotion activities, respectively. other services such as transport, servicing, engineering, etc.
• A full distributor bears the risks associated with the purchase, possession and sale of goods
• Other risks include warehousing and non-sale risks, warranty risks, liquidity risks, operational and competitive risks, market risk and others
• Full-fledged distributors may also own marketing intangible assets such as trademarks

Commissioner

• He represents the principal
• Concludes contracts on its own behalf and issues invoices to customers
• Legal title to the goods passes from the principal to the customer
• The commission agent is entitled to a percentage of the sales or a percentage of his costs as profit
• The commission agent acts in his own name as agent of the principal, but the risk is on the principal’s side
• The goods remain the property of the principal until they are taken over by the customer
• The functions and risks associated with the purchase and storage of goods and the credit risk on the sale of goods are borne by the principal

Distributor with limited risk

• Under a contract between the distributor and the principal, the principal compensates the distributor for certain costs
• The main functions and risks are on the side of the principal
• The risks associated with the goods are reimbursed by the principal

Agent

• Arranges business with customers / brokers the opportunity
• The contractual terms are subsequently agreed without his intervention between the principal and the customer
• Does not take legal title to the goods
• Entitled to routine compensation

Author of the article: Mgr. Andrej Choma, transfer pricing specialist