The Arm's Length Violations That Trigger DPT Transfer Pricing Adjustments: Management Fees, Royalties, and Shareholder Loans Under Scrutiny

Transfer pricing refers to the prices charged between related parties — companies under common ownership or control — for goods, services, loans, intellectual property licences, and other transactions. When a parent company in Germany sells raw materials to its Albanian subsidiary, or when an Albanian Sh.p.k. pays management fees to a UAE holding company, those prices directly affect how much profit is reported and taxed in each country.

Albania's tax authority (Drejtoria e Përgjithshme e Tatimeve — DPT) is increasingly focused on transfer pricing as Albanian subsidiaries of foreign groups grow in number. The DPT has the power to re-characterise or re-price related-party transactions that do not reflect the arm's length principle — the standard under which transactions between unrelated parties dealing independently in comparable circumstances would be priced.

Albanian transfer pricing rules are codified in the Law on Income Tax (Law No. 29/2023) and subsequent DPT guidance. Albania's rules broadly follow OECD Guidelines, which are used as an interpretive reference even though Albania is not an OECD member.

Albanian tax law defines related parties broadly. Two persons (natural or legal) are related if one directly or indirectly controls the other, or if both are under common control of a third party. Specific indicators of control include:

• Direct or indirect ownership of 50% or more of shares or voting rights
• The right to appoint or remove the majority of the board of directors
• Family relationships (spouse, children, parents, siblings) between individual shareholders
• Common directors or management
• Creditor relationships where one party finances 50% or more of the other's operations

The most common related-party scenarios for Albania are: an Albanian Sh.p.k. wholly owned by a foreign parent; an Albanian company making management fee or royalty payments to a foreign group entity; an Albanian company with a shareholder loan to its parent or sister company; and two Albanian companies under common Albanian ownership.

Related-party transactions must be priced as if the parties were independent and dealing at arm's length. The DPT will adjust taxable profit upward if it determines that related-party pricing has shifted profit away from Albania.

The approved transfer pricing methods (mirroring OECD Guidelines) are:

• Comparable Uncontrolled Price (CUP): Compare the related-party price to prices in comparable uncontrolled transactions. The most direct method where comparable data exists.
• Resale Price Method (RPM): Used for distributors — start with the resale price and subtract a standard gross margin.
• Cost Plus Method (CPM): Used for manufacturers and service providers — add an appropriate mark-up to the cost base.
• Transactional Net Margin Method (TNMM): Compares net profit margins to those earned by comparable independent companies. The most commonly used method in practice due to data availability.
• Profit Split Method: Splits combined profit between related parties based on the relative value of their contributions. Used for highly integrated transactions.

The taxpayer may choose the method best suited to the transaction but must be able to justify the selection. The DPT may challenge the chosen method if it concludes another method would produce a more reliable result.

Albania requires taxpayers with related-party transactions to maintain transfer pricing documentation that supports the arm's length pricing of those transactions. While Albania has not yet adopted formal Country-by-Country Reporting requirements, the DPT expects documentation to include:

• Description of the group structure: An overview of the multinational group, ownership structure, and business activities.
• Description of the Albanian entity: Its functions, assets employed, and risks assumed (the functional analysis).
• Description of the controlled transactions: Nature, volume, and pricing of each related-party transaction type.
• Benchmarking analysis: Comparable uncontrolled transactions or companies (sourced from commercial databases such as Bureau van Dijk Orbis) supporting the chosen transfer price or profit margin.
• Summary of intercompany agreements: Copies or summaries of contracts governing management fees, royalties, loans, and similar arrangements.

Documentation does not need to be filed with the annual tax return but must be made available to the DPT on request, typically within 30 days. During a tax audit, failure to produce documentation shifts scrutiny and often leads to deeper investigation.

Three transaction types draw the most DPT scrutiny in practice:

Management fees: Payments by an Albanian entity to a foreign parent for shared services (HQ overhead, IT, HR, finance) are deductible only if the services are genuinely performed and the fee reflects a reasonable cost-plus mark-up. The DPT routinely challenges management fees where: no written agreement exists; the services cannot be specifically identified; the fee is a fixed percentage of Albanian revenue without reference to actual costs; or the payment flows to a low-tax jurisdiction.

Royalties: Licence fees for trademarks, software, or know-how paid to a foreign IP-owning entity are deductible subject to Albania's 15% withholding tax on royalties (unless reduced by a double tax treaty). The DPT scrutinises royalty rates against industry benchmarks — rates above 3–5% of revenue are often challenged absent strong justification.

Shareholder loans: Interest rates on loans between related parties must reflect market rates. The DPT will impute interest at a market rate if a loan carries zero interest. Additionally, thin capitalisation rules limit interest deductions when a company is heavily debt-financed by related parties — the safe harbour is a 3:1 debt-to-equity ratio.

If the DPT determines that related-party transactions were not priced at arm's length and Albanian taxable profit was understated, it will assess:

• Additional corporate income tax: At 15% on the adjusted profit amount
• Interest: At the Albanian National Bank reference rate plus a margin, accruing from the date the original tax was due
• Tax evasion penalties: Up to 100% of the underpaid tax for deliberate mis-pricing
• Failure to file the annual controlled-transactions notice: a fixed ALL 10,000 per month of delay (Law 9920/2008, Article 115/1(1))
• Where transfer-pricing documentation WAS filed: Article 115/1(3) is explicit that such taxpayers owe only the additional tax and interest, not fines. Filing the documentation is itself the protection.

To manage transfer pricing risk effectively:

• Formalise all intercompany transactions with written agreements before transactions begin
• Conduct a benchmarking analysis annually using public data or a commercial database
• Ensure management fee and royalty amounts are proportionate to documented services and fair market rates
• Set intercompany loan rates at or near Albanian bank market rates (currently 5–8% for ALL-denominated commercial loans)
• Engage a qualified Albanian accountant and, for complex group structures, an international tax adviser to prepare contemporaneous documentation

Disclaimer: The information in this article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Cross-border tax structuring requires professional analysis of your specific circumstances. We recommend consulting with a qualified tax advisor before making decisions based on this content.