We would like to share our vision about certain issues of determining of the Transfer Pricing related arm’s length method, based on practical examples, as this topic has recently become the subject of client inquiries. We hope that this information will provide useful practical insights and help to avoid potential mistakes in structuring future transactions.
In our practice, we faced a case where the tax authorities, during the tax control over the client’s compliance with the Transfer Pricing rules and the arm’s length principles, insisted that when using information on a comparable company, it ought be mandatory to ensure that such comparable company has not been loss-making – by referring to subparagraph 39.3.2.9 of Article 39 of the Tax Code of Ukraine (TCU).
At the same time, the Comparable Uncontrolled Price (CUP) method had been used by the client, which was also approved by the tax authorities.
Nevertheless, while responding to the tax authorities’ inquiries, we managed to show that the requirement of non-loss-making by the comparable company is not applicable in the context of the CUP method.
Our position was supported by the argument that the requirement concerning the absence of losses in respect of the comparable company is not overwhelmingly mandatory for all transfer pricing methods. It is binding only in cases where the calculation of financial indicators, as provided under subparagraph 39.3.2.5 of Article 39 of the TCU, is required — that is, for methods based on financial profitability, namely:
- the Cost Plus method (subparagraph 39.3.1.3 of Article 39 TCU);
- the Net Profit method (subparagraph 39.3.1.4 of Article 39 TCU);
- the Profit Split method (subparagraph 39.3.1.5 of Article 39 TCU).
By contrast, the requirement regarding the absence of losses may not be applied for the CUP method (subparagraph 39.3.1.1 of Article 39 TCU), as well as in certain cases for the Resale Price method (subparagraph 39.3.1.2 of Article 39 TCU), since these methods primarily compare prices or mark-ups rather than financial profitability.
The wording of subparagraph 39.3.2.9 of Article 39 TCU itself (“for the calculation of financial indicators referred to in subparagraph 39.3.2.5”) indicates that this requirement applies only to those methods where such indicators are calculated, and not to every and all arm’s length principles.
At the same time, given the conservative approach of the Ukrainian tax authorities, even when using the CUP method, it is recommended to avoid insertion of the loss-making companies in the set of the comparable companies in order to minimize risks of potential tax disputes. This is due to the fact that, despite the absence of a direct legal requirement for the CUP method, Ukrainian tax authorities in practice may challenge the comparability with the loss-making companies, even where subparagraph 39.3.2.9 of Article 39 TCU is not formally applicable thereto.
Conclusion: Based on the above analysis, although the tax laws do not formally require the exclusion of the loss-making companies when applying the CUP method, we still recommend avoiding their use. Doing so will help reduce risks during tax audits and potential disputes with the tax authorities.
Author: Vasyl Klym, attorney-at-law and partner at ArtesLex
September 10, 2025
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