Through Resolution 01428-1-2023, the tax court reaffirms its objection to low-value-added services between related parties, where a fee of 8% of the service provider’s costs and expenses was agreed upon, with the limit set at 5% for low-value-added services, in accordance with the provisions of subsection (i) of Article 32-A of the Income Tax Law.
As indicated, the services of administration, treasury, human resources and communications, finance and accounting, information technology, and taxes were business support services necessary for the normal conduct of business operations; the Tax Administration verified that such services are classified as low-value-added, insofar as they were auxiliary or supportive of the main business activity. Therefore, the difference between the 5% limit on costs and expenses and the 8% profit margin agreed upon between the related parties is not deductible.
In this regard, it is important to determine whether the services are low value-added in order to establish the profit margin. Furthermore, the criteria chosen for allocating costs and expenses should be disclosed, and appropriate documentation demonstrating the validity of the services rendered should be provided.