Linked operations are those that are carried out between subjects that have some kind of relationship with each other. For example, between a father and a child or between the parent company and its subsidiary .
As they are transactions between subjects that are closely related to each other, they have a special condition, however, for tax reasons, related transactions must be valued at market prices.
To locate the unrelated operations we are going to see the two main types of operations that exist:
- Unrelated operations. Here are the majority of commercial operations. They are those that are carried out between independent subjects and, therefore, under normal market conditions.
- Vinculated operations. They are an exception to the general rule and are those that are carried out between dependent subjects. They may not be carried out under normal market conditions, so they have a special treatment.
Consequences of related-party transactions
The most important consequence in related-party transactions is the obligation to value the transaction at market, as if it had been carried out between independent subjects.
For example: Company A owns 100% of the capital of Company B. Company A sells merchandise to Company B for 20 currency units. This operation is classified as related, since company A owns 100% of the capital of company B. Under normal market conditions, this operation would have been valued at 50 monetary units. Being a related operation, both companies must value the operation for 50 monetary units, and not for the initial 20 monetary units. This has tax implications (since the taxes will be settled for 50 monetary units), accounting, etc.
Characteristics of related-party transactions: degree of relationship between subjects
The main characteristic of related-party transactions is that they are carried out between subjects, both individuals and legal entities, with some type of relationship or link with each other. This degree of connection varies depending on the legislator, although general patterns can be established:
Linked operation between natural persons
A related party transaction between natural persons is determined based on a certain degree of relationship. Third or fourth degree of kinship is usually established to qualify a related operation. For example: between a parent and a child there is a first degree of kinship, so it will be classified as a linked operation.
Linked operation between legal entities
An operation between legal entities is determined based on the participation of one of the legal entities in the shareholding of the other. A participation percentage is established from which the participation will be classified as linked. For example: if the legislator establishes a percentage of 25% to classify an operation as related, a sale between two companies in which one of the two participates in the capital of the other 50%, will be a related operation
Linked operation between legal and natural persons
In this case, a related transaction between a natural person and a legal entity is usually determined by one of the following assumptions: when a natural person is a partner of the legal person in a certain percentage, when the natural person is an administrator of the legal person , etc