Based on our experience during the audits of transfer pricing documentation, as well as the new Decree No. 45/2025 (XII.23.) of the Ministry for National Economy, which must be applied for the tax year beginning in 2026, and the related guidance published by the Ministry of Finance, functional analysis requires greater attention than ever before. Audits may cover not only whether the documentation contains a functional analysis, but also whether it presents the actual role of the related parties in the given transaction accurately, consistently and in accordance with verifiable facts.

A properly prepared functional analysis establishes the connection between the operation of the company, the characterisation of the parties, the selected transfer pricing method, the comparability analysis and the substantiation of the arm’s length price. Its central element is characterisation, the purpose of which is to determine into which basic business model the parties participating in the transaction can be classified in respect of the transaction, based on their functional profiles, the assets used by them and the risks assumed by them. A detailed presentation of characterisation and the individual basic business models will be published as part of our newsletter series. The first part of the series was the newsletter entitled “Business Models in Transfer Pricing – Toll Manufacturing”, while the presentation of further business models is expected in the subsequent parts of the series.

As a significant conclusion from the functional analysis, characterisation is an important starting point for selecting the appropriate method and, where necessary, the tested party, and therefore it also has an impact on the assessment of the pricing of the transaction.

If this connection between the functional analysis, the characterisation and the selected transfer pricing method cannot be clearly followed, the professional logic of the documentation may easily become questionable.

Characterisation must be carried out in relation to the given related-party transaction or the transactions that are justifiably aggregated; the same company may perform different functional roles in its different transactions.

Key aspects of the new regulation

Based on Section 6(3) of Decree No. 45/2025 of the Ministry for National Economy and the related guidance, particular attention must be paid to the following in the functional analysis:

• the functions performed by all parties participating in the related-party transaction; the assets and intangible assets used; and the risks assumed, their control and financial assumption;
• how the functions relate to the broader value creation of the group, the circumstances of the related-party transaction and industry practice;
• the relevant functional characteristics of comparable independent transactions or enterprises;
• the characterisation of the parties, which is an essential conclusion drawn from the functional analysis.

 

Content of the functional analysis

The content elements of the functional analysis set out in Decree No. 45/2025 (XII.23.) of the Ministry for National Economy are summarised below:

Function analysis Presentation of strategic management, research and development, procurement, engineering support for the launch of production, production, quality control, packaging, logistics, inventory management, market research, marketing strategy, brand development, marketing and advertising, determination of pricing policy, conclusion of contracts, distribution, customer acquisition, customer verification, receivables management, customer service, and the collection and provision of data to support decision-making  and administration.

Risk analysis Presentation of market risk, research and development risk, design risk, investment risk, procurement risk, capacity utilisation risk, operational risk, quality risk, reputational risk, logistics risk, inventory risk, credit and customer risk, liquidity risk and foreign exchange risk.

Assets Presentation of the intangible and tangible assets used, as well as human resources.

In the case of unique and valuable intangible assets DEMPE analysis: presentation of the development, enhancement, maintenance, protection and exploitation of the intangible asset.

Sources for the functional analysis

For a correct presentation, the actual content of the related-party transaction can be determined by examining several sources. In this respect, the following documents and information, taken together, are particularly helpful:

• contracts between the related parties, their annexes and amendments;
• invoices, purchase orders and certificates of performance;
• the Master File and other group-level documents;
• internal policies, process descriptions, organisational charts and rules governing powers and responsibilities;
• business plans, management reports and documents supporting decisions;
• detailed information received from employees participating in the transaction;
• data available on the company’s website and in other public sources.

The contract alone is not sufficient: the functional analysis must reflect the actual conduct of the parties and the operation developed in practice. If there is no written contract or its content is not sufficiently detailed, the accurate presentation of the processes, decision-making powers and risk management becomes particularly important.

Audit areas

The audit questions clearly demonstrate that the review is not limited exclusively to the text of the documentation: the objective is to identify the actual operation of the company, including local and group-level decision-making, as well as who performs and controls the economically significant functions and risks. The questions typically focus on the following areas:

• The company’s activities and business model: What activities does it perform, how does it fit into the operation of the group, and did any business restructuring take place during the period under review or in the preceding years?
• Strategic and operational decision-making rights: Who is entitled to make decisions and up to what amount; are decisions concerning production, sales, procurement and pricing made locally or at another group member?
• Risks and their actual management: What market, inventory, production, warranty or financial risks affect the company; who is able to control them, and who bears their consequences?
• Financing and treasury: Who manages the funds and receivables; are there any intragroup loans, cash-pool agreements or atypical financing arrangements?
• Related-party services and cost recharges: For what information technology, R&D, management, marketing, HR, legal or other central services does the company pay; what is the content, basis and allocation key of the fees, and can the invoicing be verified?
• Intangible assets and development functions: Who develops the products, who performs the essential DEMPE functions, and is any fee paid for the use of a brand name, patent or trademark?
• Production and product strategy: Who determines the product range, who decides on the launch or termination of a new product or project, and how are planning and product development carried out?
• Pricing and transfer pricing method: How are the cost price and the sales price calculated; who participates in the preliminary calculation and approval; has the method changed, and what justified the change?
• Sales and procurement processes: Who identifies new customers and suppliers, who conducts price negotiations, who approves prices and contractual terms, and how are changes in raw material prices reflected in the prices?
• Warranties and supplementary costs: What warranties does the company undertake, who bears the costs of repairs and subsequent work, and are these costs recharged between related parties?

The common purpose of these questions is to identify whether the functions, assets, risks and decision-making powers presented in the documentation correspond to the actual operation. During an audit, therefore, not only the content of the statements but also their substantiation by documents, process descriptions and the identification of specific responsible persons may be essential.

Cooperation in the preparation of the functional analysis

The functional analysis properly fulfils its role if it is complete, accurate, consistent and in line with the actual operation of the company. Therefore, all information that may assist in presenting the actual operation more accurately is necessary for the preparation of the transfer pricing documentation.

The precise preparation of the functional analysis and the good cooperation required for this may contribute significantly to reducing transfer pricing risks and to the professional substantiation of the documentation.

It is particularly important to verify whether the presentation of the functions is consistent with the contracts, internal processes and actual decision-making, and whether the characterisation determined on the basis of the analysis appropriately reflects the economic role performed by each party in the given transaction. Incorrect characterisation may lead to an inappropriate method, comparable data and pricing conclusion, thereby increasing the risk of an adjustment by the tax authority.

The comprehensive preparation and review of the functional analysis is not merely a formal task: it establishes the basis for ensuring that the transfer pricing method, depending on the method, the tested party, and the examination of the arm’s length price can also be consistently substantiated during an audit.