Sale of shares – how to determine the arm’s length value?

Although part of business operations for years, capital transactions raise doubts among taxpayers from transfer pricing perspective. This category includes the sale of shares between related parties, which – if the statutory documentation threshold is exceeded – triggers TP obligations. Nevertheless, each transaction of sale of shares should be valued at arm’s length. Such a valuation may actually become challenging, and its underlying assumptions challenged by tax authorities, which is confirmed by the judgment of the District Administrative Court in Szczecin published at the end of 2022 (ref. I SA/Sz 439/22)[[1]].

(Non-)arm’s length price of shares

The authorities challenged the taxpayer’s method of determining the share price based on net assets. They stated the valuation based on the accounting books does not reflect the actual value of the company’s assets. The arm’s length value of shares cannot be determined without analyzing the financial situation of the entity whose shares are sold. According to the authorities, both the strong market position and high financial ratios should be reflected in the valuation of the shares sold.

The authorities conducted their own benchmarking analysis based on the CUP method. To determine the arm’s length value of the shares, they compared data of the transactions of the sale of shares and the increase the company’s share capital. In fact, they recognized the acquisition of shares in the increased share capital as a comparable transaction since both types of transactions have a common feature – making a cash contribution rather than a contribution in-kind. The effect of both the purchase and taking up of shares in the increased capital is the acquisition of shares in the company.

As a consequence, the authorities concluded that the taxpayer did not sell the shares at a price consistent with arm’s length principle. The court had no doubts about the authorities’ decision and fully agreed with it. It also highlighted the fact that in the transfer pricing documentation the taxpayer did not even attempt to justify the arm’s length nature of the valuation. This confirms that a properly prepared transfer pricing documentation minimizes the risk of tax authorities challenging the settlements between related parties. Lack of or incomplete documentation triggers a risk during the tax audits which may cost the taxpayer a lot.

Key aspects of the valuation of shares at arm’s length level

The analyzed decision does not provide technical details of the benchmarking analysis concluded by the authorities. However, the adopted CUP method requires strict comparability of the analyzed observations. Therefore, it will not always be possible for the taxpayer to apply this method if the differences between comparable transactions significantly impact on the sale price of the shares or if reasonable adjustments cannot be implemented to eliminate the effects of such differences. In such a case, a different method of determining the arm’s length value of shares should be considered. If comparable transactions cannot be identified, valuation techniques may be used to estimate the arm’s length price of intangible assets, including shares. In the decision, the court highlighted several aspects that should be considered when determining the method of valuation of shares and calculation of their sale price.

The key aspect in the valuation of the shares sold is to prepare calculation based on a method that reflects the specific nature of the transaction and the actual value of the company’s assets. Taxpayers are allowed to choose the transfer pricing method, but the selection of appropriate method should be driven by both the course of the transaction and the availability of reliable data necessary to apply the selected method. A red flag should be raised when the calculation leads to a negative value of the shares or involves a significant risk from the adoption of estimates. This is confirmed by the provisions of the Code of Commercial Companies whereby shares cannot be sold below their nominal value.

When determining the sale price of shares, the taxpayer should consider, among others: the company’s reputation, including factors such as success in industry competitions, increase in product sales and profits. The recognition of the company on the market and even having qualified employees or patents are also to be considered. If a company invests in the development of its business activity and, consequently, in the increase in sales of products or services and in the profits achieved, the sale price of its shares should be higher than if it had not developed its business.

In line with market practice the standard method for determining the value of shares is a valuation provided by an independent appraiser. It can be used in transactions with related parties if it has been prepared reliably and based on assumptions reflecting the circumstances of the analyzed transaction. However, tax regulations do not regulate the method of valuing companies, including the rights to shares in them. The parties to the share sale or purchase agreement are free to determine their legal relationship, including the share sale price. However, any operation on shares should take into account the actual market value of these shares. The actual market value should be considered as the value that the shareholder would obtain on the market if it sold the shares to a third party. Such an approach, similarly to the one expressed by the District Administrative Court, was presented in the decision of the Supreme Court (ref. II CSK 121/13)[2]. In the justification, the court stated that in order to determine the actual / arm’s length value of the shares, existing transactions related to the shares, including previous share trading, should be analyzed. If data on historical transactions related to the company’s shares are available and meet the comparability criteria, it is worth considering them when establishing the arm’s length value of shares.


Valuation of the sale of shares between related parties at arm’s length level is, from the perspective of the transfer pricing regulations, necessary. Tax authorities pay special attention to this type of transaction which are frequently challenged during the tax audits. The method of determining the arm’s length price is not obvious – especially given the need to ‘valuate’ concepts that are difficult to clearly define, such as the company’s reputation and recognition on the market, or the value of human capital. However, the analyzed judgment does not include a detailed description of the technical calculation of the above aspects. This causes further difficulties for taxpayers in terms of arm’s length valuation of such transactions. Before the sale of shares, it is worth preparing for it at the stage of establishing the terms of the planned transaction.

It is important that the taxpayer present in detail the valuation of the sale of shares, the assumptions underlying the calculation and the comparative data applied. This is a good time to prepare tax documentation to collect and present business arguments confirming that the agreed price is set at arm’s length level. This will also allow to prepare for questions that tax authorities may ask in the event of a potential tax audit.

[[1]] Judgment of the DAC in Szczecin of 17 November 2022, file I SA/Sz 439/22, link:


Urszula Nowicka

Senior Consultant, Transfer Pricing Practice

Tel.: (+48) 503 973 472