Transfer Pricing in Related-Party Transactions

When two companies within the same group provide services to one another, finance one another, transfer intangible assets, share costs, sell products, or pass on expenses, the agreed-upon price is not merely an internal matter. The tax authorities may review whether those terms meet arm’s-length criteria and whether the available documentation supports them.

Transfer pricing in related-party transactions is a critical issue for corporate groups, family-owned businesses, parent companies and subsidiaries, partnerships with related parties, permanent establishments, and international structures. The risk lies not only in the price itself, but also in the lack of analysis, comparability, documentation, or economic rationality.

This page is part of the international tax attorneys and focuses on the legal and tax review of transactions between related parties.

Tax Advisory Services for Corporations and Related Groups

Transactions between related parties must be analyzed based on the nature of the transaction, the parties involved, the roles they assume, the assets used, the risks borne, and the terms that independent parties would have agreed upon.

The Tax Agency provides practical guidelines on transactions between related parties in the Corporate Income Tax Manual.

In practice, many issues arise because intra-group transactions are documented late, formalized using generic contracts, or valued without sufficient economic analysis. IN DIEM reviews the structure of the transaction, the existing documentation, and the tax exposure prior to an audit or a significant transaction.

Which related-party transactions should be reviewed?

Not all related-party transactions carry the same level of risk or require the same approach. The analysis must be tailored to the type of transaction, the amount involved, the parties involved, the applicable jurisdictions, and the relevant obligations.

Intragroup Services, Financing, and Licensing

Support services, management, administration, marketing, technology, financing, transfers of intangible assets, licenses, and royalties typically require special attention. In many corporate groups, these payments recur over many years and can result in significant tax exposure if they are not properly justified.

For intra-group payments of interest, royalties, or services, the international withholding taxes may seem like a secondary issue, especially when companies located in different countries are involved.

Partners, managers, and family-owned businesses

Related-party transactions do not affect only multinational companies. They can also occur in family-owned businesses, companies with managing partners, loans between a company and a partner, leases, the provision of professional services, transfers of assets, or related-party compensation.

In these cases, the problem usually stems from a lack of formalization, the absence of comparable data, or the difficulty in demonstrating that the terms are consistent with market conditions. A proactive review helps to organize contracts, valuation criteria, and documentation.

Functions, Assets, Risks, and Market Value

Transfer pricing analysis requires an understanding of what each party does, what assets it uses, and what risks it assumes. It is not enough to simply set a margin or price; one must justify why that price is reasonable for the specific transaction.

The Corporate Income Tax Law governs transactions between related persons or entities and requires that such transactions be valued at market value.

Transfer Pricing Documentation and Form 232

Documentation is key. Contracts, reports, internal policies, comparable data, organizational charts, job descriptions, invoices, proof of actual services rendered, allocation criteria, and financial analyses may be necessary to defend one’s tax position.

Form 232 is filed in conjunction with the informative return on transactions with related persons or entities and on transactions or situations involving non-cooperative jurisdictions, as applicable. Official information is available from the Tax Agency.

It should not be assumed that every related-party transaction requires the same documentation or the same disclosure requirements. The review must take into account the relationship, the transaction, the amounts involved, the applicable regulations, the fiscal year, and the available documentation.

There may also be procedures for advance pricing agreements, information on which is available from the Tax Agency.

Related-Party Transactions in International Structures

In cross-border structures, related-party transactions can affect multiple jurisdictions. A poorly designed transfer pricing policy can lead to adjustments, discrepancies among tax authorities, or double taxation.

When an intra-group transaction adjustment may affect two jurisdictions, the international double taxation becomes a factor in the analysis. If the structure includes companies with management, administration, or partners in multiple countries, international tax residency may be relevant.

In transactions between a head office and its branch in Spain, the permanent establishment in Spain may affect the allocation of income. And when a foreign investment is structured through group companies, the transfer pricing policy must be reviewed from the outset along with the foreign investment in Spain.

In more complex structures, an international holding company may require a consistent policy regarding financing, dividends, services, licensing, and management functions.