Understanding Commissionaire Arrangements in the context of transfer pricing

Commissionaire structures are a distinctive feature of civil law jurisdictions and frequently appear in the operating models of multinational groups. While the legal concept may seem arcane, its implications for transfer pricing, permanent establishment risks, and intercompany agreement design are far-reaching.

At its core, a commissionaire arrangement allows a person or entity to sell goods in their own name but for the account of a principal. This means that there is typically no direct contractual relationship between the principal and the ultimate buyer. As a matter of commercial practice, it is a common structure as between unconnected parties. However, this type of arrangement may also be put in place as between related parties within a multinational group, and it reflects a hybrid between an agency relationship and a distributor relationship.

As with any intercompany transaction, the legal rights and obligations of the parties – including the allocation of risk and reward – form a key part of the fact pattern which must be considered in order to create a commercially rational controlled transaction, which can then be priced appropriate from a transfer pricing perspective. The legal form and substance of the proposed arrangements also impact on the treatment of the relevant transactions for other purposes, including VAT, withholding taxes, tariffs, statutory accounts and – importantly – whether the principal may be deemed to have a taxable presence in the commissionaire’s country.

Understanding the commissionaire model is therefore essential for tax and legal teams tasked with designing compliant intercompany agreements and defending transfer pricing positions which are subject to challenge in tax audits or tax enquiries.

Key features of a commissionaire arrangement

Under a commissionaire arrangement:

• the commissionaire sells to customers, and acts in the commissionaire’s own name under a contract
• the principal, often a company or manufacturer, is contractually bound to deliver the goods sold to the customers, which creates a bind on the principal
• legal title in the goods sold passes directly from the principal to the customers at the point the goods are sold
• the commissionaire is contractually bound to remit the price received for the goods sold to the principal
• no contractual relationship is created between customers and the principal, and customers have a right of recourse against the commissionaire only

From a transfer pricing perspective, this separation of legal title and contractual responsibility raises questions about the economic substance of the arrangement. Tax authorities may scrutinise whether the commissionaire is appropriately compensated for its functions, risks, and assets, and whether the principal’s profits are being correctly attributed across jurisdictions.

The fundamentals of risk allocation

It is a core principle of the OECD Transfer Pricing Guidelines that the allocation (or assumption) of risk can fundamentally change the economic nature of a controlled transaction, and therefore the application of the arm’s length principle to pricing.

Designing and implementing an intercompany transaction which is likely to withstand transfer pricing challenges requires a clear allocation of risk and reward, which can then be taken into account in the selection of the best or ‘most appropriate’ transfer pricing method. Such an allocation of risk requires an alignment of four factors:

(1) contractual allocation of the relevant risks in a legally binding agreement which is signed and dated in advance;

(2) the party which is purporting to assume the relevant risks must have the financial capacity to actually bear those risks;

(3) that party must also contribute to the control of the relevant risks; and

(4) the transaction as documented must reflect the actual operations and conduct of the relevant parties.

It is only when this alignment is achieved, that the transaction can be appropriately priced from a transfer pricing perspective in a robust way.

Specific risks to consider in connection with commissionaires

These generic considerations listed above must be applied especially rigorously in proposed commissionaire arrangements, given the special characteristics of commissionaires as outlined above. In particular the relevant economically significant risks must be identified ‘with specificity’, so that the terms of the transaction can be designed.

In the context of proposed commissionaire arrangements, relevant risks to consider may include the following:

• Market risks (including the risk of diminished demand for the relevant products)
• Inventory risks
• Product liability / recall risks
• Credit risks
• Currency risks
• Regulatory risks

It should be noted that the contractual structure of remuneration (i.e. how the return to be received by the commissionaire is to be calculated in each year) can, of itself, constitute an allocation or risk. The respective positions of the principal and the proposed commissionaire entity may therefore depend on a combination of commercial terms and contractual clauses.

Choice of law considerations

As indicated above, the commissionaire arrangement is a concept deeply embedded in civil law jurisdictions, where the commissionaire acts in their own name but for the account of the principal. This unique structure means that, under civil law, the commissionaire is not simply an agent but a party who sells goods or services to customers without creating a direct contractual relationship between the principal and the customer. Instead, the principal remains behind the scenes, and the commissionaire is the only party contractually bound to the customer.

In contrast, common law countries such as the US and the UK do not recognise the commissionaire structure in the same way. The closest equivalent is the undisclosed agent, who enters into contracts with customers on behalf of the principal. However, under common law, both the agent and the principal can be contractually liable to the customer, which differs significantly from the civil law approach where only the commissionaire is liable.

These legal distinctions are not merely academic – they directly influence how intercompany agreements should be drafted and what transfer pricing methods, policies and comparables may be appropriate.

They also mean that the choice of the applicable law for the intercompany agreement, and the understanding of the impact of the relevant local laws (and any mandatory provisions of those local laws), tends to be more significant for intercompany commissionaire arrangements than for many other transaction types. So, for example, a commissionaire agreement in France may require different functional and risk characterisations than an agency agreement in the UK, even if the commercial outcomes are similar.

Additionally, the question of whether a commissionaire arrangement creates a permanent establishment for the principal in the country where the commissionaire operates is a key issue for tax authorities and can impact the overall tax position of the business.

The Zimmer SAS case

A notable example of commissionaire arrangements in civil law countries is the Zimmer SAS case. The Zimmer SAS case is a landmark example of how commissionaire arrangements can trigger permanent establishment disputes, with tax authorities arguing that the principal has a taxable presence due to the activities of the commissionaire. This underscores the need for careful documentation and robust economic analysis in intercompany agreements involving commissionaire structures.

Key takeaways

As multinational businesses expand across jurisdictions, the choice between a commissionaire structure and other potential commercial models is not just a legal decision – it’s a strategic one with direct implications for transfer pricing compliance, tax risk, and intercompany agreement design. Civil law jurisdictions may offer operational advantages through commissionaire arrangements, but they also demand careful attention to how profits are allocated, how risks are documented, and how contractual relationships are structured.

For tax and legal teams, understanding the commissionaire concept is essential – not only to ensure compliance with local law, but also to defend the group’s transfer pricing position and avoid unintended permanent establishment exposure. A well-drafted intercompany agreement that reflects the true economic substance of the arrangement is your first line of defence.