One of the most common questions we are asked is which law should govern an intercompany agreement (ICA), and to what respect ICAs should be localised.
The starting point is that every ICA should specify which law governs it and which courts would have jurisdiction in the case of a dispute. This is because there needs to be a contract in order to achieve a contractual allocation of risk as contemplated by the OECD’s TP Guidelines. And contracts need to be clear, in order to fulfil their major function of delineating the underlying transactions. (By the way, ICAs do get litigated in some situations, such as insolvency scenarios. This is because the contractual allocation of risk and IP rights can have a significant impact on the outcomes for creditors of a particular legal entity within a group.)
There are very few situations in which a particular ICA needs to be governed by the laws of a particular country – and in general this is not an issue, because by definition the applicable law cannot match both ends of a cross-border transaction. Similarly, if a parent company is providing support services on similar terms to 20 subsidiary companies in 20 different countries, it would be impractical and inadvisable for each intercompany agreement to be governed by a different law. That’s how we, as a firm, are able to help corporate groups globally, despite not being licensed to practice in the laws of all 89 countries which have signed the BEPS Multilateral Instrument.
There are some situations where the applicable law governing an ICA may need to be considered, and we might obtain additional local legal input if appropriate. These include the following:
- The granting of security interests over real estate or other assets located within a particular jurisdiction. (This is very rare in practice.)
- Legal forms such as commissionaire arrangements, which may be recognised in some legal systems but not others.
- Mandatory provisions of local law, such as entitlements of agents to compensation or indemnity on the termination of their appointments.
More often, the question of localisation of agreements for intercompany transactions affecting a particular country boils down to three questions:
- Whether local factors relating to the economic analysis and comparables mean that the commercial terms of the transactions need to be different.
- Whether local regulatory issues apply which override the TP analysis – such as earnings stripping rules which limit the amount of interest which may be payable, or where a party to a controlled transaction is a regulated entity.
- What local translations are required, and whether those translations need to be certified or notarised.
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N.B. If you are short on Continuing Professional Development / Education hours for the year ended 31 October, there’s still time to register for our Online Course in Intercompany Agreements which qualifies for 10 hours CPE / CPD, and you can choose to complete all of the modules in whatever timescale you want. The course has been listed by the UK’s Chartered Institute of Taxation (CIOT) as relevant for its ADIT qualification. You can find details of the course and a booking form here.