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Can we call our intercompany agreements whatever we want?

Group Reorganisations

Intercompany Agreements

28 January 2015

This is a question that we get asked quite a lot, in the context of intercompany agreements for transfer pricing. In fact, it’s probably the second most frequent question, after “can we backdate it?

The point came up very recently, when we were asked to help a manufacturing and retail group on their arrangements between the UK parent and an overseas subsidiary. The document was described as a “distribution agreement”. But it didn’t deal with the things usually comprised in a distribution agreement, namely the supply of goods for resale, together with obligations relating to marketing and possibly exclusivity. Instead, the agreement granted a fairly vague bundle of rights with something like a trade mark licence, in return for a fee.

So here’s our view from an English contract law perspective (not a tax perspective – we advise on legal implementation, not on tax or comparables analysis).

The short answer is: yes, in general you can give your agreement whatever label or title you want. However, there are two important legal qualifications.

1. The document as a whole cannot be a “sham” – in other words, the document must correctly represent the true relationship between the parties. If it doesn’t it can imply an intention to mislead on the part of at least one of the parties.

2. The legal relationship as described cannot be a legal impossibility. For example, a “contract” between a company and its own branch is not a contract, because the branch does not have a separate legal identity. A person cannot enter into a contract with itself.

Of course, the more immediate task in this kind of situation is to identify the relevant legal rights and assets involved, what goods or services are being supplied, and what the terms of those supplies are intended to be. That’s not an end to the matter. But it does enable you to put in place legally valid intercompany agreements, and those agreements can set the starting point for discussions with local tax authorities if the arrangements are challenged.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance