• +1 747 212 0206
  • +44 20 3286 8868
  • +86 21 2052 0623

Exclusive Distribution Rights: approach with caution

Intercompany Agreements

21 September 2022

When TP arrangements involve Exclusive Distribution Rights, they can sometimes go off the road.

Ordinarily, the grant of a right (including in respect of IP) involves five main elements:

1. the subject matter of the right (e.g. trade marks, patents etc).

2. the permitted use (e.g. to carry on a specified business).

3. the geographical territory of the licence (e.g. worldwide).

4. the duration (e.g. 10 years).

5. whether or not the right granted is exclusive.

These apply to arrangements between unconnected parties as well as those between related parties. (There are other considerations too, of course, such as contractual risk allocation.)

In TP policies, EDRs are often used to reconcile different considerations, in particular the customs treatment of the relevant payments. This means that EDRs are often primarily a negative right – that is, the right of the grantee (distributor) to prevent the grantor from distributing certain goods, or allowing a third party to do so. Often this means that the EDR fee is expressed as a fixed amount for a certain period.

Effectively, the grantee is buying exclusivity. So the arrangement can make commercial sense, but only if the duration of the right is clearly specified and the grantee has visibility on the other terms of the relationship (e.g. the ongoing price it will need to pay). Otherwise, no sane person acting in the interests of the grantee would approve the arrangement.

So my view – from a commercial and legal perspective – is that EDRs can work in TP policies and intercompany agreements, but they should be approached with caution. And they need to be reviewed carefully, in the context of the overall arrangements.

Free insights

Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups

We won't share your details and you can opt-out any time. Learn more in our Privacy Policy

Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance