Why Legal Operating Models Matter More Than Ever

Most multinational groups operate with complex webs of legal entities, cross-border roles, intercompany flows, and regulatory obligations, but very few have a single, coherent framework that explains how all of this is supposed to work. That gap is increasingly becoming a real source of tax, governance and operational risk.

Tariff escalation, diverging U.S.–EU approaches to digital and intangible-heavy business models, and the early implementation challenges of Pillar 2 are all forcing organisations to reassess their structures. At the same time, tax authorities are demanding evidence of governance, substance, and risk control, not just after-the-event transfer pricing analysis.

This is why Legal Operating Models (LOMs) are moving rapidly up the agenda.

Watch the webinar: Introduction to Legal Operating Models

Why Transfer Pricing Alone Is No Longer Enough

Across industries, groups are recognising that traditional, after-the-event transfer pricing analysis is no longer an adequate governance tool. Risks are shaped by conduct and ex ante contracts, and neither can be retroengineered once a transaction has occurred.

Tax authorities are increasingly demanding evidence of governance, not just assertions in transfer pricing documentation. Questions about entity roles, risk control, DEMPE responsibilities, contracting positions, and intercompany cash flows now sit at the heart of the arm’s-length outcome.

As a result, multinational groups are seeking a contemporaneous, legally coherent framework that defines how the group is intended to work — a framework that can be operationalised, monitored and reported on.

What Is a Legal Operating Model?

A Legal Operating Model is the high-level blueprint of how a multinational group functions from a legal entity perspective. For any given financial year, a well-designed LOM sets out:

• the group’s legal entities
• what each entity does
• how each entity is capitalised and regulated
• how staff are engaged
• how each entity contracts with customers, suppliers and related parties
• where IP sits and how it is protected
• how risks are ringfenced in legal entities
• how intercompany cash flows move between entities
• how governance is exercised at entity level and group level

If intercompany agreements (ICAs) document specific relationships, the LOM is the architecture that makes sense of the entire system. It provides the macro-level view that sits above the agreements and explains the logic of the group’s structure.

A helpful analogy is the German TP Matrix, which is a structured, entity-by-entity map of functions, assets, risks, and flows. A LOM achieves something similar, but with a broader legal, governance, and operational lens.

Why LOMs Are Becoming Essential: The Coca-Cola Example

The widely cited Coca-Cola v. Commissioner decision in the U.S. Tax Court perfectly illustrates the consequences of not having a coherent, contemporaneous explanation of how a group operates.

The Court identified:

• inconsistencies in the roles of foreign ‘supply points’
• contradictions between legal ownership of intangibles and the claimed transfer pricing positions
• incomplete and outmoded intercompany agreements
• intercompany charges with no contractual justification

These weaknesses contributed to the IRS’s victory and an exposure of up to USD 18 billion for Coca-Cola.

A clearly articulated LOM would have provided the Court with exactly what it said was missing: a defensible, entity-level blueprint of how the business worked, why profits were allocated as they were, and how DEMPE functions were exercised.

Today, that expectation is reinforced by several external pressures:

• Tariff and customs volatility, making it essential to know which entity is importer/exporter of record
• Heightened focus on intangibles, including DEMPE and chain-of-title analysis
• Pillar 2 and Amount B, which require consistent, defensible entitylevel roles
• Regulatory scrutiny of risk allocation, especially in financial services and technology
• Investor expectations around governance, transparency and operational resilience

What a Good Legal Operating Model Delivers

A well-designed LOM provides tangible benefits across tax, legal, finance and governance functions.

1. Clarity

A single source of truth about how the group works — accessible to tax, legal, finance, compliance and the board.

2. Consistency

Alignment between the legal fact pattern, transfer pricing policies, regulatory filings and operational reality.

3. Audit Readiness

A coherent narrative that tax authorities, auditors and regulators can understand, test and rely on.

4. Transaction Readiness

A structure that can accommodate acquisitions, disposals, IP migrations and reorganisations without creating contradictions.

5. Risk Management

A clear articulation of where risks sit, how they are controlled, and how they are contractually supported.

Where to Start

For most groups, the first step is a health check assessment:

• What is the current Legal Operating Model?
• What is the current matrix of intercompany transactions within that model?
• Does it reflect the reality of the group’s operations, regulatory environment, contracting model with third parties, and IP protection strategy?
• Is it aligned with transfer pricing policies and tax filings?
• Does it meet the needs of the group’s wider stakeholders, such as the treatment of withholding taxes, tariffs, VAT compliance and financial reporting?
• Are there gaps, contradictions or legacy structures that no longer make sense?

From there, the LOM can be updated, simplified, and embedded into the group’s governance cycle, becoming a living framework, not a static document.

This is an area where LCN regularly supports multinational groups and their legal departments. Our support includes undertaking preliminary health check assessments, designing or re-designing the LOM as needed and equipping in-house legal teams with the resources and training they need to implement the governance, documentation, and control cycle required to keep it current.

If you would like to discuss your group’s LOM or arrange a free consultation, please get in touch.