Non-tax drivers for Intercompany Agreements between related parties

Intercompany agreements are often seen as essential in the context of domestic and international tax and transfer pricing compliance. However, it is also important to remember that there are a number of highly relevant non-tax related drivers for having well drafted intercompany agreements in place between members of a corporate or financial services group.

1. Governance and directors’ duties – a director owes personal duties in respect of each company or entity of which he or she is a director. Without clarity as to the commercial terms affecting each company, a director cannot show compliance with those duties. Depending on the nature of the breach, consequences for breach of directors’ duties can include disqualification, fines or other criminal penalties.

2. Regulatory / compliance requirements – regulatory and compliance issues are particularly relevant in the financial services sector. For example, Solvency II regulation may often require debt between entities within a regulated group to be documented. Intercompany agreements may also be required to identify the ownership of assets as between regulated and unregulated entities within a financial services group.

3. Ability to enforce IP against third parties – in order to claim damages for infringement of IP rights against third parties, a group needs to demonstrate the connection between the owner of the IP, registered licensees and actual use of the rights. This can be evidenced by properly documented intercompany agreements.

4. Ring-fencing of liability – the commercial aims of ring-fencing liability (for example through commissionaires or limited risk distributors) will not be met unless the internal relationship between the relevant group entities is documented appropriately.

5. Preparation for future corporate actions – these may include third party fundraisings, debt facilities, demergers and divestments of part of the business or assets of the group.

6. Joint ventures – where a particular entity has third party shareholders or stakeholders, those third parties will want clarity as to the provision of supplies, licenses and finance to and from that entity, and the terms on which those supplies, licenses or finance are actually provided.