Virtual reality: are intercompany agreements ‘artificial’ or not?

At my recent TP Minds session in Sydney ('How not to screw up your intercompany agreements') we polled the audience on several questions, including the one posed in the subject line of this newsletter. We asked them to agree or disagree with the statement: ‘Intercompany agreements are artificial and only exist for transfer pricing purposes’. 11% agreed.

I think that, often, this view is underpinned by the idea that both parties in an intercompany agreement, as they are part of the same group, must therefore share the same interest. That’s not necessarily the case, however.

The fundamental legal reality is that individual legal entities in a group can actually have very different interests.

Systems of corporate law typically have well-established rules regarding directors’ duties, dividends, deemed distributions, transactions at an undervalue, transactions defrauding creditors and so on. These rules generally operate at legal entity level, not group level. But what about the group’s interests: don’t they take priority? From a legal perspective, not necessarily. Group interests may be subsidiary to other interests which legal entity directors need to have regard to.

To give one example: simply extending the term (repayment date) of an intercompany loan may create an unlawful deemed distribution for the lender entity. This may create problems for that entity’s statutory accounts.

The conclusion is clear. Transfer pricing advisors need to make sure that they understand the legal environment before they start putting documentation in place. That may mean bringing in legal advisers to work alongside them, and doing so at an earlier stage than might be assumed.