Arm's-length principle
The arm's-length principle is the rule that a transaction between two related companies in the same group must be priced as if the parties were independent and unconnected. It is endorsed by the OECD and written into Article 9 of the OECD Model Tax Convention, and it is the cornerstone of the whole transfer pricing system. It works well for ordinary goods with a clear market price. It breaks down for unique intangibles, such as a one-of-a-kind global brand or a single drug patent, because there is no genuine comparable to price against. That ambiguity is where multinationals and tax authorities fight, and where expensive advisers earn their fees.
ByLoopholeKiln EditorialPublished
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Example: an Irish subsidiary licenses a drug patent to a German sister company; the Irish side argues the "arm's-length" royalty is 30% of revenue, Germany argues it is 5%, and billions in tax hinge on the answer.
Why it matters to a small business: you trade at real arm's-length because you have no related party to manipulate. A large group can engineer what "arm's-length" means for its own unique assets, using advisers you could never afford.