Look at the profit and loss of a typical two or three entity trading group and one pattern shows up again and again. The regulated or client facing entity, the one carrying the licence, the capital requirement and the complaints, reports a thin margin. An affiliated company somewhere else, holding the brand, the software licence or the marketing function, reports most of the group's profit. Nothing about that arrangement is automatically improper. Everything about it is a transfer pricing question, and the burden of showing it is defensible falls on the group.
The rule underneath is the arm's length principle. Transactions between related companies should be priced as they would be between independent parties dealing at arm's length. Most tax authorities apply some form of it, many follow the OECD framework in outline, and the practical effect is that a tax administration can restate the pricing of an intercompany charge and tax the entity as if a different price had been used. The group still paid what it paid. It is simply taxed on a number it did not book.
The four charges that get looked at
In trading groups the intercompany flows cluster in a small number of categories. Management and support services, where a head office charges the operating entity for finance, HR, compliance support or executive time. Technology, where one company licenses a platform or CRM to the others. Intellectual property, where a brand or a trading algorithm sits in a holding company that charges a royalty. And introduction or marketing fees, where a group company sends clients to the licensed entity and takes a share of revenue.
Each of these has a natural pricing method and a natural failure mode. Services are often priced on cost plus a margin, which requires that the costs are real, allocated on a sensible key, and that the service was actually rendered and needed. A royalty demands that the entity receiving it did something to develop, maintain or control the intangible. An introduction fee should reflect what a genuinely independent introducer would earn for the same work, which is a market most operators know well from their own introducing broker programmes.
Where the risk actually concentrates
The most challenged item in this sector is the IP royalty. A group forms a holding company in a low tax jurisdiction, assigns the brand and the platform to it, and pays a royalty out of the operating company. The tax analysis has moved a long way in the last decade. The question is no longer only who holds legal title. It is which entity performs the functions, controls the risks and funds the development. Where the holding company is a filing cabinet with a nominee and no staff, the royalty is exposed, and the same substance evidence that supports a licence application supports the pricing. Our note on offshore substance requirements covers what regulators and tax authorities look for, and the two lists overlap heavily.
The second concentration is the thin licensed entity. Regulators have their own interest here, separate from tax. A licensed firm is expected to hold capital and to be financially sound. If intercompany charges strip it to a break even position every year, a supervisor may ask whether the entity can absorb losses or fund an orderly wind down. That question is uncomfortable in a way a tax question is not, because the answer can affect permissions. The interaction between group charging and capital requirements is a real constraint on how aggressive the pricing can be.
This is descriptive, not advice. Transfer pricing rules, documentation thresholds and penalty regimes vary by country and by group size. Every group needs its own advisers in each relevant jurisdiction.
Documentation is the whole defence
There is a version of transfer pricing that exists only in a spreadsheet at year end. It does not survive contact with an examiner. The defensible version has three parts and they are built during the year, not after it.
First, written intercompany agreements that describe the service, the pricing basis and the term, signed before the period they cover. An agreement dated after the tax year it purports to govern is worse than no agreement. Second, evidence that the service was delivered: time records, deliverables, tickets, board minutes recording that the operating company asked for and received the support. Third, an analysis showing why the price is at arm's length, whether that is a benchmarking study of comparable service margins or a documented rationale for the method used. Larger groups may fall inside formal documentation requirements with master file and local file obligations and, above certain size thresholds, country by country reporting. Smaller groups usually still need contemporaneous support even where a formal file is not mandated.
The group's own record keeping matters here more than founders expect. Being able to show that a marketing entity actually generated the leads it charged for means being able to produce attribution data years later, which is a function of how the CRM was set up and migrated rather than of anything the tax team can fix afterwards.
How a challenge tends to arrive
Rarely as a transfer pricing audit on day one. More often it arrives sideways. A bank asks why the operating company's revenue leaves so quickly. An auditor qualifies an opinion on related party transactions. A regulator reviewing financial resources asks about a large payable to a connected company. A new jurisdiction's licence application requires a group structure chart, and the chart makes the flows visible to a reader who then asks what the holding company does. Each of these is a smaller event than a tax assessment, and each is a warning that the arrangement is readable from the outside.
Groups that handle this well tend to have made a decision founders often resist: keeping the licensed entity genuinely profitable. It costs more tax in the short run. It removes an entire category of question from every future conversation with a supervisor, a bank and an acquirer of the business. Firms planning a multi entity structure should read it alongside how the holding company sits above the operating entities, because the tax design and the regulatory design constrain each other and cannot be settled separately.
"If your licensed entity ends the year with almost no profit and the company that owns the brand ends it with almost all of it, you have already written the first question of the audit for them."
— Alex Onta, Executive Director, SINGUARD
Key Takeaways
- Intercompany charges must be priced as independent parties would price them, and a tax authority can restate the price and tax the difference.
- The most challenged item in trading groups is the IP or brand royalty paid to an entity with no people and no control over the intangible.
- Stripping the licensed entity to break even creates a regulatory problem about financial resources, not only a tax problem.
- The defence is contemporaneous: signed agreements before the period, evidence of delivery, and a written arm's length rationale.
Frequently Asked Questions
Do small trading groups need transfer pricing documentation?
Formal master file and local file obligations usually start at size thresholds set by each country, so a small group may sit below them. The arm's length principle itself does not have a size threshold, so even small groups generally need signed intercompany agreements and some contemporaneous support for the prices they charge.
Can the licensed entity pay a royalty to a group brand holder?
It can, but the pricing has to reflect what the receiving entity actually does. Where that company has no staff, no decision making and no development activity, the royalty is a common point of challenge. Legal title to a trademark on its own is a weak basis for a large recurring charge.
Does a regulator care about intercompany pricing?
It can. Supervisors assess whether a licensed firm has adequate financial resources and can wind down in an orderly way. Charges that leave the entity with no retained profit invite questions about solvency and about whether the firm is genuinely directed from where it says it is.
About the Author
Alex Onta is an Executive Director at SINGUARD. He built eTrader, the terminal, the mobile apps, eTrader Broker, Copytrading, Business and Community, along with the worldwide clustered-server infrastructure it all runs on, with his brother Roman Onta helping on the design, and he leads that division today. Together with Roman he builds the Prop Firm CRM, the Broker CRM, Scalegram and CopySignals, and the two of them carry worldwide compliance, payment processing and international business structuring side by side. He lives and works in Dubai for most of the year. Meet the executive duo leading Singuard's five divisions.