Transactions between subsidiary and parent company

Learn about some of the most commonly used methods for making transactions when selling goods and services between a subsidiary and parent company and why it is important to get this right from the start
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Transactions between subsidiary and parent company

There are a lot of things to think about when you are establishing your business in a new country. One thing you need to make sure you get right from the start is deciding how your parent company will transact across borders with your subsidiary company. You need to ensure you are compliant, but working in a way which is beneficial to your business.

Why it matters

Your UK business must have an economic purpose as the UK tax authorities will not look favourably if they are of the view that it only exists to incur the costs associated with generating revenue in a different territory. It is thus important to ensure that transactions between group entities are properly documented and priced in accordance with the transfer pricing methods to achieve arm’s length price. This is the case for example with a parent company selling goods or services to a subsidiary company, or vice versa.

Cost-plus arrangement

A Cost-plus arrangement is the simplest form of transfer pricing method. With this arrangement, sales invoicing and revenue is collected by the parent company and the costs for the UK operation, such as office rent, salaries and marketing are charged back to the parent company by the subsidiary, with an agreed markup. By marking up the UK costs, at a predetermined rate, it puts profit into the UK subsidiary company.

Inter-company loans

Another common inter-company transaction is inter-company loans. This is where the UK subsidiary is funded by the parent company. In such cases it is important to ensure that there is an inter-company loan agreement in place – this should include the amount of interest rate to be charged and the repayment terms for the loan. Failure to put in place an agreement can create future tax problems, where the funding may be deemed an investment by authorities, rather than a loan.

The decision on how you transact between your group companies is usually determined by the nature of the business and overall group structure, and failure to set it up correctly at the start can result in significant unexpected future costs. Goodwille can support you with putting in place the relevant agreements, and through our network of specialist tax advisors, we can ensure your subsidiary is set up in a way which is beneficial to your business. Contact us today for more information.