Transfer Pricing and related-party transactions

Transfer Pricing and related-party transactions: an accounting, tax and management guide for companies and groups

Transfer pricing is no longer a topic reserved for multinationals. In the Spanish mid-market, family-owned groups with multiple operating companies, real estate holding entities leasing property, commercial subsidiaries, shared service centres, intra-group financing, guarantees and transfers of intangibles (brand, software, know-how) are increasingly common. In this context, the pricing of related-party transactions becomes critical for a simple reason: the price set within the group determines where margins sit, how profits are allocated across entities, which company bears risk and requires capital, and what accounting and tax narrative will ultimately be defensible vis-à-vis third parties (auditors, banks, investors or the tax authorities).

The usual problem is not that related-party transactions exist, but that they are managed informally: management fees without real supporting evidence, intra-group loans without contracts or interest, rents materially out of line with market levels, growing balances in shareholder current accounts, or intangible licences priced “by intuition”.

This distorts EBITDA by entity, complicates the year-end close, increases audit costs and, in the worst case, results in tax adjustments with interest and penalties. The purpose of this guide is to provide a practical framework: when a relationship qualifies as “related”, how to price transactions, the accounting implications, the documentation requirements and how to reduce risk without unnecessary bureaucracy.

What transfer pricing is and why it matters

Transfer pricing refers to the values (price, margin or consideration) assigned to transactions between related parties: sales of goods, service provision, financing, leases, guarantees, licences, asset contributions or internal reorganisations. The underlying rule is the arm’s length principle: related parties must set terms equivalent to those that would be agreed between independent companies in comparable circumstances.

This is not purely a tax issue. In practice, a transfer pricing policy is a financial control and group governance tool. When well designed, it allows management to measure true profitability by unit, avoid “artificial” profit shifting, maintain year-on-year consistency and minimise friction in audits and M&A processes. When poorly designed, the opposite occurs: numbers lose meaning, risks increase and negotiations with third parties become weaker.

When a relationship is “related”: corporate, accounting and tax perimeter

One of the most common mistakes in SMEs and mid-sized companies is underestimating the scope of relatedness. It is not limited to 100%-owned subsidiaries. From a corporate law perspective, the concept of a group is based on control and unity of decision-making, even where there is no obligation to prepare consolidated financial statements. From an accounting perspective, the perimeter of “related parties” is often broader, capturing situations of significant influence and links to relevant individuals (shareholders with influence, directors and, in certain cases, family members). From a tax perspective, there is a defined perimeter with participation thresholds and specific tests, in addition to relatedness arising from membership in a corporate group and dealings with permanent establishments.

The practical consequence is that, even if a company is “not a multinational”, it may have multiple related-party transactions that must be priced at arm’s length, documented and, where required, reported. To avoid omissions, it is advisable to maintain two living documents: (i) an annual related-party map (entities and individuals), and (ii) an annual transaction inventory (type, amounts, counterparties, contracts and impacted accounting lines).

Valuation rules: accepted methods and how to choose

From a tax standpoint, the objective is to price at “market value”. The rules allow methods aligned with international practice. In the mid-market, the choice of method should not become an academic exercise, but a decision driven by two questions: which method best fits the transaction, and which reliable comparables are available?

• Where strong price comparables exist, the most direct method is the Comparable Uncontrolled Price (CUP). It works well when the product or service is clearly comparable and there are reasonable internal or external references (certain leases, commodities, standard licences, highly commoditised services). Its weakness is that it requires high comparability; where differences cannot be reliably adjusted, the method loses strength.
• For intra-group services and contract manufacturing, it is common to start from cost and apply a reasonable mark-up (cost plus). The key is to define the cost base properly and ensure that allocation drivers make sense.
• The resale price method is used for distribution: it starts from the final third-party selling price and deducts the gross margin an independent distributor would require for similar functions. Where granular pricing data is not available, the most widely used approach in practice is TNMM (Transactional Net Margin Method), which benchmarks profitability (for example, operating margin on sales, on costs or on assets) against ranges derived from comparable companies.
• For complex and integrated transactions, especially those involving valuable intangibles or cross-contributions, a profit split approach may be required, although it is less common in the mid-market due to complexity and the need for robust contribution data.

More important than the name of the method is the coherence of the comparability analysis and consistency over time. Changing methods without a clear rationale raises questions. If functions, risks or the business model change, the change should be explained and documented; if not, stability is preferable.

Accounting and audit implications

If the tax question is “is it at arm’s length?”, accounting adds a decisive layer: “does it reflect the economic substance?”. In related-party transactions, the risk is not only a future tax adjustment; it is that the financial statements tell an incorrect story about the group’s profitability and true financing. This affects the close process, dividend capacity, covenants, leverage headroom and credibility with banks and investors.

1. Contract price vs. fair value: what accounting requires

In transactions between group companies, accounting often requires initial recognition at fair value. Where the agreed price materially deviates from fair value, the difference cannot simply be treated as ordinary income or expense; it must be interpreted based on its underlying economic cause.

If a company transfers an asset to a shareholder below market value, the difference is economically akin to a distribution of value to the shareholder. Conversely, if the shareholder contributes an asset or provides financing on favourable terms, the difference resembles a contribution to equity. In intra-group debt waivers, the accounting entry may affect reserves or the carrying amount of the investment, depending on the economic direction of the transaction.

The practical implication is clear: a transfer pricing policy cannot be designed “in parallel” to accounting. If an intra-group price is set away from market terms for management reasons (for example, to support a subsidiary), the group must consciously accept the accounting and tax consequences of that support and how it will be reflected in the financial statements.

2. Intra-group services: where tax, accounting and audit converge

Management fees are the most recurring focus area. From an accounting standpoint, the expense must be supported by actual services rendered, correct accrual and appropriate classification. From an audit standpoint, auditors will seek sufficient appropriate evidence that the expense is real, properly measured, authorised and documented. From a tax standpoint, the service must also provide benefit or utility.

That is why intra-group services must go beyond the invoice. What works in practice is: a contract with a clear service description, evidence of performance (deliverables, reports, tickets, tools), traceability of hours or resources where feasible, stable allocation keys and an economic rationale explaining why the service is necessary for the recipient entity. If these elements are missing, the impact is typically threefold: tax adjustment, accounting challenge and audit friction.

3. Intra-group financing: accrual, pricing and substance

For intra-group loans, accounting looks at financial accrual and classification, but also at substance: tenor, subordination, guarantees, repayment capacity and evidence of intent to collect. A zero-interest loan or an arrangement without clear terms is hard to sustain as a “market transaction” and may require a reassessment of whether there is implicit financing or whether, in substance, the arrangement is an equity contribution or a disguised distribution.

In cash pooling structures, operational coherence is equally important: a treasury policy, clarity on which entity performs the central treasury function, how that function is remunerated, and how movements and balances are documented. Without a framework, cash pooling becomes a black box that raises questions for both auditors and the authorities.

4. Shareholder current account (account 551): the silent risk in SMEs

In family groups, a classic risk area is the shareholder/director current account. When shareholder debit balances accumulate without a contract, repayment schedule or interest, tax risk increases and auditors become concerned: it may be treated as disguised remuneration or a below-market loan, and it also requires an assessment of recoverability and disclosure.

The solution requires discipline: formalise loans, accrue reasonable interest, approve them when necessary, document movements and avoid using the current account as a permanent catch-all. It is one of the simplest changes with the greatest impact on risk reduction.

5. Tax audits and adjustments: accounting effects on tax, provisions and comparatives

If a tax audit adjusts transfer prices, the accounting impact typically includes additional corporate tax, interest and potential penalties, as well as provisions or reclassifications. In some cases, it may affect prior periods (reserves and comparatives) if errors or incorrect policies are involved. This reinforces a key point: transfer pricing is not a post-close report; it is part of the close control framework.

6. Why auditors scrutinise related-party transactions

Related-party transactions are a natural risk area: they can shift results, conceal liquidity issues or formalise non-transparent decisions. Auditors typically focus on significant non-routine transactions (asset sales, waivers, unsecured loans), dominant relationships without counterbalances and transactions with limited supporting evidence. If the company arrives at year-end without a related-party inventory, without contracts and without evidence, audit work increases and so does friction.

Documentation: Master File, Local File and Form 232

Documentation is the defensive backbone and, when well prepared, reduces future costs. The Master File should explain the group: structure, businesses, value chain, overall policy, intangibles, financing and financial position. Its value lies in building a coherent narrative: who decides, who bears risk, where intangibles are developed and how the group is funded.

The Local File focuses on the entity: functions, assets and risks, related-party transactions, method applied, comparables and arm’s length range, and reconciliation to the accounts. This is where a defence is won or lost.

In parallel, Form 232 operates as a risk radar enabling mass data cross-checks. In practice, red flags include: significant amounts per counterparty, sensitive transaction types (intangibles, real estate, business transfers), dealings with low-tax territories, sharp year-on-year changes and atypical margins without explanation. Before filing, coherence checks are essential: accounting, documentation and reporting must align.

Risks of poorly defined transfer pricing

The most visible risk is a tax adjustment with interest and penalties, but it is not the only one. There is formal risk from incomplete or incorrect documentation, double taxation risk in international transactions and accounting risk from subsequent corrections. From a business perspective, the greatest damage is often distorted entity-level margins, leading to poor decisions on investment, pricing, incentives and capital allocation.

There is also a corporate governance risk: in subsidiaries with minority shareholders, poorly calibrated intra-group pricing can transfer value between shareholders and generate disputes.

In M&A processes, these risks become monetary: purchase price reductions, escrows and specific indemnities to cover contingencies. A buyer does not only look at “compliance”; they look at whether EBITDA is real and sustainable without intra-group distortions.

How to implement a robust policy without bureaucracy

The best approach is to build a lightweight but robust system.

1. Maintain an annual related-party map and a complete transaction inventory with amounts, counterparties, contracts and impacted accounts.
2. Prioritise by risk: intangibles, financing, services, real estate and non-routine transactions typically sit at the top.
3. Define the operating model: who is the principal, who is routine, who bears risk and how each role is remunerated.
4. Select a method per transaction type and define drivers and ranges.
5. Put in place contracts and operational evidence (deliverables, reports, governance).
6. Build an accounting-tax-reporting bridge and review annually, ideally before year-end.

This approach reduces contingencies, accelerates audits and strengthens the company’s position with banks and investors. In a growing group, it is one of the highest-return “financial hygiene” initiatives.

Conclusion

Transfer pricing is not a formality; it is a structural component of group control. Its impact extends across tax, accounting, audit, internal management and value in corporate transactions. A well-defined and well-documented policy improves the quality of financial information, protects cash against adjustments and penalties, reduces close-process friction and prevents EBITDA from becoming an artificial construct. For groups with significant intra-group services, recurring internal financing, operating–property lease structures or relevant intangibles, the recommendation is clear: review related-party transactions holistically, align pricing with economic substance and have evidence ready before it is needed.

At this stage, many companies realise that the challenge is not “understanding” transfer pricing, but embedding it into a system that works: contracts and evidence that withstand audit scrutiny, a margin policy consistent with the value chain, and a year-end close that does not become an annual negotiation. This is where Maraz Corporate Finance can support as a financial advisor, connecting the group’s economic logic with its accounting, tax and reporting outcomes.

Maraz Corporate Finance can help mid-market companies and groups to structure, document and defend their related-party transactions from a value-creation and financial control perspective, particularly during periods of growth, reorganisation or preparation for financing or a transaction.

If your group has added new entities, runs material intra-group services, relies on internal financing, or wants to be ready for an audit, bank financing or a future transaction, structuring related-party transactions with a financial lens is one of the best investments you can make in control and value protection.

Javier de Rojas Roca de Togores
Partner – Maraz Corporate Finance