Intercompany Agreements: Legal Form Aligned with Economic Substance

The intercompany agreement is the document the examination reads first — and the document the file must be built around, because the agreement is where the legal form meets the economic substance. An agreement that describes functions, IP ownership and pricing that do not match the conduct is not a documentation gap; it is the finding. The discipline this guide covers: the clauses that carry the weight, the consistency test against the actual conduct, the renewal mechanics, and the enforcement reality in audit.

The clauses that carry the weight

Clause	What it fixes for the TP file	The examination read
Scope of services / function	The tested party’s function — the basis of the characterization (routine service? key development? limited-risk distribution?)	The scope is the FAR in legal form; a scope that says “administrative support” while the entity performs product development is the mischaracterization exhibit
IP ownership and licenses	Who owns the output, who is licensed to use it, on what terms — the basis of the intangibles attribution	The IP clause is read against the IP registry and the conduct; a broad “we own everything” clause contradicted by the other party’s funding, direction and exploitation is a clause the examination reads through
Pricing mechanism	The formula (cost plus X%, the royalty base and rate, the net interest on the pool balance) — the arm’s length price in legal form	The mechanism must be workable: “arm’s length price” with no definition is a clause that invites the TPO’s definition; the benchmark reference (the safe harbour, the study) stated in or annexed to the agreement is the defensible form
Decision rights	Who approves scope, milestones, changes — the control evidence for the DEMPE analysis	The decision-rights clause is the control question in contract form; “as directed by the client” is the routine-execution admission, and the file must match the conduct to it
Term, renewal and termination	The continuity (and the break points) of the arrangement — when the economics can lawfully change	The renewal terms fix the price-review mechanics; the termination clause fixes the exit (the exit-charge and wind-down questions, for the restructuring case)
Credit, security and guarantee (finance agreements)	The loan’s terms — the basis of the independent-lender analysis	The security package and the guarantee terms are the credit analysis in legal form; a “subordinated, unsecured, on-demand” loan is priced on those terms, and the file must match

The pattern: each clause is the legal expression of a TP fact — the function, the intangibles, the price, the control, the continuity, the credit. The agreement is complete for TP purposes when every examined fact has its clause, and the clause is specific enough to work without interpretation.

Consistency: the agreement must match the conduct

The OECD and the Indian examination both apply the same test: the characterization follows the substance — the functions actually performed, the assets actually used, the risks actually borne — and the agreement is the primary evidence of the intended substance, read against the actual conduct. The failure modes, in order of frequency:

1. The conduct outgrew the agreement. The entity started performing functions beyond the agreed scope (the “administrative” service centre that now runs the product roadmap) without an amendment. The examination reads the conduct, finds the function the agreement never priced, and the unpriced function is the adjustment. The fix is the amendment trail — the scope change documented, the pricing updated, contemporaneously.
2. The agreement outran the conduct. The agreement claims functions and risk the entity does not actually perform or bear (the “key development” clause over a team that executes to detailed specification). The examination reads the conduct — the decision trail, the team’s actual authority, the risk-bearing — and the claimed function falls. The file cannot argue a function the conduct does not show.
3. The side letter contradicts the agreement. The email, the side understanding, the practice — the “real” terms that differ from the signed document. Where the conduct and the side arrangement differ from the agreement, the conduct wins, and the file that presents the agreement as the whole story has presented an incomplete story.
4. The pricing clause is a placeholder. “Arm’s length price, as determined annually” with no mechanism, no benchmark reference, no dispute step. The clause gives the TPO room to determine — the defensible form states the mechanism (the method, the PLI, the safe harbour reference), so the annual pricing is an application, not a negotiation.

The consistency test, run before filing: for each examined fact (the function, the IP, the price, the control, the credit) — what does the agreement say, what does the conduct show, and do they agree? The answer “yes” for all of them is the file; the answer “the agreement says one thing and the conduct another” is the finding, identified by you before the TPO does.

Renewal and the price review

The intercompany arrangement is renewed (or rolls) year to year, and the renewal is where the pricing is refreshed:

• The price-review mechanic in the agreement — the clause that fixes how the price updates: the benchmark study refreshed annually (the pool, the range, the tested party’s position), the safe harbour re-election where the prescribed position is used (the Form 3CEFA per assessment year), the reference-rate update for the finance agreements (the MCLR/SOFR as on the fixed date).
• The renewal is not a re-pricing by default. Where the function, the market and the tested party’s position are unchanged, the renewal carries the same mechanism with the refreshed benchmark — and the file shows the continuity (the same method, the same pool logic, the year-on-year trend), which is itself the defence against the range-shopping question.
• The genuine change is the documented exception. Where the renewal changes the economics (the function moved, the market changed, the safe harbour threshold was crossed), the change is documented with the reason — the renewal is the moment the change is legitimate, and the undocumented change in a renewal is the change the examination attributes to the tax outcome.

Enforcement in audit: what the agreement actually does

In the proceeding, the agreement is evidence — and evidence has a hierarchy:

• The signed agreement is the starting point: the parties’ stated understanding, admissible as the primary statement of the intended substance.
• The conduct (the decision trail, the actual functions, the payments actually made) is the controlling evidence where it differs: the characterization follows the substance, and the substance is what happened.
• The amendment and renewal trail is the bridge: where the conduct evolved, the amendments that tracked the evolution are the evidence the arrangement stayed documented — and the gap in the trail (the conduct changed, the paper did not) is the gap the examination fills with its own characterization.

The practical rule: the agreement is only as defensible as the conduct behind it, plus the amendments that kept it current. A current, specific, conduct-matched agreement is the file’s first exhibit; a stale, generic, contradicted one is its first finding.

See also

• Functional analysis (FAR)
• Shared services
• Intercompany finance
• Group restructuring