What transfer pricing is
Transfer pricing is the price set for a deal between related parties: 2 companies with the same owner, or a company and the person who owns it. The deal can be a service, a management fee, a royalty for a brand or software, a loan, or rent for an office.
Dividends are the exception: they are a share of profit, not a price for anything. A holding company that only receives dividends from your operating company raises no transfer pricing question until it charges that company fees or lends it money.
Setting a price is not avoidance; every group has to set one. The tax question is where the profit ends up, because the price that lowers profit in one company raises it in the other. A UK company with profits above £250,000 (about $332,000) pays corporation tax at 25% (HMRC), so every £1,000 (about $1,330) it pays a related company in a zero-tax country takes £250 (about $332) of tax out of the UK.
Related is defined broadly. Article 9 of the OECD Model Tax Convention covers a company that participates directly or indirectly in the management, control or capital of another, and 2 companies in which the same persons participate. The US rule in section 482 reaches any 2 or more businesses, incorporated or not, owned or controlled directly or indirectly by the same interests. A founder who owns both companies outright is the plainest case there is.
The arm's length principle
The arm's length principle taxes related parties as if they had dealt with each other as independent businesses. Under Article 9, where the terms between associated enterprises differ from the terms independent enterprises would agree, the profit one of them would have made on independent terms can be added to its profits and taxed (OECD Model, Article 9).
HMRC applies it by replacing the actual terms with arm's length terms on paper and working out the profit again (HMRC INTM412040). The IRS has the same power: it may reallocate income, deductions and credits between commonly controlled businesses to clearly reflect each one's income (26 U.S. Code section 482).
An adjustment in one country is meant to be matched in the other. Article 9(2) has the other treaty country make an appropriate adjustment to the tax it charged on the same profit, with the 2 tax authorities consulting where necessary (OECD Model, Article 9(2)). That relief needs a treaty, and a company that paid no tax on the fee has nothing to refund, so the extra tax in the paying country is a straight loss.
The 5 transfer pricing methods
The OECD Transfer Pricing Guidelines consider 5 methods for reaching an arm's length price: 3 traditional transaction methods and 2 transactional profit methods (HMRC INTM421010). They prefer the comparable uncontrolled price and the traditional methods, but the test is the most appropriate method for each case.
The 5 OECD methods and where each fits a founder's companies
| Method | What it compares | Where it fits a founder's companies |
|---|---|---|
| Comparable uncontrolled price (CUP) | The price unrelated parties pay for the same service or goods | Your company sells the same work to outside clients at a known day rate |
| Resale price (resale minus) | The reseller's gross margin against independent resellers | A company that buys your other company's services and resells them to clients |
| Cost plus | The provider's costs plus the markup independent providers earn | A company that does development or admin work for your other company |
| Transactional net margin method (TNMM) | Net profit on costs or sales against independent companies doing similar work | A routine service or sales company tested on its margin |
| Profit split | The combined profit, divided by what each side contributes | Companies that each add something unique; rare in a one-person setup |
Every method starts from the same question: what each company actually does, with which assets, and who carries the risk. In a one-person structure the answer is usually the founder, working in one place, and no method can price profit into a company that did none of the work.
Why related-party fees in a one-person structure get challenged
In a group with staff in each country, transfer pricing is an argument about margins. In a one-person structure it is usually an argument about whether the company receiving the fee did anything at all. These 4 payments draw the question:
- A management fee to your low-tax company. Your operating company pays a monthly fee for management to your own offshore company. If you do the managing from home and the offshore company has no staff, an independent business would pay it close to nothing, and the deduction goes.
- A royalty for your brand or code. A low-tax company owns the trademark or the software and charges your operating company for using it. If you built and maintain it while working for the operating company, the tax authority asks why the income sits somewhere else.
- An invoicing company in the middle. Clients pay one company, which passes the work to your other company at cost. The EU anti-avoidance directive lists invoicing companies that buy from and sell to associated enterprises while adding little or no economic value among the income categories that CFC rules bring back to an EU parent company in Member States that use the category approach of article 7(2)(a); the others tax only income from non-genuine arrangements under article 7(2)(b) (ATAD, article 7).
- Your own pay, rent or loans. The founder is a related party too. Spain values every deal between a company and a shareholder holding 25% or more at market value (Corporate Income Tax Law, article 18), and Germany treats an overpayment to a shareholder as a hidden profit distribution, which section 8(3) of the Corporation Tax Act says does not reduce the company's income (KStG section 8).
A company that serves your other companies also changes its standing where it is registered: providing services to foreign affiliates is distribution and service center business, a relevant activity under the BVI economic substance law (BVI Economic Substance Act), and a founder working from abroad cannot meet that test alone.
Penalties of up to 70% on top of the tax
An adjusted price can bring a penalty as well as the tax. HMRC treats knowing that a price is clearly not at arm's length as a sign of a deliberate inaccuracy, with a penalty of up to 70% of the extra tax (HMRC INTM483120), and a careless one costs up to 30% (HMRC CH82470). A company that can show it checked the price against market data when it set it may owe no penalty at all.
The same idea decides how much profit a permanent establishment earns. Article 7 attributes to it the profit it would be expected to make as a separate and independent enterprise, taking into account the functions performed, assets used and risks assumed (OECD Model, Article 7). When the founder does all the work in one country, most of the profit follows the founder there.
If the company receiving the fee is also run from your home, it may not be foreign at all: under a place of effective management test your country can tax it as a resident company, and the fee becomes a payment between 2 of its own taxpayers.
A fee that holds up and a fee that gets adjusted
Holds up
Maria's Estonian company employs 2 developers in Tallinn who build features for her UK company's app. It invoices the UK company their salary costs plus a markup under a signed service agreement, with timesheets and release notes for each month. Each company's profit matches the work done in it.
Gets adjusted
Owen's UK company pays £5,000 (about $6,630) a month to his Seychelles company for strategic consulting. There is no contract, no deliverable and nobody in Seychelles; Owen does the work in Manchester. HMRC disallows the fees, and the small company exemption does not help, because Seychelles is not a qualifying territory.
Transfer pricing rules for small companies
United Kingdom: the SME exemption and its gap
The UK exempts small and medium-sized enterprises from transfer pricing for the vast majority of transactions, but not for transactions with a related business in a territory that has no UK tax treaty with an appropriate non-discrimination article (HMRC INTM412070). HMRC's list of qualifying treaties includes the UAE, Cyprus, Estonia, Singapore and the US, and leaves out the BVI, the Cayman Islands and Seychelles (HMRC INTM412090).
A one-person company is small: fewer than 50 staff and turnover or a balance sheet total of no more than €10 million (about $11.4 million), counted across the group and its associated enterprises (HMRC INTM412080). So a UK company paying your company in Cyprus is outside the UK rules, and the same payment to your company in the BVI is inside them.
| Fee the UK company deducted | £60,000 (about $79,600) |
|---|---|
| Arm's length value of what the Seychelles company didNobody there did the work | £0 |
| Profit added back in the UKNo SME exemption: Seychelles is not a qualifying territory | £60,000 (about $79,600) |
| Corporation tax on it at the 25% main rateProfits above £250,000 (about $332,000); interest and any penalty on top | £15,000 (about $19,900) |
| Tax refunded in SeychellesThe fee was foreign-source income and never taxed there | £0 |
| Extra tax the structure costs | £15,000 (about $19,900) |
Illustration. HMRC corporation tax rates for financial years 2025 and 2026 (updated April 1, 2026); HMRC INTM412070 and INTM412090 (updated October 8, 2026); Seychelles Revenue Commission on Seychelles-sourced income. GBP converted at the site's September 28, 2026 rate.
United States: Form 5472 for a foreign-owned LLC
A US LLC whose only owner is a non-US person is a disregarded entity, but for this reporting it is treated as a corporation: it files a pro forma Form 1120 with Form 5472, listing its transactions with you and with companies you control, contributions and distributions included. A missed form costs $25,000, plus another $25,000 for each 30-day period the failure continues more than 90 days after the IRS notifies you (IRS instructions for Form 5472). Those are the related-party amounts the IRS can reallocate under section 482, so a fee your LLC pays your company abroad needs the same arm's length support as any other.
Spain: your own pay and the documentation penalty
A Spanish professional who owns their company can treat their own pay as market value when, among other conditions, more than 75% of the company's income comes from professional work and the partners' pay is at least 75% of its profit before that pay (article 18.6).
Missing or incomplete documentation is fined on its own, at a fixed €1,000 (about $1,140) per item of data or €10,000 (about $11,400) per set of data when no price is corrected, capped at the lower of 10% of the deals concerned and 1% of turnover (article 18.13). When the tax office does correct a price that was not properly documented, the penalty is 15% of the correction instead (same article).
How to price and document a fee between your own companies
In the UK, HMRC expects documentation that is reasonable for the nature, size and complexity of the business and that shows the price meets the arm's length standard (HMRC INTM483030). For 2 companies with 1 owner, these 6 steps produce it.
Pricing a fee between 2 of your companies
- Write down what each company does, who does it and from where, and which assets and risks each one holds.
- Sign a service, license or loan agreement before the work starts, with the scope and the price basis.
- Price from a comparable first, such as the rate your company charges outside clients for the same work; without one, use costs plus a markup.
- Keep timesheets, deliverables, invoices and the comparables for each period.
- File what each country asks for, such as Form 5472 for a foreign-owned US LLC.
- Reprice when the facts change: you move, a company hires staff, or the work shifts between companies.
David's note
In a one-person structure I would rather see no fees between your companies at all. A company that exists to receive a fee from your other company is the first thing an auditor asks about and the hardest thing to defend, because the only person doing the work is you. One company where you live, paid by outside clients, leaves a single related-party price to defend: what it pays you.
