Transfer pricing — the pricing of transactions between related entities — has traditionally been associated with large multinationals. The OECD's Transfer Pricing Guidelines, the country-by-country reporting obligations under BEPS Action 13, and the high-profile enforcement actions against companies like Apple, Google, and Starbucks have created the impression that transfer pricing is a concern exclusively for enterprises with billions in revenue.

This impression is incorrect. For any entrepreneur who operates through more than one entity across more than one jurisdiction, transfer pricing is a live issue — and ignorance of it is not a defence.

What transfer pricing actually means for small businesses

The core principle of transfer pricing is deceptively simple: transactions between related parties must be priced as if they were conducted between independent parties at arm's length. If a US LLC owned by an individual charges a management fee to a UK LLP owned by the same individual, that fee must reflect what an unrelated management company would charge for the same services. If an Estonian OÜ licenses intellectual property from a holding company in another jurisdiction, the royalty rate must be comparable to what would be agreed between unrelated parties in a comparable transaction.

The arm's length principle exists to prevent the artificial shifting of profits from high-tax jurisdictions to low-tax jurisdictions. If a French consulting company charges a €1 million management fee to its UAE-based holding company — transferring €1 million of taxable income from France (where the corporate tax rate is approximately 25%) to the UAE (where the rate is 0% to 9%) — French tax authorities will want to know whether that fee reflects a genuine service at a market price, or whether it is simply a mechanism for moving profits offshore.

For SMEs, the transactions in question are typically less complex than those of multinationals, but they are no less scrutinised. Common intercompany transactions in SME structures include management fees charged by a holding company to operating subsidiaries, consulting or advisory fees between related entities in different jurisdictions, royalty payments for the use of intellectual property, intercompany loans and the interest charged on them, and cost-sharing arrangements for shared services such as accounting, legal, or administrative support.

Each of these transactions must be documented, priced at arm's length, and supported by evidence that demonstrates the commercial rationale and the pricing methodology. The documentation does not need to be as elaborate as the transfer pricing reports prepared by multinational groups — but it must exist, and it must be defensible.

The enforcement reality

Tax authorities in most major jurisdictions have expanded their transfer pricing enforcement capabilities beyond the traditional focus on large multinationals. France's DGFiP, for example, has increased its scrutiny of intercompany transactions in structures involving UAE entities — a direct response to the growing number of French entrepreneurs who have established international architectures with a UAE component.

The UK's HMRC has published guidance specifically addressing transfer pricing obligations for SMEs, clarifying that the rules apply regardless of the size of the enterprise. The penalties for transfer pricing non-compliance vary by jurisdiction but are universally significant. In France, a transfer pricing adjustment can result in the reassessment of taxable income, plus penalties of 40% for deliberate understatement and interest on the unpaid tax.

In the UK, HMRC can adjust the profits of either party to the transaction and impose penalties for inaccurate returns. In the US, the IRS can impose penalties under Section 6662(e) for substantial valuation misstatements in transfer pricing. The risk is not merely financial. A transfer pricing adjustment in one jurisdiction can create double taxation — the same income is taxed in two countries simultaneously.

While mechanisms exist to resolve double taxation (mutual agreement procedures under tax treaties, the EU Arbitration Convention), these processes are slow, uncertain, and expensive. Prevention through proper documentation and pricing is invariably preferable to cure through dispute resolution.

Practical approaches for SMEs

The good news for SMEs is that transfer pricing compliance does not require the armies of economists and the million-dollar studies associated with multinational transfer pricing. What it requires is common sense, documentation, and consistency. For management fees, the most defensible approach is a cost-plus methodology: identify the actual costs incurred by the entity providing the management services (personnel costs, office costs, professional fees, allocable overheads), and apply a reasonable markup that reflects the value of the services.

Markups of 5% to 15% are common for routine management services, with higher markups appropriate for specialised or strategic advisory services. For intercompany loans, the interest rate should reflect what the borrowing entity could obtain from an unrelated lender, taking into account the borrower's creditworthiness, the loan amount, the term, the currency, and the available security. Published benchmark rates — SOFR, EURIBOR, plus a credit spread — provide a defensible starting point.

For royalties and licensing fees, the pricing must reflect the value of the intellectual property being licensed. This can be benchmarked against comparable licensing agreements between unrelated parties, or calculated using a profit-split methodology that allocates the income generated by the IP between the owner and the user. The critical requirement is documentation. A brief memorandum — even two to three pages — that describes the transaction, identifies the parties, explains the pricing methodology, and presents the comparable data or benchmarks used is sufficient for most SME-level transactions.

The document should be prepared contemporaneously with the transaction and updated annually.

Conclusion

At Fidelys Partners, transfer pricing is integrated into the design of every multi- entity architecture we build. We ensure that intercompany transactions are identified at the structuring stage, that pricing methodologies are established before the first transaction occurs, and that documentation is maintained on an ongoing basis. Transfer pricing compliance is not an afterthought. It is a design requirement — one that protects the integrity of the structure and the client's position in every jurisdiction where they operate.

— Fidelys Partners —