Transfer Pricing Between Your US Company and Your Company Back Home: Arm's-Length Prices, When the IRS Cares and When Your Home Country Does, Common Set-Ups, Intercompany Agreements, Form 5472, and Documentation in India, the UK and the UAE

Many owners abroad run two companies: the one at home where the team, the know-how and often the products are, and a US company that signs American clients, takes card payments and holds a US bank account. Money moves between them all the time. The home company does the work and the US company pays it. The US company sells the products the home company makes. The US company uses the home company's software or brand.

Every one of those payments has a price, and two tax authorities care about it. If the US company pays the home company too much, US profit shrinks and the IRS may object. If it pays too little, profit piles up in the USA and the tax authority at home may object. Transfer pricing is the set of rules both use to decide whether the price is right: it must be the price that unrelated companies would agree in the same situation, the arm's-length price.

This guide explains how those rules apply to small and mid-sized businesses with a US company and a company abroad, which set-ups work, what paperwork is needed, and where most businesses go wrong. The US subsidiary guide explains how to set up the US company itself.

In short: Any dealing between your US company and a company you control abroad must be priced at arm's length and backed by a written intercompany agreement. A US C-Corporation pays 21% US tax, so the IRS checks that it keeps enough profit, and transactions with the foreign owner are reported on Form 5472. A single-member LLC owned by your home company is disregarded, so the question shifts to whether the parent has a US business; an LLC owned by you personally raises the question mainly for your home tax authority. Typical set-ups are cost plus a mark-up for services the home company provides, a routine margin for a US sales or distribution company, and a royalty for brands or software. India requires an accountant's transfer pricing report above ₹1 crore of international transactions; the UK exempts most small and medium-sized groups; the UAE applies OECD-style rules under its corporate tax.

Who is a related party

Transfer pricing applies to transactions between associated or related parties: companies under common ownership or control. In the cases this guide covers, that includes:

• your home company and the US company it owns;
• your US company and a home company you own personally, even if neither owns the other, because you control both;
• you personally and the US company, for some purposes, such as a salary or a loan you make to it.

The thresholds differ by country. The USA treats companies under common control as related whatever the percentage. Form 5472 applies to a US corporation that is at least 25% foreign-owned and to every foreign-owned single-member LLC. India treats companies as associated enterprises at 26% shareholding and in several other situations, such as one company depending on the other for its raw materials or know-how.

Which tax authority cares depends on your US entity

A US C-Corporation

A US corporation pays 21% federal tax plus state tax on its profit. When it pays a related company abroad, for services, goods, a royalty or interest, the payment reduces US profit. The IRS can adjust prices that aren't at arm's length, under section 482 of the tax code, and add penalties.

The corporation reports every transaction with a foreign related party on Form 5472, filed with its Form 1120: purchases and sales, service fees, royalties, loans and interest. The penalty for not filing, or filing incomplete forms, is US$25,000 per form per year. See Form 5472 explained and the 21% corporate tax explained.

An LLC owned by your home company

A single-member LLC owned by a foreign company is disregarded by default, so for the IRS it is part of the parent. If it has no US office, staff or dependent agents, the parent may have no US tax at all. If it does, the parent files a US return as a foreign corporation with a US business, and the question becomes how much of the parent's profit belongs to the US operation. Many parent companies prefer to have the LLC taxed as a corporation, which makes transfer pricing work in the familiar way.

An LLC owned by you personally

A single-member LLC owned by a non-resident individual is also disregarded. If its income isn't effectively connected with a US business, it pays no US income tax, and the IRS has little interest in how the LLC prices its dealings with your home company. But your home country may. If you own both a company at home and a US LLC, and the US LLC earns most of the profit while the home company does most of the work, your home tax authority can argue the home company was underpaid. See effectively connected income explained.

That is also why the "LLC pays no US tax" result is not a tax-free result overall: the profit still has to be taxed somewhere, and the transfer price decides where.

Common set-ups and how they are priced

There is no single correct price. Transfer pricing looks at what each company does, what assets it uses and what risks it takes, and gives each a return to match. The methods recognised by the IRS and the OECD guidelines, which most countries follow, include comparing with prices between unrelated parties, cost plus a mark-up, resale price margins, and comparing the profit margins of similar independent companies. In practice, small businesses mostly use a handful of patterns.

1. The home company does the work: cost plus

The most common set-up for IT, design, engineering, back-office and other service businesses. The US company signs the client and invoices them. The home company's team does the work and invoices the US company.

If the US company takes the client risk, manages the relationship and wins the work, it is often treated as the entrepreneur and the home company as a service provider. The home company is paid its costs plus a mark-up: salaries, office, software and a share of overheads, plus a percentage. The appropriate mark-up depends on the services and comparable companies. Routine low-value support services can be priced with small mark-ups (the OECD suggests 5% for qualifying low-value services); software development and IT services generally carry more. India's safe harbour rules set specific mark-ups for some IT and IT-enabled services provided by Indian companies.

If instead the home company holds the know-how, takes the risks and really runs the business, while the US company only handles invoicing and US client contact, the US company should keep only a small routine return, and the rest belongs at home. Calling the US company the entrepreneur doesn't make it one: the authorities look at where decisions are made and where the people are.

2. The US company sells: a sales agent or distributor

For a business selling products made at home:

• a distributor buys the goods from the home company and resells them in the USA, keeping a gross or operating margin comparable to independent distributors. It holds stock, takes customer credit risk and handles returns;
• a sales agent doesn't buy the goods; it finds customers for the home company and earns a commission.

The US company's margin should match what it does. A distributor with a warehouse, sales staff and inventory risk earns more than an agent working from a laptop. A US subsidiary that consistently makes losses year after year while the parent makes profits is the classic warning sign for the IRS. See importer of record for a foreign-owned US company.

3. The US company uses your brand or software: a royalty

If the home company owns the brand, the software or the patents, and the US company uses them to earn money, the US company pays a royalty. Royalties to a foreign company are subject to 30% US withholding unless a tax treaty reduces it (India 15%, UK 0%, most EU countries 0% to 10%; the UAE has no US treaty). See W-8BEN-E vs W-8BEN.

Where intellectual property is developed should match where it is owned. A US company that claims to own software written entirely by a team abroad, without paying for it, invites questions in both countries.

4. Shared costs and management charges

A parent that provides management, finance, HR or IT support to the US company can charge for it, usually at cost or cost plus a small mark-up, with a clear allocation key such as headcount or revenue. Charges with no clear benefit to the US company, such as for the parent's own shareholder activities, are usually not deductible.

5. Loans

A parent lending to its US company should charge interest at a rate an unrelated lender would charge a company of that credit standing. Interest to a related foreign lender is subject to 30% US withholding unless a treaty reduces it, and large interest deductions can be limited by US rules. Many small groups fund their US company with equity instead. See US subsidiary for a foreign company.

The intercompany agreement

Every recurring transaction should have a written intercompany agreement, signed before the transactions start, covering:

• what is provided, by whom, and the standard of service;
• the pricing method (for example, costs plus 10%, or a 4% operating margin for the distributor);
• invoicing frequency and payment terms;
• who owns intellectual property created under the agreement;
• how the price is adjusted at year end if actual results differ from the target;
• term and termination.

Then follow it. Invoice on the schedule, actually pay the invoices, and keep the books of both companies in agreement. An agreement that says "monthly invoices" with a single invoice at the end of the year, or invoices that are never paid, undermines the whole arrangement. See bookkeeping for a foreign-owned US LLC.

US documentation and penalties

The USA doesn't require small companies to file a transfer pricing report. But it does impose penalties when the IRS makes large adjustments:

• 20% of the extra tax for a substantial valuation misstatement, for example where the price claimed is 200% or more, or 50% or less, of the correct price, or the net adjustment exceeds the lesser of US$5 million or 10% of gross receipts;
• 40% for a gross misstatement.

The penalty can be avoided if the company had contemporaneous documentation, prepared by the time the return is filed, showing how it chose and applied a reasonable method, and can provide it within 30 days of an IRS request. For a small US company, that documentation can be a concise report: the business, the transactions, the functions of each company, the method, and the comparables or reasoning behind the price.

A corporation that is at least 25% foreign-owned must also keep the records needed to support its Form 5472 and transfer prices, and must produce them in the USA, translated if necessary, when asked.

Home-country rules

India

India has detailed transfer pricing rules and enforces them actively, especially for IT and IT-enabled services provided by Indian companies to related companies abroad.

• Associated enterprises include companies with 26% or more common shareholding, and several situations based on control or dependence.
• An accountant's report on international transactions with associated enterprises must be filed every year, traditionally on Form 3CEB, which is being replaced by Form 48 under the Income-tax Act 2025.
• Detailed documentation is required where international transactions exceed ₹1 crore in a year, with penalties for missing or inadequate documentation.
• Safe harbour rules allow eligible taxpayers to accept specified mark-ups for some services and avoid scrutiny; advance pricing agreements are available for larger businesses.

Indian residents who own a US company also need to follow the overseas direct investment rules, and money due from the US company must reach India within the time limits. See ODI and FEMA rules for a US company and US LLC tax for Indian residents.

The UK

The UK applies transfer pricing rules to large groups. Small and medium-sized enterprises are generally exempt, as long as the related party is in a country with a suitable tax treaty with the UK, which the USA is. The thresholds follow the EU definition: fewer than 250 staff and either turnover up to €50 million or a balance sheet up to €43 million. HMRC can direct a medium-sized business to apply the rules in some cases. Even when exempt, UK companies must be able to show that payments to a US company are for genuine services or goods. See the UK guide.

The UAE

UAE corporate tax, at 9% on profits above AED 375,000, includes transfer pricing rules based on the OECD guidelines. Transactions with related parties and connected persons must be at arm's length. A disclosure form with the tax return is required when related-party transactions exceed set thresholds, and master and local files are required for businesses with revenue of AED 200 million or more, or in groups with consolidated revenue of AED 3.15 billion or more. Free zone companies claiming the 0% rate must also respect these rules. See the UAE guide.

Elsewhere

Most of Europe, Canada, Latin America and Asia follow the OECD guidelines, with their own documentation thresholds. Brazil moved to OECD-based rules in 2024. Ask your accountant at home what applies to transactions of your size; a short document at the start is far cheaper than defending an adjustment later.

When the two countries disagree

If one country raises the price and the other doesn't lower it, the same profit is taxed twice. Tax treaties provide a mutual agreement procedure for the two tax authorities to resolve this, but it is slow. Consistent prices, agreements and documents in both countries are the best protection. Where there is no treaty, as between the USA and the UAE, there is no such procedure, and getting it right at the start matters even more.

Worked examples

These examples are illustrative.

An IT services company in Hyderabad. An Indian private limited company with 60 developers owns a Delaware corporation that signs US clients. The corporation employs one account manager in New Jersey; the Indian team does all delivery. The two sign a services agreement: the Indian company is paid its costs plus 17%, invoiced monthly. On US$2.4 million of client billing, the Indian company's costs are US$1.6 million, so it invoices US$1.87 million. The Delaware corporation keeps US$530,000 before its own costs; after the account manager's salary and US overheads of US$300,000, it pays 21% federal tax plus New Jersey tax on the remaining US$230,000. In India, the company files its accountant's report and documentation because its international transactions far exceed ₹1 crore, and the US company files Form 5472 for the service fees.

A furniture maker in Jodhpur. An exporter forms a US corporation that imports and sells its furniture to American retailers from a warehouse in North Carolina. The US company buys at a price that leaves it an operating margin of about 3%, in line with comparable independent distributors. When tariffs rise sharply, the US company starts making losses; the parent and subsidiary agree a lower transfer price under the agreement's year-end adjustment clause, and document why, rather than letting the US company make losses year after year.

A UK founder with two companies. A London consultant owns a UK limited company and, separately, a Wyoming LLC that invoices US clients. The consultant does the work personally and is employed by the UK company. The UK company is small and exempt from UK transfer pricing rules, but HMRC can still look at whether the UK company should have earned the income. The founder's accountant suggests the UK company provide the consultant's services to the LLC for a fee, so that each company's income reflects what it does. See LLC for freelancers and consultants.

A Dubai e-commerce brand. A UAE free zone company owns a US LLC, taxed as a corporation, that sells its skincare products on Amazon in the USA. The US company buys stock from the parent as a distributor. The parent licenses its brand to the US company for a 3% royalty; because there is no US–UAE treaty, the US company withholds 30% on each royalty payment. After the first year, the group stops the royalty and builds the brand value into the product price, documented in the distribution agreement, which removes the withholding. See US LLC for e-commerce sellers.

Common mistakes

1. No written agreement, or one written after the year end to match the numbers.
2. Moving all the profit to the US LLC because it "pays no US tax", while all the work is done at home.
3. Leaving a US corporation with year-after-year losses while the parent profits.
4. Invoices that don't match the agreement, or are never paid.
5. Paying royalties or interest without checking US withholding.
6. Different figures in the two companies' books.
7. Missing Form 5472, or omitting the related-party transactions from it.
8. Ignoring the home country's documentation thresholds, especially in India.

Frequently asked questions

Does transfer pricing apply to small businesses? Yes. The arm's-length rule applies to every business. Documentation requirements and exemptions vary with size.

Does a single-member LLC owned by me need transfer pricing? If you also own a company at home and the two deal with each other, your home tax authority may look at the prices. The IRS is mainly concerned when the US entity is a corporation or has US taxable income.

What mark-up should my home company charge? It depends on the services, the risks each company takes and comparable businesses. An accountant at home can benchmark it; some countries, including India, offer safe harbour rates.

Do I report these transactions to the IRS? Yes, on Form 5472, for a US corporation 25% or more foreign-owned and for every foreign-owned single-member LLC.

Is there US tax on service fees paid to my home company? Generally no withholding, if the services are performed outside the USA. Royalties and interest are different.

Who prepares transfer pricing documentation? Usually an accountant or transfer pricing adviser in the country with the stricter rules, often the home country.

How UCB can help

We form US companies and subsidiaries for owners and companies abroad, through our formation, EIN and bank account package. Each year we prepare the federal return, including Form 5472 with every related-party transaction, through our US tax filing service. We do not prepare transfer pricing studies or benchmark prices, and we do not advise on home-country tax; we work alongside your accountant at home so that both sides report the same figures.

Running a US company alongside your company at home? WhatsApp us at +1 315 961 2956 or email enquiries@ucbsolutions.com.