Arm’s length transactions

In order for a transaction to be considered at “arm’s-length”, there is a requirement that the involved parties are independent in nature and equal. When looking at “arms-length transactions” specifically in relation to contractual agreements, it is vital that different parties in an agreement maintain this independence. It may be the case that both parties

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In order for a transaction to be considered at “arm’s-length”, there is a requirement that the involved parties are independent in nature and equal. When looking at “arms-length transactions” specifically in relation to contractual agreements, it is vital that different parties in an agreement maintain this independence. It may be the case that both parties have common interests (such as an employer and employee) or are part of one group company (two subsidiaries) and therefore cannot be seen as independent. If this is the case, the agreement in question may not be considered to constitute an “arms-length transaction”. It is important that when parties are connected, the agreement should be similar to relevant industry standard, and not have marked differences to what would be expected from such an agreement due to the relationship between the parties.

Property Law

As well as this, the issue of arms-length transactions is one that also often arises in property law. A particularly common example is the purchase of property from parents. Issues may arise if the value of the property is sold at a rate that is significantly below the market value. The reason for this is that a sale as below market value may have tax and other ramifications. By way of an example, the sale could relate to potential inheritance tax avoidance. In order to ensure that no issues are encountered, an independent valuation should be carried out to ensure that the price of sale has not been affected by the relationship between the parries and reflects the true market value of the property. Other examples where the principle of arms-length transactions is discussed is when analysing organisations that may hold particular influence over other parties, particularly in the public sector.

Solicitors Regulation Authority

With regard to property and associated conveyancing transactions, the Solicitors Regulation Authority has looked at the issue of whether or not a solicitor cannot act for more than one party if the parties are not at arm’s-length. It was held that  whether or not a transaction is at arm’s length will be dependent on the specifics of the relationship between the involved parties and the particulars of the transaction and in actual fact it was not only the market value of the property that was to be considered.

Public Sector

As briefly intimated above, arms-length transactions are scrutinised in the public sector. The reason for this is that local authorities are able to award service provisions to providers within their organisations. There is much regulation concerning  public sector procurement, particular when examining a bid and/or tender process. It is therefore vital to ensure that detailed paperwork is kept during any public procurement exercises, especially if in-house service providers are applying to tenders within their own local authority.

Tax

As briefly mentioned, arm’s length transactions may have tax implications if not dealt with correctly, and therefore the issue is one that often arises when looking at tax legislation and convention. The Organisation for Economic Co-operation and Development (referred to as OECD) Model Tax Convention, deals with this issue in relation to transfers between multinationals. More specifically, it ensures that prices between subsidiaries of a group company reflect market values and that the transaction is dealt with (both from a pricing perspective and otherwise) as it would have been had the parties not been part of one group company; i.e. had the parties not been connected in any way. It is important to note that the role of this is not to ensure that prices are commercially fair; this is a matter to be decided between the involved organisations. Instead, this policy attempts to take a subjective approach and ensure that the contract values relate to the market value and are therefore not being adjusted to suit the needs of the involved parties. This rule is detailed in section 147 of the Taxation (International and Other Provisions) Act 2010.

commercial law • Conveyancing • James Swede • Property law

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