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Controlled Transaction — A Controlled Transaction is a transaction between two or more associated enterprises (related parties) that is subject to transfer pricing rules.
A Controlled Transaction is a transaction between two or more associated enterprises (related parties) that is subject to transfer pricing rules. The term "controlled" indicates that the parties are not independent—they are under common ownership or control, meaning the transaction price may not reflect arm's length market conditions.
Controlled transactions are the subject of transfer pricing analysis. The goal is to ensure these transactions are priced as if they occurred between independent parties dealing at arm's length.
The OECD Transfer Pricing Guidelines (2022) define associated enterprises in Chapter I based on Article 9 of the OECD Model Tax Convention. Enterprises are associated when one participates directly or indirectly in the management, control, or capital of another, or when the same persons participate in both enterprises.
US Treasury Regulations §1.482-1(i)(5) define "controlled" transactions as those between two or more members of a group of "controlled taxpayers"—meaning taxpayers owned or controlled directly or indirectly by the same interests.
Common Types of Controlled Transactions:
| Transaction Type | Examples |
|---|---|
| Sale of Goods | Parent sells inventory to subsidiary for resale |
| Services | Shared service center provides IT/HR/finance services |
| Licensing | IP owner licenses technology to manufacturing affiliate |
| Financing | Parent provides intercompany loan to subsidiary |
| Cost Sharing | Affiliates share R&D costs and rights |
Determining "Control":
| Jurisdiction | Control Threshold |
|---|---|
| OECD (general) | Participation in management, control, or capital |
| US | 50% or more common ownership (direct or indirect) |
| UK | 40% or more participation |
| Germany | 25% or more participation |
Key Distinction: Not all related-party transactions are controlled transactions for transfer pricing purposes. Thresholds vary by jurisdiction. Always verify the specific control definition in each relevant country.
Scenario: GlobalCorp has three entities:
| Entity | Ownership | Location |
|---|---|---|
| GlobalCorp Inc. | Parent (100%) | USA |
| GlobalCorp GmbH | Subsidiary (100%) | Germany |
| GlobalCorp Ltd | Subsidiary (100%) | UK |
Controlled Transactions:
Uncontrolled Transaction:
A transaction is controlled when it occurs between associated enterprises—entities under common ownership, management, or control. The specific thresholds vary by jurisdiction (50% in the US, lower in some countries). The key is that the parties aren't truly independent, so their transaction terms may not reflect market conditions.
Most jurisdictions have materiality thresholds or focus on cross-border transactions. Purely domestic related-party transactions may not be subject to transfer pricing rules in some countries. Additionally, de minimis transactions may be excluded. Check local rules for specific applicability.
Controlled transactions are between associated enterprises (subject to transfer pricing rules). Uncontrolled transactions are between independent parties (arm's length by definition). Uncontrolled transactions serve as benchmarks to test whether controlled transaction pricing is arm's length.
Yes, because control thresholds differ by jurisdiction. A 30% ownership stake might create a controlled relationship in Germany (25% threshold) but not in the US (50% threshold). Analyze each jurisdiction's rules separately.
Yes. All transaction types between associated enterprises can be controlled transactions: goods, services, intangibles, financing, cost-sharing arrangements, guarantees, etc. Each must be priced at arm's length.
Map your group's intercompany flows: goods movements, service agreements, licensing arrangements, loans, management fees, cost allocations. Review intercompany agreements and general ledger accounts. Many groups maintain intercompany transaction matrices for this purpose.
Most jurisdictions require transfer pricing documentation for material controlled transactions. Failure to document can result in: (1) penalty exposure if adjustments are made, (2) shift of burden of proof to taxpayer, (3) loss of penalty protection provisions, and (4) increased audit risk.