Tax
Transfer Pricing
Quick definition
IRS rule requiring related-party transactions to be priced at arm's length.
When a US parent and foreign subsidiary transact with each other (license IP, sell services, etc.), prices MUST be at arm's length — what unrelated parties would pay. If transfer prices are off, IRS can ADJUST them upward, creating taxable income. Penalties: 20-40% of the adjustment. Required: contemporaneous transfer pricing documentation (Form 6662) for material cross-border transactions. Critical scenarios: US parent licensing software IP to foreign sub, foreign sub paying US for shared services, cost-sharing arrangements.
Related tax terms
R&D Tax Credit
Federal credit for qualified research expenses, usable against payroll tax by startups.
Delaware Franchise Tax
Annual tax for Delaware corporations, often quoted wildly too high if calculated incorrectly.
Nexus (Sales Tax)
The connection with a state that triggers a tax-collection obligation.
QSBS (Qualified Small Business Stock)
Tax exemption for gains on qualifying startup stock held 5+ years.
Frequently asked questions
- What is Transfer Pricing?
- When a US parent and foreign subsidiary transact with each other (license IP, sell services, etc.), prices MUST be at arm's length — what unrelated parties would pay. If transfer prices are off, IRS can ADJUST them upward, creating taxable income. Penalties: 20-40% of the adjustment. Required: contemporaneous transfer pricing documentation (Form 6662) for material cross-border transactions. Critical scenarios: US parent licensing software IP to foreign sub, foreign sub paying US for shared services, cost-sharing arrangements.
- Why is Transfer Pricing important for startups?
- Transfer Pricing is a tax concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does Transfer Pricing belong to?
- Transfer Pricing is a Tax term in the StartupCFO finance glossary — alongside other tax concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about Transfer Pricing?
- Beyond this definition, see the related tax terms below, or explore StartupCFO's insights and tools that put Transfer Pricing in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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