Transfer Pricing for Foreign-Owned LLCs: The Basics

Transfer pricing is the pricing of transactions between related entities. When your US LLC buys services from (or sells services to) a company you also own in another country, the price must be "arm's length."

Why transfer pricing matters

The IRS wants to ensure that US entities aren't artificially shifting profits to low-tax countries by charging inflated prices for intercompany services.

Example: Your US LLC earns $100,000 in revenue. Your foreign company charges the US LLC $90,000 in "management fees." The US LLC reports only $10,000 in taxable income. The IRS will question whether $90,000 is a reasonable price for those services.

The arm's length standard

The price between related parties should be the same price that would be charged between unrelated parties in comparable circumstances. If a third-party management company would charge $30,000 for the same services, then $30,000 is the arm's length price — not $90,000.

Common intercompany transactions

• •Management fees (foreign owner managing the US LLC)
• •Software development services (foreign team building the product)
• •Licensing fees (US LLC licensing IP from a foreign entity)
• •Cost-sharing arrangements
• •Loans and interest

Methods for determining arm's length prices

Comparable Uncontrolled Price (CUP). Compare to prices in comparable transactions between unrelated parties.

Cost Plus. Start with the cost of providing the service, add a market-appropriate markup.

Resale Price. Start with the resale price, subtract a market-appropriate margin.

Documentation requirements

For most small LLCs, the IRS doesn't require formal transfer pricing documentation. But it's smart to have:

• •A written intercompany agreement
• •A description of the services provided
• •Justification for the pricing (comparable market rates)

For larger companies ($25M+ in intercompany transactions), formal documentation is required.

Form 5472 reporting

All intercompany transactions between the US LLC and related foreign parties must be reported on Form 5472, Part IV. This is separate from transfer pricing documentation but gives the IRS the data to identify potential issues.

Practical approach for small LLCs

• •Charge reasonable, justifiable prices for intercompany services

• •Document the basis for pricing in a simple memo

• •Keep intercompany agreements in writing

• •Report everything on Form 5472

• •If intercompany transactions exceed $100K, consider getting a CPA's input on transfer pricing