We are proud to be named a West Coast Regional Leader for 2024

Transfer pricing considerations for private equity funds

ARTICLE | December 14, 2023

Authored by RSM US LLP

Funds with cross-border operations often provide an array of services, including fund management, financing (e.g., loans, guarantee fees and cash pooling), managing transactions and carrying out general back-office functions. The sheer gamut of services exchanged between the fund and its portfolio companies is partially what makes analyzing transfer pricing so complex. However, doing so is critical to ensure that transactions between related parties conform to the arm’s-length standard from both U.S. tax and non-U.S. tax perspectives. Otherwise, jurisdictions may reallocate income or disallow expenses or other items that could result in additional income taxes or loss of foreign tax credits.

Navigating the regulatory landscape

Private equity funds often establish a network of subsidiaries, affiliates and investment vehicles in diverse jurisdictions. While such structures offer strategic advantages, they also trigger transfer pricing considerations. The challenge arises when these entities transact with one another, as the prices set for these exchanges should mirror those that would be charged in an open market setting.

Regulations surrounding transfer pricing vary across countries and regions. More specifically, the Organisation for Economic Co-operation and Development guidelines offer a framework for establishing arm's-length pricing—the principle that transactions between related entities should mimic those between unrelated entities. Nevertheless, reconciling local regulations with international standards can be an intricate process, leaving private equity funds with the responsibility of navigating a complex web of rules.

Challenges encountered by private equity funds

  • Complex corporate structures: The complex nature of private equity fund structures can make assessing the arm's-length nature of transactions challenging. Funds often hold diverse portfolio investments across industries and geographies, with varying degrees of interconnectedness, to satisfy their investor base.
  • Intangible assets: Intangible assets, such as intellectual property and brand value, pose a formidable challenge in transfer pricing. Determining the value associated with and attributing appropriate profits for these intangibles becomes intricate, particularly when funds operate in sectors driven by intellectual property.
  • Risk allocation: Determining the distribution of risks and rewards across affiliated entities is a pivotal aspect of transfer pricing analysis. Private equity funds, with their diverse investment portfolio and risk profiles, must meticulously allocate risks to reflect the economic substance of their transactions.
  • Benchmarking financial transactions: Private equity funds often look to introduce debt and other financing mechanisms into their fund and operating entities. Questions arise related to debt capacity and the arm’s-length interest rate to be charged. Without proper support, such arrangements could be recharacterized for tax purposes, resulting in unexpected tax inefficiencies and potential penalties.
  • Documentation requirements: Many jurisdictions demand comprehensive and contemporaneous documentation justifying the transfer pricing arrangements adopted by private equity funds. Failing to provide adequate documentation can lead to penalties and heightened scrutiny.
  • Evolving regulations: Regulatory frameworks surrounding transfer pricing are not static. Private equity funds must remain vigilant to adapt to changes in rules and guidelines, ensuring ongoing compliance across their global operations as regulators push for more transparency, accountability and governance.

Mitigating challenges to stay in compliance

To overcome the complex challenges inherent in transfer pricing, private equity funds must adopt a strategic and comprehensive approach that includes the following components:

  • In-depth analysis: Conduct a thorough analysis of the fund's global operations, identifying transactions that fall within the purview of transfer pricing regulations. This involves assessing the economic substance of transactions, analyzing comparable market data and evaluating the allocation of risks.
  • Comprehensive knowledge: Given the intricacies of transfer pricing, enlisting the support of experts who specialize in this domain is essential. Tax professionals with deep knowledge of both international regulations and the fund's specific operations can provide invaluable guidance.
  • Advance pricing agreements: Engage with tax authorities to establish advance pricing agreements whenever feasible. Such agreements provide a proactive approach by obtaining authorities' confirmation on the appropriateness of the fund's transfer pricing arrangements, mitigating future disputes.
  • Robust documentation: Develop comprehensive documentation that outlines the fund's transfer pricing policies, methodologies and economic analyses. This documentation not only demonstrates compliance, but also serves as a crucial defense in the event of an audit.
  • Continuous monitoring: Transfer pricing is not a one-time endeavor; it requires ongoing vigilance. As the fund's operations evolve, so do the associated transfer pricing considerations. Regularly reviewing the operations between related parties and updating transfer pricing policies is imperative.

Planning for success

For private equity funds with multinational operations, transfer pricing presents opportunities and challenges that call for a holistic approach to tax planning. Succeeding in today’s global investment landscape requires a sophisticated understanding of evolving cross-border regulations. RSM US LLP’s international tax practice is well-versed in navigating transfer pricing for multinationals and can work with fund managers to accelerate growth in global markets while maximizing value and mitigating risk.

RSM US manager Erik Martin contributed to this article.

Let's Talk!

Call us at +1 213.873.1700, email us at or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Lynn Ellenberg, Mark Strimber and originally appeared on 2023-12-14.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

​Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how ​Vasquez & Company LLP can assist you, please call +1 213.873.1700.

Subscribe to receive important updates from our Insights and Resources.

  • Should be Empty: