Start-ups operating across borders often begin with informal arrangements between founders, investors and group entities. Development costs may be paid by one company, employees may support overseas affiliates and intellectual property may be registered in a different jurisdiction from where it is developed.

While these arrangements may appear commercially convenient during the early stages of a business, they can create transfer pricing complications as the organisation expands. Establishing a basic policy from the outset can help avoid the need to reconstruct transactions during a tax assessment, audit or investor due diligence exercise.

Why Early-Stage Arrangements Matter

Informal pricing arrangements can continue long after the business has moved beyond its initial stage. As revenue grows and overseas operations become more structured, the original arrangements may no longer reflect the functions and risks of each entity.

A price agreed by founders without supporting analysis may later be examined against the arm’s length principle. The fact that the business was at an early stage does not, by itself, establish that the pricing was appropriate.

Start-ups should therefore maintain a record of how related-party transactions are agreed and periodically assess whether the arrangements remain consistent with the business model.

Mapping Functions, Funding and Intellectual Property

The starting point is to identify which entity develops the product, manages operations, acquires customers, funds losses and owns or controls intellectual property.

This is particularly important where an Indian development team creates technology that is legally owned by a foreign parent. Legal ownership alone does not resolve the transfer pricing analysis. The development activities, decision-making authority and contributions of the respective entities should also be examined.

The allocation of costs and returns should reflect the actual functions performed and the economic contributions made by each entity.

Establishing Clear Intercompany Agreements

Written agreements provide a practical foundation for managing related-party transactions. Depending on the business model, these may cover software or product development, distribution, management support, cost sharing and intellectual property licensing.

The agreements should identify the services or rights being provided, the pricing basis, payment terms and allocation of responsibilities and risks. Importantly, the actual conduct of the parties should remain consistent with the documented terms.

A contract that is prepared only for compliance purposes, but does not reflect how the entities operate, may provide limited support during a review.

Pricing Services, Loans and Guarantees

Where an Indian start-up provides development or support services to an overseas affiliate, a cost-plus approach may be appropriate where the functions performed are routine and the facts support that characterisation. The cost base and mark-up should nevertheless be supported by a suitable transfer pricing analysis.

Funding arrangements require separate consideration. Intercompany loans should reflect relevant factors such as the borrower’s credit standing and the terms of the financing. Parent-company guarantees should also be examined to determine whether a separate fee is warranted and, if so, whether the amount is at arm’s length.

Equity contributions should be clearly documented as equity rather than left as unrecorded advances, particularly where funding is provided to support early-stage operations.

Monitoring Compliance Requirements

Start-ups should track their international transactions from the first year of operations. Indian transfer pricing rules prescribe documentation and reporting requirements, including the accountant’s report where applicable.

The relevant obligations and filing requirements should be identified in advance rather than reviewed only when the annual tax return is being prepared. Missing a reporting requirement may create separate penalty exposure, irrespective of whether the transaction price ultimately results in an adjustment.

Conclusion

A start-up does not require an unnecessarily complex transfer pricing framework, but it should establish a clear policy, document its intercompany arrangements and maintain a compliance calendar. Addressing these matters early helps reduce future reconstruction, supports investor due diligence and creates a consistent record of how value is generated and remunerated across the group.