What Is Legal Definition of Arm`s Length
A business transaction refers to a transaction in which the buyer and seller negotiate independently without either party influencing the other. This type of sale claims that both parties are acting in their own interests and are not subject to pressure from the other party; In addition, he assures others that there is no collusion between buyer and seller. In the interest of fairness, both parties generally have equal access to information related to the transaction. It is important that a transaction be carried out at arm`s length, as it can have legal and tax implications. In many countries, tax laws require holding companies or companies to deal at arm`s length with their subsidiaries. The arm`s length principle aims to ensure fair market conditions and to ensure that taxes are properly allocated in transactions where potential conflicts of interest may arise. It is specifically used in contract law to reach an agreement that stands up to legal scrutiny, even if the parties have common interests (e.g. employer-employee) or are too closely related to be considered completely independent (e.g. the parties have family ties). The OECD Model Tax Convention provides the legal framework for governments to have their fair share of taxes and for companies to avoid double taxation of their profits. The arm`s length standard is crucial in determining the share of profits attributable to a company and, therefore, the extent of a country`s tax claim on that company. The OECD has developed detailed guidance on how to apply the arm`s length principle in this context.  Under this approach, a price is considered reasonable if it falls within a price range that would be calculated by independent parties trading on market terms.
This is generally defined as a price that an independent buyer would pay to an independent seller for an identical item on identical terms if neither of them is forced to negotiate. An independent relationship differs from a fiduciary relationship, in which the parties are not equal, but there are asymmetries of power and information. Arm`s length transactions are often used in real estate transactions because the sale involves not only the people directly involved in the business, but also other parties, including lenders. The World Customs Organization (WCO) and the World Trade Organization (WTO) have adopted the arm`s length principle for customs valuations. The Agreement on the Implementation of Article VII (known as the WTO Customs Valuation Agreement or „Customs Valuation Convention”) ensures that the determination of the customs value for the application of customs duties to imported goods is neutral and uniform, excluding the use of arbitrary or fictitious customs values.   „Arm`s length comparison” is a term commonly used to refer to transactions in which two or more independent and unrelated parties agree to transact, independently and in their own interest. In „arm`s length transactions”, the parties concerned should have equal bargaining power and symmetrical information, which encourages the parties to agree on fair market conditions. On the other hand, a transaction that is not conducted „at arm`s length” may take place between parties who may have a personal or close relationship; For example, transactions between family members, personal friends or the parent company and its subsidiaries. In one case, it was decided that „an arm`s length transaction involves transactions between two parties that are not related and do not have a confidential relationship and are considered to have approximately equal bargaining power. In addition, an arm`s length transaction must generally be voluntary (without coercion or coercion), take place in the open market, and the parties must act in their own best interests. In another case, it was held that „an arm`s length transaction is a transaction between independent parties who are not parties to a confidential relationship and who have approximately equal bargaining power.
An arm`s length transaction is „characterized by three elements: [(1)] it is voluntary, that is, without coercion or coercion; [(2)] It usually takes place in an open market; and [(3)] the parties act in their own interest. Similarly, international sales between non-market companies, such as two subsidiaries of the same parent company, must be made at arm`s length prices. This practice, known as transfer pricing, ensures that each country collects the appropriate taxes on transactions.