The arm's length comparison is an internationally recognized benchmark for assessing appropriate tax relationships based on the principle that performance fees between dependents are to be set as if they were independent persons or companies.
The guiding principle is the price that a conscientious and orderly manager would have agreed with a third party under otherwise identical conditions. The arm's length comparison is primarily used in national tax law when determining hidden profit distributions and hidden deposits (Section 8 III EStG) as well as in contracts between relatives (family businesses).
In international tax law, the third-party comparison (dealing-at-arm's-length rule) serves to differentiate income between affiliated companies or between a permanent establishment and the head office. The transfer price is to be determined (§ 1 AStG; Art. 9 OECD-MA).