Arm's Length Value / Market Value (Valor de mercado)

What Is Arm’s Length Value?

Arm’s length value — or valor normal de mercado — is the price that independent parties acting in conditions of free competition would agree for an identical or substantially similar transaction. It is the Spanish implementation of the arm’s length principle developed in the OECD Transfer Pricing Guidelines and incorporated into Spanish law through the Corporate Tax Act (LIS).

Two provisions of Ley 27/2014 (LIS) establish when arm’s length valuation is mandatory:

• Article 17 LIS requires market value for certain operations between the company and its own shareholders, including non-cash contributions to companies, transfers of assets to shareholders, and other transactions where the contractual price diverges from economic reality.
• Article 18 LIS mandates arm’s length pricing for all related-party transactions (operaciones vinculadas), i.e., transactions between parties who are not independent: parent-subsidiary relationships, transactions between siblings within a corporate group, and transactions involving directors, administrators, or their close relatives.

The arm’s length principle ensures that taxable income is determined as if the transaction had been carried out between unrelated parties. Where related parties charge prices that deviate from market, the Spanish tax authority (AEAT) has the power to re-price the transaction and assess additional tax accordingly.

Transactions Subject to Arm’s Length Pricing

Under Article 17 LIS, market value applies to, among others:

• Non-cash contributions to companies (shares, real estate, business assets).
• Transfers to shareholders at below-market prices or without consideration.
• Restructuring transactions under the FEAC regime: the deferred gain is calculated as the difference between the market value of assets or participations transferred and their carrying tax value.
• Stock transfers within groups where the price may be influenced by common control.

Under Article 18 LIS, all transactions between related parties must be at arm’s length, including:

• Intra-group services (management, IT, financing).
• Loans and guarantees.
• Licences of intangible property.
• Purchases and sales of goods and real estate.

Transfer Pricing Methods

Article 18.4 LIS and the Corporate Tax Regulations (RD 634/2015) establish a hierarchy of methods, aligned with OECD Guidelines, for determining arm’s length price:

Method	Description	Priority application
Comparable Uncontrolled Price (CUP)	Compares the related-party transaction price with comparable third-party transactions	Commodity transactions, standard loans, plain licences
Resale Price Method	Applies the buyer’s gross margin to the purchase price	Distribution without significant transformation
Cost Plus Method	Adds a mark-up to the supplier’s cost base	Manufacturing, routine intra-group services
Transactional Net Margin Method (TNMM)	Compares the entity’s net operating margin with comparables	Where traditional methods are not reliably applicable
Profit Split Method	Allocates combined profit according to each party’s contribution	Unique intangibles, highly integrated operations

Documentation Requirements

For companies with a net turnover of €45 million or more (or that exceed certain transaction thresholds with related parties), the LIS and its Regulations require two levels of transfer pricing documentation:

• Master File: group-level information on the corporate structure, transfer pricing policy, and intangibles.
• Local File: transaction-by-transaction analysis for each category of related-party operations.

Insufficient documentation may result in a penalty of 15% of the tax adjustment made by the AEAT, in addition to the tax due.

Bilateral Adjustment

When the AEAT re-prices a related-party transaction because it was not at arm’s length, the adjustment is bilateral: the income correction applied to one party must be mirrored by a corresponding adjustment in the other related party’s tax return. In cross-border situations, this coordination is achieved through Mutual Agreement Procedures (MAP) under the applicable double tax treaty or through the EU Arbitration Convention, to avoid double taxation.

Arm’s Length Value in FEAC Restructurings

In FEAC transactions — spin-offs, mergers, contributions of branches of activity, and securities exchanges — the arm’s length value of the assets or participations transferred is the benchmark for quantifying the deferred gain. The beneficiary entity receives the assets at the market value that corresponds to the consideration given, but the historical tax carrying value rolls over, and the difference (the deferred gain) only crystallises on subsequent disposal.

Common Pitfalls

Assuming book value equals market value. Real estate, participations in unlisted companies, and intangibles regularly diverge significantly from their book values. In restructurings, the deferred gain is precisely the spread between these two figures.

Undocumented related-party transactions below thresholds. Even when formal documentation is not required, any related-party transaction can be challenged if prices cannot be justified. The AEAT may request informal documentation for any transaction.

Underestimating secondary adjustments. When an arm’s length adjustment is made, a secondary adjustment may be required — characterising the excess payment as a deemed dividend or loan — with further withholding tax or income tax consequences.

Relationship with BMC

BMC assists business groups and family-owned companies in documenting arm’s length pricing for related-party transactions, preparing transfer pricing studies, valuing participations and intangible assets, and defending positions before the AEAT in tax audits.