The unique nature of single family offices means that transfer pricing is particularly relevant. We explain the link and main considerations.
Single family offices (SFOs) are private, stand-alone business entities created to manage the financial and personal priorities of a single wealthy family.
The financial capital and assets managed by the SFO are the family’s own wealth. SFO’s can also manage the emotional and intellectual capital of the family, and can also serve multiple branches of the same family group or family enterprise. Transfer pricing, which refers to the rules and methods for pricing transactions between related parties, can have an important impact on the work of the SFO.
Although there is an upfront cost to set up an SFO, it is a sophisticated vehicle through which to manage family wealth professionally and to protect its future. SFOs provide solutions not only for managing the complexities of a single family’s wealth but also for centralising control of their assets.
As the business environment evolves, particularly regarding regulatory, tax and wealth management, it’s crucial that investment strategies remain flexible to shift alongside market dynamics.
Over time, generational wealth preservation has become increasingly challenging. The risk management process can be influenced by interest rates, financial markets and unstable geo-political conditions.
Why is transfer pricing so key?
Transfer pricing is important for SFOs because a relationship of common control means that the services they provide will often be related party transactions. So the transfer pricing implications of these arrangements should be carefully managed. And it may be that an SFO is set up in a low tax jurisdiction, with migrations from territories such as the UK, which can lead to transfer pricing risks and obligations.
How can SFOs identify related party transactions?
Transfer pricing in SFOs can be particularly complex, because of the unique nature of the related entities. Unlike traditional businesses, SFOs operate exclusively for the benefit of one family, which can complicate the application of standard transfer pricing methods.
By nature, they only provide services to the same family. So inevitably these are often related party transactions. SFOs should consider transfer pricing, particularly when determining compensation for the services they provide to trusts, foundations, and investment or other businesses, associated with the family members.
Which common SFO structures are likely to trigger transfer pricing?
SFOs are often set up in a way designed to support both existing and new investments by the family members. Common structures most likely to trigger transfer pricing are cases where the family engages in investment or operational services to managed businesses. SFOs may provide accounting, advisory, administrative and investment management services, among others. These could be to related foundations, individuals, trusts or other entities, linked to the family.
The diagram below shows a typical SFO set-up.
Transfer pricing considerations for SFOs
The bespoke nature of SFOs means that no two are the same. But they are likely to encounter similar issues regarding transfer pricing compliance. Because they manage the money of high-net-worth individuals and families, representatives often sit on the boards of investment companies or other related entities. The board of directors typically includes both family members and trusted advisors who provide oversight and strategic direction. This is important because SFOs should ensure that the compensation charged for the services provided to the different entities is in line with the arm’s length principle.
SFOs providing investment management and financial planning services to related parties must determine the appropriate transfer price for the services. This can be challenging, particularly where there are no comparable uncontrolled transactions.
When implementing and managing the pricing of related party charges in an SFO, there are various transfer pricing methodologies which may be right for determining the correct remuneration. It’s best to undertake a functional analysis to select the most appropriate method. This should assess the key functions, assets and risk of the parties in relation to each transaction, including the location where key decisions are made.
SFOs should maintain contemporaneous transfer pricing policies and documentation, implementing inter-company agreements and transfer pricing documentation with benchmark analysis, as appropriate. Proper documentation is essential to support transfer pricing arrangements. Requirements, including timing of preparation, can vary by territory.
It’s also worth undertaking robust risk management, as transfer pricing audits can be costly and time consuming. This will also reduce the likelihood of disputes with tax authorities. It should include regular reviews of transfer pricing policies with business operations.
Next steps
SFOs should carefully consider whether related party transactions and overall structures are tax compliant in operating markets. An SFO tax and transfer pricing assessment can identify potential risks and opportunities as matters to address.
If you would like further guidance, please contact Farhan Azeem in the UK. He collaborates with local tax experts across PKF Global.
