Transfer pricing risks for Indian groups sit among the most common areas of tax exposure. However, they are also among the least understood by businesses new to the UK. The India-UK CETA will bring many more Indian businesses into the UK Corporation Tax net. As a result, more Indian-owned UK entities must think carefully about how they price intercompany transactions.
This article sets out what the UK rules require. It also covers how they apply to Indian-owned businesses. Finally, it explains what you can do now to make your position defensible.
The arm’s length principle
UK transfer pricing legislation sits mainly in Part 4 of the Taxation (International and Other Provisions) Act 2010. This is commonly known as TIOPA 2010. It requires connected parties to price transactions on an arm’s length basis. In other words, at the price that unconnected parties would have agreed in comparable circumstances.
The legislation covers cross-border transactions and, in some circumstances, domestic ones. Importantly, for accounting periods beginning on or after 1 January 2026, a new exemption applies to most UK-to-UK transactions. For an Indian group with a UK subsidiary, the most commonly affected transactions include:
- Service charges from the Indian parent to the UK subsidiary (management fees, IT support, shared services)
- Royalties or licence fees for use of intellectual property owned by the Indian parent
- Intercompany loans and the interest charged on them
- Prices at which goods transfer between group entities
If HMRC believes a transaction is not at arm’s length, it can adjust the UK entity’s taxable profits upwards. In addition, it can impose significant penalties where it concludes the arrangement was designed to reduce tax. In the most serious offshore cases, penalties can reach up to 200% of the additional tax due.
Who the rules apply to
Many newly established Indian businesses assume transfer pricing applies only to large multinationals. This is not accurate. Understanding transfer pricing risks for Indian groups starts with knowing who is in scope.
There is an SME exemption. Broadly, small enterprises have fewer than 50 employees and either turnover or a balance sheet below €10 million. However, the exemption does not apply automatically. Specifically, it does not apply where the other party sits in a non-qualifying territory. It can also be disapplied where HMRC issues a direction. Medium-sized enterprises (broadly, fewer than 250 employees and turnover below €50 million) receive more limited protection.
In practice, any Indian-owned UK business with material intercompany transactions should seek advice. Do not assume that size alone provides protection.
Common high-risk transactions for Indian groups
The following areas drive the majority of transfer pricing risks for Indian groups operating in the UK.
- Management service charges
A UK subsidiary that receives support from its Indian parent will typically pay a management fee. However, HMRC expects the fee to reflect the value of services actually provided. In addition, it must be apportioned on a reasonable and consistent basis. Fees set as a flat percentage of turnover or profit are a common audit trigger. This is especially true where they lack reference to actual cost or value.
- Intellectual property royalties
Many Indian businesses hold valuable intellectual property in the Indian parent entity. As a result, they charge their UK subsidiary a royalty for its use. HMRC will scrutinise whether the royalty rate reflects arm’s length terms. Specifically, it looks for benchmarks against comparable IP in comparable markets. Furthermore, unbenchmarked rates that shift profits out of the UK attract close attention. HMRC’s updated Guidelines for Compliance (GfC7) flag intangibles as a high-risk area.
- Intercompany loans
Where the Indian parent funds its UK subsidiary through a loan, the interest rate must reflect arm’s length terms. Therefore, you must consider the borrower’s credit quality, the loan terms, and comparable market rates. HMRC publishes clear guidance on intercompany loan pricing. In addition, it scrutinises thin capitalisation closely. This is where excessive debt reduces UK taxable profits.
- Goods transfers
Indian businesses in textiles, chemicals, and pharmaceuticals often supply goods to their UK subsidiary for onward sale. Consequently, the transfer price between the Indian and UK entities must reflect arm’s length terms. Common methods include the resale price method and the cost-plus method. Importantly, the chosen method should be documented and defensible.
Documentation: what HMRC expects
The UK does not currently require you to submit transfer pricing documentation with your tax return. However, HMRC expects it to exist and can demand production during an enquiry. Good documentation demonstrates several things. First, that you have considered the rules. Second, that you have identified related-party transactions. Third, that you have selected and applied an appropriate arm’s length method consistently.
For larger groups, wider requirements apply. Specifically, groups with consolidated global revenues exceeding €750 million must comply with OECD BEPS country-by-country reporting. In addition, they must prepare an OECD-standard master file and local file for UK purposes. This applies to accounting periods beginning on or after 1 April 2023. In some circumstances, disclosures must also flow to tax authorities in other jurisdictions, including India.
Even below these thresholds, HMRC expects businesses to keep adequate records. A transfer pricing policy document is the foundation of a defensible position. Ideally, it is supported by a functional analysis of each group entity and a benchmarking study for key transactions.
Advance Pricing Agreements
For groups with significant or complex intercompany transactions, an Advance Pricing Agreement (APA) offers valuable certainty. In addition, a bilateral APA can be agreed jointly with the Indian tax authority. APAs fix the transfer pricing methodology in advance for a set period. Typically, this is three to five years. However, HMRC is also open to longer terms in certain cases.
APAs remain underused by Indian groups in the UK. Often, this is because the process seems time-consuming and resource-intensive. In practice, though, the certainty an APA provides usually justifies the investment. Furthermore, it removes a significant source of audit risk. HMRC’s APA programme is well established and set out in its International Manual.
The 2026 reforms: what is changing
Importantly, the UK transfer pricing landscape is evolving rapidly. For accounting periods beginning on or after 1 January 2026, several reforms take effect. First, a general UK-to-UK exemption applies to many domestic transactions. Second, Diverted Profits Tax is being replaced by a new Unassessed Transfer Pricing Profits (UTPP) charge. Third, HMRC continues to expand its guidance in high-risk areas such as intangibles and offshore procurement hubs.
Consequently, Indian groups establishing UK operations should build their transfer pricing framework to meet these evolving expectations.
Acting early
Transfer pricing is one area where early advice generates the greatest return. A policy established before transactions begin, documented correctly and reviewed annually, is straightforward to maintain. By contrast, a position reconstructed under an HMRC enquiry is expensive and stressful. In addition, it frequently leads to a worse outcome.
The increased volume of Indian businesses entering the UK will almost certainly draw more HMRC attention. As a result, now is the time to make sure your position is sound.
How we can help
Managing transfer pricing risks for Indian groups requires specialist knowledge of both UK and Indian tax rules. Our team advises Indian businesses on structuring, documentation, benchmarking, and APAs. Through Ecovis International, we also coordinate seamlessly with our colleagues in India. Together, we cover over 90 jurisdictions.
