Arm's length principle

The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction".

It is used specifically in contract law to arrange an agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer–employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).....

It is also one of the key elements in international taxation as it allows to an adequate allocation of profit taxation rights among countries that conclude double tax conventions, through transfer pricing, among each other. Transfer pricing and the arm's length principle was one of the focal points of the Base Erosion and Profit Shifting (BEPS) project developed by the OECD and endorsed by the G20.

A simple example of not at arm's length is the sale of real property from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences. To avoid such a classification, the parties need to show that the transaction was conducted no differently from how it would have been for an arbitrary third party. This could be done, for example, by hiring a disinterested third party, such as an appraiser or broker, who could offer a professional opinion that the sale price is appropriate and reflects the true value of the property.

The principle is often invoked to avoid undue government influence over other bodies, such as the legal system, the press, or the arts. For example, in the United Kingdom Arts Councils operate "at arm's length" in allocating the funds they receive from the government.

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