Related-party transactions: concept, scope and how to record them correctly

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🏁 Understanding what a related-party transaction really is

Related-party transactions appear in the daily activity of many businesses, although they are not always identified correctly. They occur when a company — or a self-employed professional — carries out a transaction with someone who can influence its decisions: shareholders, directors, group entities or close family members.

Although they may seem routine — loans, services, purchases, rentals, asset transfers — they have significant tax and accounting implications. The reason is simple: when a relationship exists between the parties, the tax authorities require that prices reflect those that independent companies would agree in comparable market conditions.

This is the well-known arm’s length principle, the cornerstone of the OECD’s international transfer pricing framework.

➤ If you want to understand how tax residency and effective control are determined within corporate groups, we recommend the article Place of effective management: key to determining a company’s tax residence.

🧩 What is considered a related party?

A related party exists where there is control, influence or dependence between the parties. Without entering into extensive legal definitions, the typical situations are:

• A shareholder with significant direct or indirect participation.
• A director or executive with decision-making influence over the transaction.
• Companies with shared shareholders or directors.
• Corporate groups, even if not formally structured.
• Close family members of a shareholder or director involved in the transaction.

Under Andorran tax law, this concept is primarily defined in the Corporate Income Tax Law 95/2010, which allows the Administration to adjust the transaction’s value if it does not reflect market prices.

📢 Why related-party transactions matter

They have direct implications:

• On the taxable base of Corporate Income Tax.
• On the deductibility of expenses and the valuation of income.
• On the true and fair view required by the Andorran GAAP (Law 30/2007).
• On transparency with the tax authorities, especially after the 2023 tax reform and OECD/EU alignment.

Common errors — interest-free loans, unjustified services, illogical prices or below-market rentals — may lead to:

• Adjustments during audits.
• Late-payment interest.
• Disallowance of expenses considered artificial.

➤ For group structures, you may find useful Holding companies in Andorra: taxation and key advantages.

⚖️ Essential regulatory framework

🇦🇩 Corporate Income Tax Law 95/2010

Although each country has different rules, the underlying principles are similar. In Andorra, this law requires related-party transactions to be valued at market price and allows adjustments when the declared value is not reasonable.

➤ To deepen your understanding of corporate taxation, see Corporate tax in Andorra: rates, special regimes and tax deductions.

📘 Andorran GAAP (Plan General de Comptabilitat – Law 30/2007)

It requires transactions to be recorded in accordance with the true and fair view and to disclose information in the notes to the financial statements: relationship, amounts and year-end balances.

➤ For a clearer understanding of Andorran accounting rules, see Accounting in Andorra: origin and structure of the General Accounting Plan (PGC).

🌍 OECD – Transfer Pricing Guidelines (2022/2024)

International reference for valuing intra-group transactions and defining accepted methods.

🇪🇺 ATAD Directive (2016/1164)

It does not directly regulate transfer pricing but provides anti-abuse principles applicable to intra-group arrangements.

In short: related-party rules follow an international logic; they are not unique to Andorra.

📏 The arm’s length principle

This principle requires that the operation be valued as if it had been carried out between two independent parties.

Common examples in Andorra:

• Shareholder–company loan → must apply an interest rate consistent with the market.
• Services between group companies → services must be real, and prices must be comparable or reasonably justified.
• Rentals between shareholders and the company → must reflect market conditions.
• Transfers of assets → require a justified valuation.

☑️ Accepted methods to value related-party transactions

The OECD recognises five main methods:

🔹 Comparable Uncontrolled Price (CUP)

Compare with prices agreed between independent companies.

🔹 Cost Plus Method

Cost of the service + reasonable margin.

🔹 Resale Minus Method

Start from the final resale price and deduct a standard margin.

🔹 Transactional Net Margin Method (TNMM)

Compare the operating margin with similar companies.

🔹 Profit Split Method

Useful where several group entities contribute jointly to creating value.

In Andorra, SMEs usually rely on CUP and Cost Plus due to their simplicity and the availability of comparables.

🤝 How to correctly record a related-party transaction

Proper management combines documentation, valuation and accurate accounting.

Documenting the transaction

Written contract, economic justification, market evidence (interest rates, prices, margins) and external valuation reports when relevant.

Applying a reasonable valuation

Market-based interest rates, comparable prices or independent valuations for significant asset transfers.

Recording the transaction in the accounts

Income and expenses must be recognised under the PGC, reflected clearly, and consistent across the invoice, accounting records and notes.

Disclosing information in the notes to the financial statements

The PGC requires disclosure of:
identity of the related party, nature of the relationship, amount, conditions and closing balances.

👁️ Common examples in Andorra

• Shareholder–company loans without interest or at symbolic interest rates.
• Directors providing services without proper remuneration or justification.
• Rentals between shareholders and their company, or absence of rental arrangements.
• Intra-group services.
• Transfers of assets without professional valuation.

All these situations may lead to adjustments if the values do not reflect market conditions.

➤ To better understand how to remunerate shareholders and directors, read How to remunerate partners and directors legally and tax-efficiently.
➤ If you are planning to set up a company or manage several structures, consult Key aspects to consider before incorporating a company.

Conclusion

Related-party transactions are not a problem in themselves; they form part of the normal life of any business.
The risk arises when they are not documented, justified or valued correctly.

Prudent management — transparency, documentation and reasonable pricing — helps avoid future adjustments and ensures compliance with OECD standards and Andorran legislation.

If you would like us to review your related-party transactions or need assistance documenting and recording them correctly, we can guide you so you can take decisions with confidence. You can book your personalised meeting below or contact us through the form.

Last revision: November 2025.