Intercompany Service Agreement

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Intercompany Service Agreement

Intercompany Service Agreement is an agreement between two or more businesses or divisions of the same parent company or corporation. One of the two parties involved would be referred to as a service provider and another would be a recipient. Provider provides a service to the other party in exchange for money.

The service provider can provide a wide range of service depending on the requirement of the other party involved. The Intercompany Service Agreement doesn’t put a restriction on the nature of service. It is a type of Intercompany Agreement, which actually includes more than just services. It may include cost and revenue sharing, intellectual property licenses, etc. This agreement can also refer to the internal transaction of sales or transfer of good. All kinds of intercompany agreements are a basic part of Transfer Pricing compliance.

When is Intercompany Service Agreement Needed?

While the tip of the iceberg is the service provided by one party to another, Intercompany Service Agreements are used for many other reasons by corporations and businesses that have more than one company or division under them. Intercompany transitions help companies in a huge way by using specific methods and defining the way transfers can take place.

Purpose of the Intercompany Service Agreement:

  • To use the service of a company within the corporation itself
  • To make intercompany transitions easy and legal
  • To mitigate adverse tax consequences
  • To benefit from the expertise of one company
  • To make the best use of service provided by the owner’s company’s other division
  • Resource sharing between involved parties

Inclusions in Intercompany Service Agreement

Like many other service agreements, Intercompany Service Agreement will also have the details of service or service that will be provided by the service provider and, the payment, details mode and terms. The promises made by both the parties should be noted down in the agreement to avoid future conflicts and legal ramifications.

The agreement will also have names, address, phone numbers, etc of both the companies involved. It should be noted that the details of termination are very crucial for an agreement like this so one should be careful with the termination dates, terms and promises. The agreement should specify these details adequately. Parent company’s name should also be mentioned in this agreement.

How to Draft Intercompany Service Agreement?

It is very important to note that the Organization for Economic Co-operation and Development (OECD) has set the guidelines for Intercompany Service Agreements. Under the OECD’s Base Erosion and Profit Shifting (BEPS) guidance, it is required out of corporations to produce an agreement. Due to the legal binding, it is highly suggested that one should take an expert’s help to draft the Intercompany Service Agreement.

The type of service and payment promises should be cleared out, in the beginning, itself to avoid any future conflicts and legal intervention. The agreement should mention the list of deliverables with the timeline and payment method with caution.

Here are some more common terms that should be added in the agreement –

Benefits of Intercompany Service Agreement

This agreement benefits the parent company more than the parties involved. For the parties involved, it is more or less like a relationship of the service providers and the recipient. For the recipient, it gets extremely convenient to take help from its own sister organization or business. In addition, the recipient also gets to use the expertise of a company that has the niche in the required area.

Payment negotiations are easier when companies involved in an agreement are part of the same bigger group but one should keep in mind the Transfer Pricing. It is important to comply with the rules otherwise a strict action can be taken against the defaulters.  It becomes easy for the parties to have trust on each other.

  • Easily available service
  • More reliance because of the same parent organization
  • No adverse effect on taxation
  • Intercompany transactions are easier to handle
  • Easier data interpretation

Key Clauses in Intercompany Service Agreement

Some very crucial clauses of the Intercompany Service Agreements are –

  • Governing law
  • Force Majeure
  • Cost Sharing
  • Access to Employees and Information
  • Dispute resolution

While the common terms and clauses remain the same for any type of service, some other terms add up further for specific service such as technical, Administrative, Sale and Marketing, Air travel, etc.

What Happens When You Violate the Intercompany Service Agreement?

As discussed above, Intercompany Service Agreements are monitored by tax companies. They also have legal binding, so in the case of any breach and violation both the parties stand a right to approach the court. The agreement would have details about the governing law, one should pay close attention to them before signing the agreement.

It is highly common that the payment methods create confusion later on so the agreement should specifically mention the details of payment, payment mode, payment cycle, etc.

Sample Intercompany Service Agreement

Intercompany Services Agreement is a legally enforceable document so the terms and clauses should be dealt with carefulness. Our expert attorney has drafted a sample of this agreement. You can download simple intercompany service agreement template here and customize it as per your requirement.

Intercompany Service Agreement Template

Intercompany Service Agreement

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