Meaning
Management structures define the rules and procedures for financial interactions between different entities within the same corporate group. Effective intercompany governance ensures that transactions such as internal loans or service agreements are conducted at arm’s length. This framework maintains the legal and financial separation of subsidiaries and ceases to apply if the entities are merged into a single legal person.
Control Policy
Directives from the parent company set the boundaries for how subsidiaries can move cash and assets between themselves. Through intercompany governance, a group prevents individual offices from taking on excessive risk that could endanger the whole organization. This oversight is necessary for accurate consolidated financial reporting.
Transfer Pricing
Rules require that the price of goods or services sold between related parties matches the market rate. Within the scope of intercompany governance, these prices are documented to satisfy tax authorities and prevent illegal profit shifting. This documentation is a primary defense during a multi-jurisdictional tax audit.
Entity Liability
Legal protections depend on each company in the group being treated as a distinct business with its own board and capital. Weak intercompany governance can lead a court to pierce the corporate veil, making the parent responsible for the debts of the subsidiary. This risk makes the formal recording of all internal meetings and contracts an essential administrative task.
Clear separation of interests helps to limit the contagion of financial failure between different parts of the group.
