A transaction conducted between parties with a pre-existing relationship, such as family members or affiliated companies, where the terms are not necessarily determined by market conditions. This can manifest as the sale of an asset at a price significantly different from its fair market value or the provision of services without a standard rate. For instance, a parent selling a property to their child for substantially below market price exemplifies this type of exchange.
Understanding the implications of these dealings is crucial, particularly in financial reporting and taxation. Such arrangements can potentially distort financial statements and lead to tax avoidance if prices are manipulated to shift profits or losses between related entities. Consequently, regulatory bodies often scrutinize these activities to ensure fairness and prevent illicit practices. Historically, concerns over tax evasion have driven increased oversight and the development of specific regulations governing valuation and transfer pricing.
