Everything on Associated Enterprises | Article 9


We live in a world of conglomerates. Today enterprises are part of large, complex, and intertwined networks of entities. The growing number of mergers and acquisitions has made some companies a giant oak tree sheltering thousands of companies across the globe. When entities are part of a family, then commercial transactions are arranged to favor them the most. What would be an open market term might not exist in the business among related parties.

Frequently we come across the news of related entities ending up in tax litigation, the reason being the tax evasion. Article 9 of the OECD Model Tax Convention assists the contracting states to plug the hole of tax evasion through the channel of related entities or associated enterprises.

When are enterprises associated with each other?

In simple words, parent companies, subsidiary companies, and companies under common control are called ‘associated enterprises.’

The below image will explain the term ‘associated enterprise.’

Associated Enterprises as defined by Article 9 of the OECD Model Tax convention
Associated Enterprises by Article 9

How does Article 9 tax the Associated enterprises?

Article 9 (1) of the OECD Model Tax Convention will adjust the profit :


  1. Two or more associated enterprise enter into a transaction, and
  2. The terms of the transaction involve conditions (commercial or financial) which would not exist in the open market commercial transactions between independent parties,


Article 9(1) empowers the contracting states to adjust the profits derived by the entity through the specified transaction.


Any price paid more than the Arm’s length price (Open market price) will be reduced and taxed as the profits of the entity.


ZM Inc, of State C, owns Zinka Inc, incorporated in State A and Minka Inc, incorporated in State B. Zinka Inc, specializes in selling assorted chocolates and placed an order to Minka Inc, for cocoa beans. According to the terms of the contract, Minka Inc will supply a crate of cocoa beans at 1000$. Competitors of Zinka Inc procure the cocoa beans at around 800$. Assuming all the countries have adopted the OECD Model Tax Convention, how will Article 9 impact Zinka Inc taxation?

Example of Associated Enterprise transaction
Illustration: Associated enterprises as mentioned under Article 9

In the given case, the same entity controls Zinka Inc and Minka Inc, hence are the associated enterprises.

The Arm’s length price prevalent in State A is 800$. Zinka Inc shows purchases in its books at 1000$ for the deduction. Article 9(1) empowers the tax authorities of State A to increase the profits of Zinka Inc by 200$ by adjusting the purchase price to 800$.

Relationship between Tax treaty and Domestic thin capitalization rules

Committee of Fiscal Affairs in their report on ‘Thin Capitalisation’ has discussed the interplay between the tax treaties and domestic regulations on thin capitalization.

The Committee considers:

  1. Article 9 does not prevent the application of domestic rules on thin capitalization as it attempts to bring the profits of the borrower to the profits it would have been during the arms-length transaction.
  2. Article 9 seeks to identify whether the loan provided is at the rate which is prevalent in the arms-length transaction
  3. Article 9 identifies whether the loan is prima facie a loan or is to be considered the contribution towards the capital.

The principles of thin capitalization seek to bring the profits of the enterprise at the Arm’s length profit only and will not have the effect of increasing the taxable gain.

Impact on profits from the adjustment made under Article 9(2)?

Adjustments made by Article 9(1) opens the door for economic double taxation. The amount which is adjusted gets taxed in both the states and to avoid it, Article 9(2) provides the other State to make appropriate adjustments.

Continuing the previous example, as per Article 9(2), Minka Inc can take the corresponding adjustment in its books and treat the sales price as 800$ rather than 1000$.

The tax authorities of the other State do not need to accept the adjustments made by the States on the profits and transaction price. The many States allow the modifications only if it is satisfied with the computation as no government wishes to reduce its exchequer.

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