LRD vs fully fledged distributors: key contractual differences

A comparison of typical commercial terms

There is, of course, no such thing as a ‘limited risk distributor’ (or ‘LRD’) in transfer pricing. As the ongoing Amount B debacle shows us, it’s not easy to squeeze real-life fact patterns into pre-defined boxes.

Nevertheless, the term ‘LRD’ can be a useful way to highlight the contrast with a so-called ‘fully fledged distributor’, as long as both terms are approached with caution.

The OECD Transfer Pricing Guidelines tell us that the ‘true’ contractual arrangement between the parties is as important as the functional analysis (who does what) in delineating a transaction. Because, amongst other things, the contractual allocation of risks can completely change the economic substance of the transaction.

In the slide above, I’ve summarised some of the key differences between LRDs and fully-fledged distributors, as regards the ‘typical’ contractual terms of their appointment. (And in passing, it illustrates why using third party contracts is usually a poor place to start when drafting intercompany agreements.)

The slide is not exhaustive; it only contains as much as will legibly fit in the available space. If it is missing anything that you think is particularly important, or if you have any suggestions for how it could be improved, please let me know.

Article by Paul Sutton

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