Delineation is now in focus as proposed updates to Chapter VII reshape the private equity approach to transfer pricing methodologies, shareholder services, and benefits.

It is indisputable, despite a long stream of business challenges, Hong Kong has endured as one of Asia’s premier international financial centers, with free capital flows, a common law system, and deep capital markets making it a highly attractive base for private equity firms seeking to raise funds, access the Mainland China market, and execute cross-border transactions. Operationally, multinational portfolio companies often set up their regional headquarters in Hong Kong to oversee operations across Asia-Pacific, benefiting from its strategic location near Mainland China and other key Asian markets.

For Hong Kong based private equity firms, hidden tax risks embedded in complex webs of intra-group service fees are an accepted fact of business. From due diligence investigation to post-merger integration, intra-group services are often found to lack clearly documented benefits, rely on unsubstantiated transfer prices and exhibit inconsistent application of service pricing policies, often a consequence of disruption from business restructuring.

The OECD’s public consultation document, released on June 1, 2026 (Consultation Document), proposes revisions to Chapter VII of the OECD Transfer Pricing Guidelines that deal with intra-group services and brings forward a clear theme - the starting point of an intra-group services policy is a clear delineation analysis. Delineation requires a deeper degree of granularity than a functional analysis, beginning with mapping specific tasks to actual employees to understand who exercises control over a function and who is accountable for the embedded risks. Contractual labels and broad descriptions of activities are increasingly insufficient to determine how a service should be accurately positioned within a transfer pricing framework.

While attention is often given to transfer pricing service models during due diligence to identify existing tax risks, post-merger operations are where the approach to an integrated services pricing model between target portfolio companies and the fund encounter operational complexity.

The Private Equity Service Model – Intrinsically Complex With Multi-Layer Considerations

Private equity firms often employ a complex series of intra-group service charges to manage their investments and generate revenue. The primary flow of fees runs from the portfolio company to the general partner (GP) of the private equity fund, with charges often taking on the following characteristics: (i) Transaction/portfolio management/monitoring to optimize the private equity fund’s investment returns; (ii) On-the-ground deal sourcing and market intelligence that provide management with direct visibility into local opportunities and serving as the firm's investment execution arm in the region; and (iii) Operating support such as strategic management, HR, IT, legal, or treasury that provides day to day operational assistance at the portfolio level.

Beyond the GP‑portfolio company relationship, many private equity firms also use a central ‘portfolio headquarters’ or shared services center within the portfolio group to deliver cost‑efficient, standardized support across their entire investment portfolio. This central unit often provides functions such as finance, procurement, IT, and legal services to portfolio companies, charging them on a usage‑based or allocated‑cost basis.

Reshaping the Application of Transfer Pricing Methodologies

Perhaps the most notable area addressed by the Consultation Document is the refinement of the OECD’s view on transfer pricing methodologies and the calculations underlying their application to intra-group services. For private equity firms and their service models, revisiting transfer pricing methodologies, both as applied by target companies in existing structures and as new businesses are integrated into larger portfolios, gives rise to several important considerations.

Cost-plus is no longer the default.

Private equity firms face recurring challenges when examining pre- and post-deal transfer pricing service models - unsubstantiated intra-group service charges that are broadly characterized as cost based or fixed fee to minimize transfer pricing complexity. Absent a detailed transfer pricing analysis, the traditional response has been to revert to a cost-plus method, which generally held consensus as the default accepted methodology to price intra-group services and is specifically referenced in the OECD Guidelines. The Consultation Document challenges this assumption:

The most appropriate transfer pricing method should be determined according to the guidance in Chapters I-III. It should not be assumed that a particular transfer pricing method such as a cost-based method (cost plus method or cost-based transactional net margin method) is always preferred for intra-group services. In selecting the most appropriate transfer pricing method, it is important to consider the economically relevant characteristics of the intra-group service (e.g. the use of any unique or valuable intangibles and the risk profiles of the relevant entities) rather than the label assigned to the services.[1]

While the Consultation Document does not specifically dislodge the position of the cost-plus method in the methodology hierarchy, it shifts the dynamic such that cost-plus should no longer be unchallenged as the most appropriate methodology for pricing intra-group services, and heightened consideration of other methodologies (specifically the Comparable Uncontrolled Price (CUP) and the Profit Split methods) should be implemented.

The guidance highlights that clear delineation of (service) transactions is increasingly required for identifying accurate transfer pricing treatment, and blanket application of cost-plus to broadly labelled services is no longer an acceptable safe harbor approach.

Relevant to the acquisition activity of Hong Kong based private equity firms, the Consultation Document prompts consideration of two common business models where alternative methodologies can be called into review:

CUP – Linking supply chain services with scalable value.

Although the CUP methodology[2] has always been conceptually available for transfer pricing service models, its practical application is often constrained by demanding comparability standards and a general scarcity of robust benchmarking data. Consequently, the cost-plus method tends to be preferred because it is less sensitive to comparability challenges and data limitations. The Consultation Document renews attention to applying the CUP methodology to intra-group services, which leads to a very specific consideration for Hong Kong based private equity firms.

While the economic landscape has undergone several iterative phases, Asia (and particularly the Greater China region) has established itself as the world’s manufacturing engine, resulting in manufacturing and production related businesses being the most active sector for transaction activity[3]. Given the strong representation of manufacturing business related deals, many Hong Kong private equity firms oversee portfolio companies with substantial regional production supply chains. Value-linked service[4] models are therefore increasingly common, with supply chain activities such as procurement, sales support, and logistics often serving as key value drivers.

Consistent with the long-held OECD position, the new guidance does not specifically establish a CUP-led methodology hierarchy for supply chain service models but reinforces that CUP is the preferred methodology where comparability challenges are overcome and reliable comparables are available.

Importantly, independent market pricing (often through available third-party contracts) for such supply chain related services is frequently linked to transaction value or trade volumes[5]. Given the risk profiles associated with these transactions, a risk-based delineation approach would strengthen the case for applying a CUP-based supply chain service model by ensuring that the economically relevant characteristics, including the functions performed, assets employed, and risks assumed, closely mirror those of the independent transactions.

The table below illustrates how differing economic characteristics of procurement services would potentially impact the choice of transfer pricing method. Services that exhibit higher levels of functionality and risk may align more consistent with independent commission-based providers, rather than a more routine cost-plus approach. 

Profit Split – technology driving business.

The Profit Split[6] method is generally considered where intra-group services involve a high degree of complexity or integration (such that the value of the service cannot be cleanly allocated across the value chain), particularly when the activity contributes to the development of business driving IP.

With the Greater China region formally announcing technology and innovation as a core component of its economic future, even receiving direct spotlight in the 15th Five-year Plan (2026-2030), the acquisition of businesses founded on novel and unique R&D originating in Mainland China has become a key area of investment focus for growth orientated private equity firms[7]. Within these businesses, the location of value creating development functions is a significant tax priority with a cursory allocation of functions at the entity level through simple contractual assignment, in the absence of real economic substance, no longer being sufficient.

Addressing the value creation dynamics and substance requirements of increasingly decentralized, technology driven business services involving R&D, data analytics, AI-related activities, and shared technology platforms is becoming a higher priority issue at the due diligence and post deal planning stages. For example, in an increasingly mobile workforce, start-up technology development is often driven by talented developers working remotely from Eastern Europe, with the commercial team based in Hong Kong or Mainland China. A delineation driven review of this structure may identify key development tasks and associated risks assumed by remote workers, which, at the due diligence stage, could give rise to substantial deal risks, not only from a transfer pricing perspective but also through the unrecognized creation of permanent establishments and unclear IP ownership. Post deal, this type of structure may also encounter challenges if management seeks to establish a robust and efficient IP model going forward.

The Consultation Document reinforces that a detailed delineation of where IP related functions and risks are controlled and managed (and by whom) is now the paramount factor in determining the allocation of profits across the IP value chain. Where the delineation outcomes bear the hallmarks of highly complex, intertwined decision making and risk assignment model, there is greater emphasis on the Profit Split’s leading position as the most appropriate transfer pricing methodology to accurately align value and profit.

Post-Merger Duplication

Within a portfolio group, a key issue is duplication of services, especially in a bolt on context where each merging businesses carries over its respective service functions from their legacy operations. For example, it is common for two businesses to maintain their own shared service functions (finance, HR, legal), and, upon merger, the challenge facing the private equity manager is how to untangle the potentially duplicated services.

The Consultation Document reaffirms the long-held principle that a service is not chargeable (i.e., the service costs cannot be passed on by the service provider) where the service activity is duplicated and is already performed by the recipient or by another provider within the group. That said, the Consultation Document clarifies that duplication must be assessed on a case-by-case basis. A degree of overlap may still be chargeable if facts and circumstances show that both sets of services are required, for example, where an activity is temporary due to the business merger, complementary, performed for reasonable risk mitigation (such as obtaining an appropriately localized/specialized second opinion), or required by regulation to be carried out both locally and centrally. Incidental benefits (e.g., one group member performs an activity that provides a direct benefit to itself or for certain group members and incidentally benefits other group members) should also not create a chargeable service to the extent that the potential benefit is indirect or remote, such that an independent enterprise would not be willing to pay for it and would not be willing to perform a comparable activity for itself.

The refined guidance reinforces the need for private equity management to identify potential duplication in merging structures and to review each service for chargeability. Such issues can be addressed and managed through a clear investigation and documentation of the facts to ensure that service charges reflect the post-deal business reality.

Portfolio Management - Shareholder Services or Operating Benefits?

The Consultation Document re-emphasizes the treatment of shareholder services, offering expanded commentary and concrete illustrations to clarify the boundary between shareholder functions and broader stewardship or management responsibilities. The fundamentals remain the same - tasks carried out solely due to ownership and benefiting only the shareholder in question remain non-chargeable. The draft reiterates familiar examples, including matters tied to corporate structure, parent-level reporting and audit, investor relations, equity financing for acquisitions, and compliance with the parent’s tax obligations.

At the same time, the Consultation Document asserts that activities undertaken at the portfolio parent or private equity fund level (e.g., Chief Executive Officer) are not automatically qualified as shareholder activities, nor do they automatically imply that a service charge should be denied (and vice versa). Whether such activities are chargeable still requires a careful factual and functional assessment. In this respect, the guidance provides a stronger basis for distinguishing non-chargeable ownership duties from chargeable forms of coordination, advisory input, technical expertise, or operational support.

With a centralized oversight structure, private equity firms focused on portfolio returns typically engage in the following types of oversight activities:

• Transaction/Portfolio Management/Monitoring - Target identification, deal sourcing, exit planning, group restructuring, and strategic board support to the private equity network. These activities are likely shareholder services because they do not directly benefit portfolio company operations and should not create a chargeable service.
• Operational Support - Procurement optimization, IT systems implementation, and HR policy development. These are likely not considered as shareholder services because they provide a direct benefit (and ultimately profitability) to portfolio company operations and should create a chargeable service.

While the additional commentary on shareholder services needs to be addressed, it is clear that the risk driven delineation of these strategic management activities and a detailed functional analysis remains critical to substantiate the service model.

Clarity on the Benefits Test

Globally, tax authorities prevail in approximately 64% of intra-group services disputes, with benefit test failures being the most common reason for disallowance[8].

Private equity is a returns focused business, where the firm's primary operational objective is to drive sustainable EBITDA growth and maximize investment returns, typically through margin enhancement, revenue optimization, and strategic portfolio management.

Relating to this model, a significant aspect highlighted by the Consultation Document is in relation to the chargeability of intra-group services and the refinement of where a ‘benefit’ can be observed. The OECD has long defined a benefit exists when one group member provides another with economic or commercial value that enhances its business position. The long-standing test for whether a benefit exists is whether an independent enterprise, in comparable circumstances, would have been willing to pay for the activity if performed by another independent enterprise or would have performed the activity in-house.

The Consultation Document now includes an important clarification, a reasonable expectation of benefit may be sufficient even if anticipated benefits do not ultimately materialize.

As noted above, portfolio companies often pay service fees for a variety of operational benefits, including strategic advice, turnaround support, and operational improvements. If those improvements fail to materialize (e.g., a transformation project misses targets), it was previously less clear whether there was an embedded risk that service fee deductions would be disallowed. Another example would be the private equity firm’s in-country deal sourcing support, where a local investment sourcing subsidiary identifies opportunities that may never reach the transaction stage. The Consultation Document now provides explicit certainty that the existence of the benefit is not linked to whether the beneficiary ultimately capitalized on it to achieve a beneficial outcome.

Where the activities do not deliver the benefit as expected, an evaluation of multiple year data may be valuable in understanding whether the benefit was, in fact, reasonably expected at the time the activity was performed. In addition, such information may be valuable in determining whether the ongoing activity consistently fails to deliver a benefit as expected, and if so, to assess whether independent parties would be willing to continue to pay for such activities [9].

The guidance is also explicit that contemporaneous documentation is more critical than ever and where an expected benefit does not materialize, a lack of clear documentation identifying the nature of the expected benefit and the rationale for why it was substantially expected to materialize could lead to full disallowance.

Key Takeaways:

The messaging is clear – intra-group services can no longer be viewed through a superficial lens and characterized under a blanket cost-plus approach. When identifying embedded target risks and designing post deal operating service models, private equity management now needs to be mindful of the extended details included in the Consultation Paper:

• While an entity level functional analysis is a starting point for substantiating intra-group service charges, a detailed delineation analysis is now key to thoroughly position the control of business functions and risk and to ensure accurate compensation across the post-merger value chain.
• The deductibility of intra-group service charges could now also be subject to heightened risk unless the services are supported by clear delineation analysis and the transfer pricing treatment is accurately identified and documented accordingly.
• Transfer pricing methodologies for services are no longer assigned to a cost-plus methodology by default - the application of alternative methodologies such as the CUP and Profit Split need to be considered in view of business realities.
• The application of transfer pricing in both due diligence and post-merger integration is evolving, with specific consideration on the transfer pricing impact of operational duplication and on substantiating benefits for supervisory portfolio services taking on heightened importance.

• Documentation will remain critical to conducting the right analyses and ensuring a defensible post-deal strategy.

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References

[1] Revisions to Chapter VII of the OECD Transfer Pricing Guidelines – Special considerations for intra-group services, para 7.52, OECD, June 1, 2026.

[2] The CUP method is a traditional transfer pricing method that compares the price charged in a transaction between related parties (a controlled transaction) to the price charged in a comparable transaction between independent parties (an uncontrolled transaction). It is considered the most direct and reliable way to apply the arm's length principle when sufficiently comparable data is available

[3] State Administration for Market Regulation: Domestic Corporate Mergers and Acquisitions Were Relatively Active in the First Half of the Year, Economic Information Daily (Xinhua News Agency), July 30, 2025.

[4] Intra-group services that go beyond routine, low-value support functions and directly contribute to or drive the revenue, profitability, or strategic value of the multinational enterprise (MNE) group

[5] Independent enterprises are not captive in nature and would be required to run a more wholistic operation

[6] The Profit Split method is a transfer pricing methodology that identifies the relevant profits (or losses) from a controlled transaction between associated enterprises and then splits them on an economically valid basis

[7] Headline deals such as the acquisitions of SMIC and Animoca brands

[8] Intra-Group Services Transfer Pricing: Cases and Guidance, TPcases

[9] Revisions to Chapter VII of the OECD Transfer Pricing Guidelines – Special considerations for intra-group services, para 7.16, OECD, June 1, 2026.