Intercompany Agreements That Actually Work

The invisible infrastructure of multi-entity startups

The moment an African startup establishes a second legal entity, whether a holding company in Delaware or a subsidiary in a new market, it creates an intercompany relationship that must be governed by written agreements. This is not optional. It is a legal requirement in every jurisdiction where we operate, and the consequences of ignoring it range from transfer pricing penalties to the complete disallowance of tax deductions on intercompany charges. Yet in our experience advising startups across 18 African markets, fewer than 20 percent have adequate intercompany agreements in place at the time they raise their Series A. The median cost of establishing these agreements retroactively, including the transfer pricing documentation required to support them, is $60,000 to $120,000. The cost of establishing them correctly from the outset is $8,000 to $20,000.

This guide explains the intercompany agreements that every multi-entity African startup needs, the terms that matter most, and the specific transfer pricing considerations that apply in the jurisdictions where African founders most commonly operate.

The four essential agreements

Every multi-entity African startup needs at minimum four categories of intercompany agreement. The specific terms vary by jurisdiction and business model, but these four cover the vast majority of intercompany transactions we encounter.

1. The IP licence agreement

In most African tech startups, the intellectual property, including the software platform, brand, and proprietary algorithms, is owned by the holding company or a designated IP-holding entity. Each operating subsidiary uses that IP to conduct business in its local market. This usage must be governed by a licence agreement that specifies the scope of the licence, the territory, the duration, and critically, the royalty rate.

The royalty rate is where most startups get into trouble. Transfer pricing rules in every African jurisdiction require that the royalty charged by the IP owner to the operating subsidiary reflect what an unrelated party would pay for a comparable licence in an arm's length transaction. In practice, royalty rates for technology platform licences in Africa typically range from 3 to 8 percent of the subsidiary's net revenue, depending on the nature of the technology, the degree of localisation required, and the availability of comparable transactions. The Nigeria Federal Inland Revenue Service has published guidance indicating that royalty rates above 5 percent will receive heightened scrutiny for technology licences. The South African Revenue Service applies the OECD Transfer Pricing Guidelines and generally accepts royalty rates that are supported by a benchmarking study using comparable uncontrolled transactions.

The most common mistake we see is founders setting the royalty rate at whatever percentage produces the desired profit allocation between entities, without any economic justification. This approach invites audit adjustment. Revenue authorities in Nigeria, Kenya, and South Africa now have dedicated transfer pricing audit teams with access to international databases of comparable transactions. A royalty rate that cannot be supported by a contemporaneous benchmarking study is a royalty rate that will be adjusted, typically upward in the jurisdiction receiving the payment and denied as a deduction in the jurisdiction making the payment, creating double taxation.

The IP licence agreement should also address the allocation of development costs. If engineers in the Kenyan subsidiary are contributing to the development of the group's core platform, the economic contribution of that development activity must be reflected in the intercompany pricing. This can be accomplished through a cost-sharing arrangement, a contract development services agreement, or an adjustment to the royalty rate. The specific mechanism matters less than the principle: every entity that contributes to the creation or enhancement of the group's IP must receive arm's length compensation for that contribution.

2. The management services agreement

The holding company or a centralised shared services entity typically provides management services to each operating subsidiary. These services include strategic planning, financial management and reporting, human resources administration, legal and compliance oversight, and investor relations. The management services agreement formalises this relationship and establishes the fee that the subsidiary pays for these services.

Management fees are typically calculated as a percentage of the subsidiary's revenue or as a cost-plus arrangement where the actual costs incurred by the service provider are marked up by an agreed margin. In our experience, management fees for African tech startups range from 5 to 12 percent of subsidiary revenue, or a cost-plus margin of 8 to 15 percent. The appropriate level depends on the scope and complexity of the services provided and the relative importance of centralised management to the subsidiary's operations.

The critical drafting point is specificity. A management services agreement that says the parent will provide "general management services" for a fee of 10 percent of revenue will not survive transfer pricing scrutiny. The agreement must enumerate the specific services to be provided, the methodology for calculating the fee, the basis on which costs are allocated to each subsidiary, and the key performance indicators by which the quality of service delivery will be measured. Revenue authorities in Nigeria and Kenya have both disallowed management fee deductions where the agreement lacked sufficient specificity to demonstrate that real services were provided and that the fee was commensurate with the benefit received.

A practical tip: maintain contemporaneous documentation of the services actually delivered. Monthly management reports, board presentations, financial analyses, and compliance reviews prepared by the holding company for the subsidiary should be retained as evidence that the management fee reflects genuine service delivery. In our experience, companies that maintain this documentation successfully defend management fee deductions in 90 percent of audit situations. Companies that do not maintain it lose approximately 60 percent of the time.

3. The intercompany loan agreement

When the holding company downstreams capital to an operating subsidiary, the transfer must be characterised as either equity or debt. The characterisation has significant tax consequences. Interest payments on intercompany loans are generally deductible for the borrowing subsidiary, reducing its taxable income, while dividend payments on equity are not deductible. This makes intercompany debt an attractive mechanism for extracting profits from high-tax jurisdictions to the holding company.

However, African jurisdictions have implemented thin capitalisation rules that limit the tax deductibility of interest on intercompany loans. Nigeria limits the debt-to-equity ratio for connected party lending to 2:1 for non-financial companies and restricts interest deductions to 30 percent of EBITDA under the Finance Act provisions. Kenya applies a debt-to-equity ratio of 3:1 for related party debt. South Africa restricts interest deductions on excessive debt through a combination of transfer pricing rules and specific anti-avoidance provisions that limit deductions where the debt exceeds what an independent lender would provide on similar terms.The intercompany loan agreement must specify the principal amount, currency, interest rate, repayment schedule, and security arrangements. The interest rate must reflect arm's length terms, meaning it should approximate the rate the subsidiary would obtain from an independent lender for a comparable loan. For African subsidiaries of technology startups, this rate is typically in the range of the local central bank base rate plus 3 to 8 percentage points, depending on the subsidiary's creditworthiness and the currency denomination. A loan denominated in US dollars from a Delaware parent to a Nigerian subsidiary at SOFR plus 2 percent is unlikely to reflect arm's length terms, because an independent lender would price the currency risk, country risk, and credit risk at a significantly higher margin.

The loan must also be treated as a genuine debt obligation, meaning the subsidiary must actually make interest payments on schedule and the parties must intend that the principal will be repaid. Revenue authorities in Nigeria and Kenya have recharacterised intercompany loans as disguised equity where the loans had no fixed repayment date, interest was capitalised rather than paid, and the commercial substance suggested that repayment was never genuinely expected. The tax cost of recharacterisation is severe: all prior interest deductions are disallowed, and penalties and interest on the underpaid tax are assessed retroactively.

4. The secondment or cost-recharge agreement

In early-stage African startups, personnel frequently work across multiple group entities. The CTO employed by the Kenyan subsidiary may spend 40 percent of her time managing infrastructure that serves the Nigerian and Ghanaian operations. The CFO employed by the holding company may spend significant time on local regulatory filings for each subsidiary. These cross-entity personnel deployments must be governed by either a secondment agreement or a cost-recharge arrangement.

A secondment agreement formally transfers an employee from their home entity to a host entity for a defined period. The employee remains on the payroll of the home entity, but the host entity reimburses the home entity for the employee's compensation costs plus an appropriate markup. The markup typically ranges from 5 to 10 percent and reflects the administrative costs of maintaining the employment relationship. Secondment agreements are most appropriate for extended deployments of three months or longer.

For shorter or more informal cross-entity work, a cost-recharge arrangement allows the entity that employs the individual to charge a portion of their compensation costs to the entities that benefit from their work. The allocation must be based on a reasonable and documented methodology, such as time sheets, project allocations, or headcount ratios. The key principle is that each entity bears a share of personnel costs that is proportionate to the benefit it receives from the employee's services.

The immigration and employment law implications of cross-entity personnel deployments are frequently overlooked. An employee seconded from Kenya to Nigeria requires a Nigerian work permit. An employee who spends more than 183 days in a jurisdiction other than their home country may create a permanent establishment for their employer in that jurisdiction, triggering corporate income tax obligations. We have seen at least a dozen cases where informal cross-border personnel arrangements created unintended permanent establishment exposures that resulted in back-tax assessments ranging from $30,000 to $200,000.

Transfer pricing documentation: what you actually need

Intercompany agreements alone are insufficient. They must be supported by transfer pricing documentation that demonstrates the arm's length nature of the pricing. The documentation requirements vary by jurisdiction, but the OECD's three-tiered approach, adopted in varying degrees by Nigeria, Kenya, South Africa, and Egypt, requires a master file describing the group's global operations and transfer pricing policies, a local file for each entity detailing its specific intercompany transactions, and country-by-country reporting for larger groups.

For early-stage startups, the practical minimum is a local file for each African subsidiary that documents each category of intercompany transaction, the pricing methodology applied, the comparable transactions or data used to support the pricing, and the economic analysis demonstrating that the pricing falls within an arm's length range. The cost of preparing this documentation ranges from $8,000 to $25,000 per entity per year, depending on the complexity of the intercompany transactions and the jurisdiction.

Nigeria requires transfer pricing documentation to be filed with the annual corporate income tax return. Companies that fail to file face penalties of up to 1 percent of the total value of connected party transactions plus NGN 10 million. Kenya requires transfer pricing documentation to be maintained contemporaneously and provided to the Kenya Revenue Authority within 30 days of a request. South Africa requires documentation to be available within 21 business days of a request.

The return on this investment is significant. In our experience, companies with robust transfer pricing documentation resolve audit queries in an average of three months with adjustments of less than 5 percent. Companies without documentation face average audit cycles of 12 to 18 months with adjustments that can reach 30 to 50 percent of the intercompany charges in question.

Getting started: a practical timeline

For founders who have not yet established intercompany agreements, the priority sequence is straightforward. In the first two weeks, engage a transfer pricing adviser to conduct a functional analysis of your group, identifying every material intercompany transaction and the appropriate pricing methodology for each. In weeks three and four, draft the four core agreements based on the functional analysis. In weeks five and six, prepare the initial transfer pricing documentation, including the benchmarking studies that support each pricing methodology. From month two onward, implement the operational disciplines required to maintain compliance: monthly intercompany invoicing, quarterly reconciliation of intercompany balances, and annual updates to the transfer pricing documentation.

The total cost for this initial establishment process ranges from $15,000 to $35,000 for a two-entity structure and $25,000 to $60,000 for a four-entity structure. These figures are a fraction of the cost of retroactive establishment during a Series A or Series B due diligence process, where time pressure and the need for retrospective documentation invariably increase both the advisory fees and the risk of suboptimal outcomes.

Intercompany agreements are not glamorous. They do not feature in pitch decks or accelerator curricula. But they are the connective tissue that holds a multi-entity group together, and the founders who invest in getting them right from the beginning are the ones who avoid the restructuring costs, audit penalties, and management distraction that consume their less disciplined peers. The infrastructure is invisible when it works. It becomes painfully visible when it does not.