Legal Definitions - arm's length

Definition: “Arm’s length” is a term used to describe business transactions between two or more parties who are not related or affiliated with each other. In these transactions, the parties act independently and in their own self-interest, with equal bargaining power and symmetric information. The terms of the transaction are agreed upon based on fair market conditions.

For example, if a company wants to buy a product from another company, and both companies are not related or affiliated, they can negotiate the terms of the transaction at arm's length. This means that they will agree on a fair price for the product based on market conditions, without any undue influence or pressure from either party.

However, if a company wants to buy a product from its subsidiary, which is a related party, the transaction may not be considered arm's length. This is because the parent company may have more bargaining power and information than the subsidiary, and may not negotiate the terms of the transaction based on fair market conditions.

The concept of arm's length is important because it ensures that business transactions are conducted fairly and transparently, without any conflicts of interest. It also has legal and tax implications, as many countries require companies to engage in business transactions with related parties at arm's length to ensure that taxes are correctly allocated.