Arm’s-Length (Arms-Length) Transaction, Sales at-

A transaction between two unrelated parties, or where the transaction is between related parties, a calculation of price and agreement of terms that is not influenced by the relationship between the parties. Related party transactions can be very difficult if there is no unrelated party transaction to act as a measure for fairness. ‘Arm’s-length’ is a term frequently used in licensing and tax-law.

One problematic issue that arises with respect to royalty rates is that some parties and markets are notorious for heavily under-reporting sales (cheating) – licensors frequently respond by charging higher royalty rates so as to recover the anticipated ‘under-report.’ However, tax authorities may see this as an arm’s-length sale for establishing what a reasonable royalty rate should be. See Super-Royalties.