Non-recognition and recharacterisation refer to the power of tax authorities to disregard the legal form of a controlled transaction and either substitute an alternative characterisation or deny the transaction any tax effect altogether. The power derives from the arm’s length principle as codified in Article 9 of the OECD Model Tax Convention and implemented in domestic transfer pricing legislation. Unlike a mere pricing adjustment, which accepts the transaction as structured and corrects only the price, non-recognition and recharacterisation go further: the authority asserts that no independent party would have entered into the arrangement at all, or would have done so only in a fundamentally different form.

Disputes typically arise where a multinational group uses an intermediate entity, a sale-and-leaseback of intangibles, or a re-invoicing structure that appears to lack independent commercial rationale. Tax authorities challenge arrangements such as Marcopolo’s offshore re-invoicing entities in the British Virgin Islands and Uruguay, trademark transfers followed by licence-back agreements as seen in Polish cases involving S. spółka z o.o. and P.B., or private equity financing structures involving Cayman Islands funds designed to produce deduction-without-inclusion outcomes. The taxpayer ordinarily argues that the transactions have genuine commercial substance and reflect choices that independent parties would make; the authority counters that the arrangement is circular, lacks business purpose, or has been constructed solely to generate tax deductions.

The governing framework is Chapter I, paragraphs 1.119–1.131 of the 2022 OECD Transfer Pricing Guidelines, which authorise non-recognition only in exceptional circumstances: where the economic substance of the transaction differs from its form, or where independent enterprises would not have entered into the arrangement and its structure practically impedes determination of an arm’s length price. Chapter VI addresses recharacterisation in the context of intangible transfers and licence arrangements. Domestically, courts have applied anti-avoidance rules, substance-over-form doctrines, and fraus legis concepts alongside these OECD standards, as illustrated by the Netherlands Supreme Court preliminary ruling on non-business loan characterisation.

Courts examine whether the transaction has economic substance, whether it was entered into for a non-tax business purpose, and whether comparable independent parties would have assumed the same risks and obligations. Evidence of cash flows, contractual allocation versus actual conduct, and the commercial coherence of the group structure is central. The Cameco Federal Court of Appeal decision illustrates that courts set a high threshold before displacing the taxpayer’s chosen form, requiring tax authorities to demonstrate that the transaction as structured cannot be priced rather than merely that a different structure would be more tax-efficient.

These cases collectively define the outer boundary of legitimate tax planning within multinational groups, making this category essential reading for practitioners advising on intragroup restructurings, intangible migrations, and financing arrangements.