A non-arm’s length transaction, also known as an arm-in-arm transaction, is the opposite of an arm’s length transaction. This is where two parties in an existing relationship (either a personal or a business relationship) come to a deal. For instance, if a parent sells a house or a car to their child, this is a non-arm’s length transaction: the parent would likely offer the child a discount.
Non-arm’s length transactions are legal, but tax laws are generally designed to treat these transactions differently from arm’s length transactions.
For example, if you make an international sale between two subsidiaries of the same parent company, this should be made using arm’s length (neutral) prices. This is transfer pricing, and it ensures each country gets its fair share of taxes.