Key points
An intercompany transaction is any exchange between two legal entities under common control, such as a parent and its subsidiary.
Each transaction is recorded twice, once in each entity's ledger, and the two sides must agree in amount, account pairing and period.
At consolidation the group removes these transactions, but they still matter for each entity's tax return, statutory accounts and cash.
For startups the most common types are cost-plus service fees, costs paid on behalf of another entity, intercompany loans and IP licenses.
A written intercompany agreement and a monthly matching routine prevent most of the differences that surface during an audit.
What counts as an intercompany transaction
An intercompany transaction is a sale, charge, loan or transfer between two entities that share a parent. Both sides are inside the group, so the deal is not at arm's length in the ordinary sense. Each entity still books it as real activity, because each is a separate taxpayer with its own accounts. The group then removes it during consolidation accounting.
Direction is useful shorthand. Downstream flows go from parent to subsidiary, upstream flows go the other way, and lateral flows run between sister companies.
The types you will actually see at a startup
Type | Typical startup example | Parent books | Subsidiary books | Watch for |
|---|---|---|---|---|
Cost-plus services | UK engineering team builds product for the US parent | R&D expense, intercompany payable | Service revenue, intercompany receivable | Markup set by transfer pricing policy |
Costs paid on behalf | Parent pays the UK team's laptops and SaaS seats | Intercompany receivable | Expense, intercompany payable | Recharging at cost vs including in the cost base |
Intercompany loan | Parent funds the subsidiary's payroll for six months | Loan receivable, interest income | Loan payable, interest expense | Documented terms and interest rate |
IP license or royalty | Subsidiary sells locally and pays the parent for the platform | Royalty income | Royalty expense, often in COGS | Which line it hits in each entity's margin |
Capital contribution | Parent capitalizes a new subsidiary | Investment in subsidiary | Share capital | Not a loan, so no repayment or interest |
Worked example: a cost-plus service fee
Fieldnote AI, a fictional Series B company with usage-based pricing, has a US parent and a UK subsidiary, Fieldnote AI Ltd. The UK team performs development work for the parent under a written services agreement at cost plus 8%. In March the UK entity's costs are $100,000, so it invoices the parent $108,000. To keep this illustrative example simple, the invoice is in USD and both companies use the same accounts calendar.
UK subsidiary, at invoice
Account | Debit | Credit |
|---|---|---|
Intercompany receivable, Fieldnote AI, Inc. | 108,000 | |
Intercompany service revenue | 108,000 |
US parent, at invoice
Account | Debit | Credit |
|---|---|---|
R&D expense, intercompany services | 108,000 | |
Intercompany payable, Fieldnote AI Ltd | 108,000 |
Both entities, when the parent wires cash in April
Entity and account | Debit | Credit |
|---|---|---|
Parent: intercompany payable, Fieldnote AI Ltd | 108,000 | |
Parent: cash | 108,000 | |
UK: cash | 108,000 | |
UK: intercompany receivable, Fieldnote AI, Inc. | 108,000 |
The UK entity reports an $8,000 profit on its local return. The group reports none of the $108,000 as revenue. In consolidation, the service revenue and R&D expense cancel, and the group's R&D cost is the $100,000 actually spent with outsiders. The mechanics of that removal are covered under intercompany eliminations.
Why it matters beyond consolidation
Eliminations make intercompany disappear from group reports, which leads some teams to treat it as a year-end chore. That misses three live consequences.
Tax. The markup determines how much profit each country taxes. Tax authorities expect arm's-length pricing and documentation, so the rate should come from a transfer pricing policy, not habit.
Cash. Unsettled balances mean one entity is financing another. A subsidiary that never gets paid can run short of local cash for payroll.
Margin reporting. In a usage-based business, cloud and inference spend paid by one entity and consumed by another must land in COGS on consolidation. A recharge coded to "other expense" quietly flatters gross margin.
Common mistakes
One-sided bookings. The parent records a recharge, the subsidiary never does, and the balances disagree at close.
Different periods. The invoice lands in March for one entity and April for the other.
Currency mismatches. An invoice in GBP booked by a USD parent at a different rate than the subsidiary used.
Using general receivables accounts. Intercompany mixed with customer AR distorts DSO and makes matching harder.
No agreement on file. Auditors and tax advisers will ask for the contract that supports the markup and payment terms.
An intercompany policy checklist
Sign an intercompany agreement for each entity pair that states services, markup, invoicing currency and payment terms.
Create dedicated intercompany receivable, payable, revenue and expense accounts, tagged by counterparty entity.
Set an invoicing cut-off date that both entities use each month.
Choose one exchange-rate source for intercompany invoices.
Match balances pair by pair before the consolidation step, and settle cash on a regular schedule.
Review the markup annually with a tax adviser.
How Quanta handles it
Quanta's in-house accounting team keeps the ledger, and its integrations into Stripe, Ramp, Rippling and cloud bills bring costs in with COGS lines tagged. That tagging is what lets a recharged cloud bill still read as cost of revenue for the group. Numbers trace back to journal entries, so a finance lead can follow any intercompany balance to its source.
Quanta perspective
Treat intercompany as a monthly control, not a tax afterthought. In usage-based businesses, compute that crosses entities is often the largest intercompany flow, and if it is not coded to COGS on both sides, the group's gross margin is wrong before anyone reprices.
Frequently asked questions
Are intercompany transactions included in consolidated revenue?
No. Sales between group entities are eliminated, so consolidated revenue includes only sales to outside customers.
Do intercompany transactions need to be at arm's length?
For tax purposes, generally yes. Most tax authorities expect related-party pricing to match what unrelated parties would agree, and they expect documentation to support it.
What is the difference between intercompany and intracompany?
Intercompany transactions cross legal entity lines, such as parent to subsidiary. Intracompany transactions move between departments or locations inside one legal entity and need no elimination.
How often should intercompany balances be reconciled?
Monthly is the practical standard for a growing company. Waiting until year-end lets timing, currency and one-sided errors stack up.
Should intercompany balances be settled in cash?
Settling regularly keeps local cash where payroll and taxes are paid and keeps balances small. Long-outstanding balances may need to be documented as a loan.