What is an arm's length transaction?

An arm’s length transaction is when two independent parties conduct a deal fairly, without any special relationship or pressure influencing the terms. It ensures the price and conditions are market-based. For example, selling a house to a stranger is arm’s length, but selling to your cousin at a discount is not.

In accounting and law, this term is crucial because it prevents conflict of interest. Tax authorities also use it to check that multinational companies aren’t manipulating prices between subsidiaries to reduce taxes.