Local File

Key takeaways

• A Local File documents one entity's intercompany transactions, methods, and arm's length evidence while the Master File covers the group as a whole.
• Its content follows the OECD Transfer Pricing Guidelines, Annex II to Chapter V: the local entity, controlled transactions, and financial information.
• Deadlines and penalties are set locally. Germany requires submission within 30 days of a tax audit announcement, tightened from 60 days as of January 2025. Denmark fines up to DKK 250,000 per entity per year for late or inadequate documentation.
• Inconsistency across the Local File, Master File, and CbCR is one of the most common audit triggers.

1. What is a Local File in transfer pricing?

A Local File is an entity-level transfer pricing document that sets out a single group entity's local business operations and material intercompany transactions. It provides the local tax authority with the analysis needed to assess whether those transactions are consistent with the arm's length principle under that jurisdiction's transfer pricing rules.

It's the entity-level layer of the OECD's three-tiered transfer pricing documentation framework. Where the Master File tells the story of the multinational group as a whole, the Local File zooms in on one legal entity in one country: what it does, who it transacts with inside the group, and why the prices on those transactions hold up.

The OECD set out the Local File template as Annex II to Chapter V of the OECD Transfer Pricing Guidelines, following the 2015 BEPS Action 13 report. Since then, most major economies have written Local File requirements into domestic law. The template itself is entity-specific documenting a single local taxpayer but how many files a group actually maintains depends on domestic rules: a group with one entity in each of 40 countries typically ends up preparing something close to 40 Local Files, while a group with several entities in the same country may need a different number depending on whether that jurisdiction allows local entities to be combined into a single filing. Deadlines, language requirements, materiality thresholds, and formatting rules are all set locally too, so the compliance calendar rarely looks the same from one country to the next.

2. Why is the Local File important?

The Local File serves several purposes at once.

Tax compliance. It shows that an entity's intercompany pricing follows local tax law.

Transparency. It gives tax authorities the transaction-level detail they need to evaluate a group's pricing.

Audit defense. It's usually the first document a tax authority requests when a transfer pricing audit opens. A clear functional analysis backed by solid benchmarking often resolves questions before they escalate into a formal adjustment.

Penalty protection. Many jurisdictions link documentation quality and timeliness directly to penalty relief. Denmark can fine up to DKK 250,000 per entity per year for missing or substandard Local File documentation plus a surcharge of 10% of any resulting income adjustment. Germany tightened its documentation deadline as of January 2025, now requiring submission within 30 days of a tax audit announcement, down from 60 days previously.

Without adequate documentation, companies risk transfer pricing adjustments, financial penalties, or an unfavorable burden of proof if a dispute reaches a tax authority.

3. What does a Local File contain?

The OECD Transfer Pricing Guidelines, Annex II to Chapter V, set the expected structure, and most jurisdictions follow it closely, with local additions. A Local File covers three areas.

A. The local entity

• Management structure, organization chart, and reporting lines
• A description of the business and strategy, including any restructurings or intangible transfers affecting the entity
• Key competitors

B. Controlled transactions

• A description of each material intercompany transaction, for example, intragroup services, financing, royalties, or the sale of goods, and the context in which it takes place
• Amounts of intercompany payments and receipts, broken down by counterparty jurisdiction
• Copies of material intercompany agreements
• A functional analysis covering the functions performed, assets used, and risks assumed by each party
• The transfer pricing method selected for each transaction category, and the reasoning behind it
• Comparables and benchmarking analysis supporting the arm's length outcome

C. Financial information

• The local entity's financial statements
• A reconciliation of the financial data used in the transfer pricing analysis to the statutory accounts
• Summary financial data for the comparables used

The functional analysis and benchmarking sections carry the most weight in an audit: they're where a tax authority tests whether an entity's characterization (a limited-risk distributor or contract manufacturer, for example) matches its actual conduct and results.

4. How is a Local File different from the Master File and CbCR?

The Local File, Master File, and Country-by-Country Report are the three tiers the OECD's BEPS Action 13 introduced, and each answers a different question.

• The Master File gives a high-level overview of the group as a whole: its global business, intangibles, financing arrangements, and overall transfer pricing policies. One version serves the entire group.
• The Local File applies those policies to a specific entity and proves the arm's length nature of its transactions. It's fundamentally entity-specific, though domestic law decides how that plays out where a group has more than one entity in the same country. The UK, for example, explicitly allows an MNE group to prepare a single amalgamated country-specific Local File covering multiple UK entities, provided it still demonstrates arm's length pricing entity by entity; other jurisdictions expect a separate file per entity regardless of how many sit in the same country.
• The Country-by-Country Report (CbCR) reports revenue, profit, tax paid, and other indicators for every group entity, jurisdiction by jurisdiction.

Tax authorities read all three together, and inconsistencies between them are one of the most common triggers for audit questions. A distributor described as low-risk in the Local File but showing entrepreneurial-level profits in the CbCR data invites scrutiny.

5. Is a Local File required per entity or per jurisdiction?

The short answer: per entity, not per jurisdiction, though in practice the two often look the same.

The OECD's Annex II template documents "the local taxpayer," a specific legal entity, not a country as a whole. That said, most groups have one operating entity per country, so "one Local File per entity" and "one Local File per jurisdiction" produce identical results in the majority of cases, and the distinction only surfaces once a group has multiple local entities in the same country.

Where that happens, domestic law, not the OECD template, decides what's required. The UK, for example, explicitly permits an MNE group to prepare a single amalgamated country-specific Local File covering several UK entities, as long as the document still demonstrates arm's length pricing for each entity's transactions individually. Other jurisdictions take the opposite approach and expect a separate, entity-level Local File regardless of how many group entities are present locally.

6. Who needs to prepare a Local File?

Any company engaged in cross-border related-party transactions may need to prepare a Local File, though local regulations set the specific thresholds, which vary by country. Companies that typically must maintain one include:

• Multinational enterprises operating in multiple countries
• Subsidiaries of foreign corporations involved in intercompany transactions
• Entities exceeding revenue or transaction-value thresholds set by local tax authorities

In the European Union, for example, most member states have written OECD transfer pricing guidance into domestic law, requiring businesses with related-party transactions above a set value to maintain a Local File.

7. When is a Local File due?

Deadlines are set at the local level and vary widely. Common patterns include:

• By the tax return deadline. The Local File must exist and be finalized internally by the time the annual return is filed, even if it isn't submitted with it.
• Upon request. Many countries only ask for the Local File during an audit or compliance review, with a fixed response window. Germany, for example, requires submission within 30 days of a tax audit announcement (tightened from 60 days as of January 2025).
• Mandatory annual submission. A smaller number of countries require the Local File to be filed proactively every year. Denmark requires electronic submission within 60 days of the tax return deadline, regardless of whether an audit is underway.

Missing a deadline can trigger penalties, adjustments, or increased scrutiny even before the substance of the pricing is reviewed.

8. How do you prepare a Local File?

1. Gather the data. Collect financial statements, transaction records, and intercompany agreements.
2. Analyze the controlled transactions. Identify and document the nature of each intercompany transaction.
3. Perform a functional analysis. Define the functions, risks, and assets of each party involved.
4. Select and apply a transfer pricing method. The comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method, or profit split method, depending on the functional profile.
5. Run a benchmarking study. Compare transaction prices or margins against market data to support the arm's length outcome.
6. Document the conclusions. Structure the report to the local jurisdiction's requirements, and keep it consistent with the Master File and CbCR.

At scale, with dozens of entities, each with its own deadline and format, this becomes a data and process problem as much as a writing one. Centralizing entity financials and intercompany agreements, standardizing the report structure across jurisdictions, and rolling each year's file forward from the last is what keeps the process from breaking down into copy-pasted templates and last-minute reconciliation. This is the workflow Aibidia's platform digitalizes: once entity data and group narratives sit in one system, generating a jurisdiction-ready Local File becomes a repeatable process, and every file stays consistent with the Master File and CbCR data by design.

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See it in Aibidia

Aibidia's platform turns this workflow into three steps: import financial and transaction data into the Aibidia platform, select the methodology and jurisdictions for each entity, and generate fully compliant, editable Local Files in bulk. You can create files for multiple countries or entities at the same time, assign tasks to other users, and track workflow status and tax risk in real time through the analytics dashboard.

See how Local Files work in Aibidia →

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9. What are the consequences of non-compliance?

Failure to meet Local File requirements can lead to:

• Transfer pricing adjustments: resulting in higher taxable income.
• Financial penalties: direct fines for missing, late, or substandard documentation, as in Denmark and Germany.
• Burden-of-proof risk: several jurisdictions allow tax authorities to estimate income themselves when documentation is inadequate, shifting the burden onto the taxpayer to disprove the estimate.
• Double taxation: if an adjustment in one country isn't matched by corresponding relief in the other, the same income can be taxed twice.

In summary

A Local File turns the arm's length principle into entity-level, country-specific evidence: what a business did, who it transacted with, and why the pricing holds up. Consistent documentation across the Local File, Master File, and CbCR, updated as the business changes rather than copied forward, is what lets a multinational tax team walk into an audit with the answers already on file.

If your company engages in cross-border intercompany transactions, staying current on local transfer pricing rules is what keeps you ahead of penalties and in good standing with tax authorities.

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