Integration, digitalisation, and the arm’s-length principle: rethinking value creation in hospitality

The digital transformation of the hospitality industry has deeply reshaped value creation, giving rise to increasingly complex transfer pricing challenges. While competitive advantage was traditionally linked to real estate assets, brands, and operational expertise, it is now increasingly driven by digital platforms, AI, customer data, and highly integrated business functions. Revenue management systems (RMS), central reservation platforms, and loyalty programmes have become strategic intangible assets that materially influence group profitability.

The extensive adoption of asset-light models, hotel management agreements, and franchising has intensified the integration of business functions and the volume of intercompany transactions involving management services, technology, and intangible assets. In this context, traditional transfer pricing analyses carried out on individual transactions may no longer be sufficient, as they may fail to capture the interconnections between the various intra-group transactions and their overall economic rationale, and, consequently, may not provide an accurate assessment of the arm’s length nature of the transfer pricing policy applied in the sector.

Consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines) and BEPS actions 8–10, profit allocation must reflect actual value creation, with particular emphasis on development, enhancement, maintenance, protection, and exploitation (DEMPE) functions relating to digital intangibles. In this context, transfer pricing should assess management fees, royalties, and centralised services as interconnected elements of an integrated value chain.

This article explores how digitalisation is reshaping transfer pricing in the hospitality sector through the evolving role of intangible assets and international case law about the three main areas in which that transformation places pressure on established transfer pricing practice.

Hotel management fees are among the most significant intra-group transactions in the hospitality sector and have gradually become complex as hotel business models evolve towards asset-light and digitally integrated structures. Hotel management agreements, franchising, hybrid leasing arrangements, and white-label operators typically encompass a broad range of services, brand and know-how exploitation, and access to proprietary technology, making it essential to accurately delineate the different components of the remuneration in accordance with the arm’s-length principle.

The operational and contractual model directly affects the allocation of functions, risks, and returns and, consequently, the transfer pricing characterisation of management fees, royalties, and centralised services.

This evolution requires a more sophisticated functional analysis than in traditional hotel business models. Management fees should be unbundled into operational services, brand licensing, and technology-related components, reflecting the growing importance of digital platforms, RMS, and other intangible assets – now embedded in those fees – in the creation of value in the hospitality sector. Failure to distinguish these elements increases the risk that tax authorities will recharacterise the entire remuneration by giving precedence to one component (for example, royalties) over the others.

Several tax courts have taken a position on this point.

In Hyatt International v Additional Director of Income Tax (Delhi High Court, December 22 2023), payments under the strategic oversight services agreement were treated as business income rather than royalties because they remunerated genuine coordination and management activities rather than the use of intellectual property. Moreover, the resolution acknowledged the existence of a permanent establishment based on the management company’s authority to appoint and supervise key personnel; set HR, procurement, pricing, branding, and marketing policies; manage operational bank accounts; and assign personnel to the hotel without the owner’s consent.

The Italian Supreme Court, in Judgment No. 25025/2018, denied the deductibility of intra-group service charges that were supported only by contractual provisions, requiring evidence of the actual services performed and the benefits received. This emblematic approach was further refined by the Umbria Regional Tax Court (Decision No. 53/2025), which identified a two-step analysis based on the benefit test and the arm’s-length nature of the remuneration.

These principles translate into concrete operational requirements: the preparation of timesheets, detailed deliverables, activity reports, and documentation that link management, franchising, and central support services to the actual benefit of each entity. These actions help to:

• Classify the cash flows (services versus royalties); and

• Demonstrate that the remuneration complies with the arm’s-length principle.

Notably with regard to the benefit test, under the OECD’s 2026 proposed revisions to Chapter VII, the absence of an immediate increase in revenue or profitability does not necessarily mean that no benefit exists, where a reasonable expectation of benefit existed when the service was performed.

The correct delineation of management fees is equally relevant for withholding tax purposes. Under the OECD Model Tax Convention on Income and on Capital, the classification of a payment as a service fee or a royalty determines the applicable withholding tax treatment. Although the OECD TP Guidelines (paragraph 6.13) recognise that the concepts of royalties and intangibles are not perfectly aligned, the unbundling of management fees remains essential for transfer pricing and tax purposes. The Accor decision (Versailles Administrative Court of Appeal, June 21 2022), in which the failure to charge royalties for brand exploitation resulted in withholding tax adjustments, confirms the practical importance of accurately distinguishing management services from the remuneration attributable to intangible assets.

Hospitality groups increasingly centralise functions such as finance, legal, HR, IT, compliance, and strategic planning within shared service centres, creating transfer pricing challenges related to the potential duplication of costs already embedded in hotel management fees. To prevent double charging, groups should adopt a clear allocation framework identifying which services are remunerated through the management fee and which constitute separately chargeable intra-group services.

A second challenge concerns the distinction between shareholder activities and deductible services. The OECD TP Guidelines (Chapter VII, paragraphs 7.6 and 7.9–7.10) provide that activities performed exclusively in the shareholder's interest – such as consolidated reporting, investor relations, and group governance – cannot be recharged because they do not generate a specific benefit for subsidiaries. By contrast, services granting an economic or commercial benefit to the recipient should be remunerated on arm’s-length terms.

Another central aspect of central corporate services is the identification of beneficiaries: the OECD’s 2026 draft places particular emphasis on identifying the actual beneficiaries of intra-group services, providing that central services should be allocated only to entities expected to benefit from them.

The distinction between low value-adding services (LVAS) and high value-added services is equally significant. Under Chapter VII of the OECD TP Guidelines (paragraphs 7.43–7.65), routine support services may qualify for the simplified LVAS regime with a standard 5% mark-up. However, paragraph 7.48 excludes services forming part of the group’s core business, while paragraph 7.49 limits the regime to activities that neither involve unique and valuable intangibles nor the assumption of significant risks. Accordingly, functions such as strategic planning, centralised revenue management, brand strategy, technology development, and digital marketing require a full functional analysis. This may determine a higher mark-up or a value-based remuneration model, as commonly observed in hotel management and franchise agreements, where fees are typically linked to total or room revenue, or to an operating profit metric.

These issues are often viewed differently depending on where a potential tax challenge arises. Jurisdictions hosting the group headquarters, shared service centres, or management company may consider that management fees do not fully remunerate all centrally performed functions. Conversely, jurisdictions where the hotels are located may resist separate charges for services that appear similar to, or overlap with, those already covered by the management fee.

This creates an inherent tension between jurisdictions and makes contemporaneous documentation critical, both to support deductibility in the recipient jurisdiction and to mitigate the risk of additional income adjustments in the service-provider jurisdiction. Groups should therefore establish clear procedures identifying the nature of each service, demonstrating the economic benefit provided and the absence of duplication with other intra-group charges.

Particular attention should also be given where the group manages both third-party and owned hotels. In such cases, the services provided to each counterparty, any differences in their scope, and the corresponding differences in the remuneration charged should be clearly defined, substantiated, and documented.

Digitalisation has fundamentally reshaped value creation in the hospitality sector, shifting the focus from traditional hotel assets towards digital and commercial intangibles. While brands and operational know-how remain key assets, AI, proprietary RMS, reservation platforms, and customer data increasingly determine competitive advantage and should be analysed under the DEMPE framework set out in Chapter VI of the OECD TP Guidelines (paragraphs 6.32–6.71). As clarified by paragraph 6.48, legal ownership alone does not entitle an entity to the returns generated by an intangible; remuneration must instead reflect the functions performed, assets employed, and risks assumed.

The analysis is further complicated by the increasing geographical dispersion of key personnel, decision-making processes, and other value-adding functions. As these functions may involve the control of significant risks and key DEMPE-related decisions, they may attract a corresponding share of the returns generated by the relevant intangibles.

In the hospitality industry, DEMPE analysis must therefore identify which entities develop, enhance, maintain, protect, and exploit brands, proprietary technology, and customer-related intangibles. This is particularly relevant where local operating companies make significant marketing investments or contribute to the enhancement of the brand, as illustrated by Annex I to Chapter VI of the OECD TP Guidelines. The importance of economic substance was also confirmed in the McDonald's France case (convention judiciaire d’intérêt public (public interest judicial agreement), Paris, June 16 2022), where the increase in royalty payments following the transfer of intellectual property to a Luxembourg entity lacking economic substance was successfully challenged by the tax authorities.

The same principles increasingly apply to AI-based RMS, which optimise pricing through real-time analysis of market data and have become one of the hospitality sector’s most valuable digital assets. Under paragraph 6.56 of the OECD TP Guidelines, where multiple group entities contribute to the development or enhancement of an intangible, each must receive remuneration commensurate with its contribution irrespective of legal ownership. In highly integrated hotel groups, where RMS, brands, and customer data jointly generate value, the profit-split method may therefore represent the most reliable pricing methodology, consistent with Chapter II of the OECD TP Guidelines (paragraphs 2.114–2.151).

Beyond management fees, corporate services, and digital intangibles, multinational hotel groups are required to address further transfer pricing challenges arising from the increasing integration of operational, financial, and commercial functions.

Many international hotel groups have progressively shifted from asset-heavy ownership models towards asset-light structures, separating real estate ownership from hotel operations and focusing on brand management, commercial strategy, and operational capabilities. This transition creates transfer pricing challenges both in implementing the restructuring and in defining the resulting operating model.

The restructuring itself – including property company/operating company separations, asset transfers, and sale-and-leaseback transactions – should be assessed from the perspective of each party, considering the commercial rationale, expected benefits, options realistically available, and any transfer or termination of valuable rights. The post-restructuring model then requires the arm’s-length pricing of new or modified flows – including leases, management and franchise fees, financing, and centralised services – together with a reassessment of the functions performed and the economically significant risks effectively controlled and assumed by each entity.

Against this background, the transfer pricing analysis should adopt a two-sided perspective, assessing whether the overall remuneration structure is economically rational for all parties involved. This may require complementing traditional transfer pricing methods with operational and financial indicators that reflect the performance of both the hotel and the relevant asset or operating entity. Metrics such as the hotel’s revenue per available room, benchmarked against comparable properties, or the return on assets earned by comparable operators may therefore provide relevant corroborative evidence when assessing whether the allocation of returns is consistent with the parties’ respective contributions and risk profiles.

For example, the characterisation of hotel operating companies as limited-risk entities cannot rely solely on contractual arrangements but must reflect the economically significant risks effectively controlled and assumed, in accordance with the six-step risk analysis set out in BEPS actions 8–10 (paragraphs 1.56–1.106). In this respect, the Italian Supreme Court (Judgment No. 26432/2024) confirmed the appropriateness of applying the transactional net margin method to genuine limited-risk operators, whereas the Swedish Pandox AB v Skatteverket decision (2022) reaffirmed that profit allocation must reflect the actual decision-making autonomy exercised by local subsidiaries. Similarly, Chapter X of the OECD TP Guidelines (paragraphs 10.69–10.72) requires intra-group financing to be assessed on the basis of the borrower’s standalone creditworthiness, an approach endorsed by the Swiss Federal Supreme Court in Hôtel X. SA (2013).

Digitalisation has also transformed hotel marketing and distribution. Proprietary central reservation systems, online travel agencies, and customer loyalty programmes now constitute key marketing intangibles. Their remuneration requires a detailed comparability analysis under paragraphs 3.27–3.30 of the OECD TP Guidelines, taking into account contractual terms, economic circumstances, and business strategies, while the DEMPE framework determines which entities are entitled to the returns generated by reservation platforms, customer databases, and loyalty ecosystems.

Finally, these arrangements also raise important VAT issues. In this regard, the Lombardy Regional Tax Court (Judgment No. 3014/2024) held that incentives paid through global distribution system platforms constituted consideration for taxable booking services under Article 28 of Directive 2006/112/EC, confirming the close interaction between transfer pricing and indirect taxation in the growing digital hospitality industry.

The increasing digitalisation of the hospitality industry requires multinational hotel groups to redesign traditional transfer pricing policies. As management fees progressively incorporate operational services, access to technology, and the exploitation of valuable intangibles, their remuneration should be carefully delineated to distinguish service components from royalties and other technology-related payments, with corresponding implications for withholding tax and transfer pricing compliance.

Likewise, the growing centralisation of corporate functions makes it essential to prevent duplication between management fees and separately charged intra-group services through robust allocation frameworks that clearly distinguish low value-adding services, high value-added activities, and non-chargeable shareholder costs.

The advent of AI-driven RMS, central reservation platforms, and loyalty programmes reinforces the need for a comprehensive DEMPE analysis capable of identifying the entities that genuinely develop, enhance, maintain, protect, and exploit these digital intangibles. At the same time, asset-light structures require lease pricing, financing arrangements, and the characterisation of hotel operating companies to be supported by rigorous functional and comparability analyses consistent with the OECD TP Guidelines.

Ultimately, transfer pricing in the hospitality sector can no longer be addressed by analysing individual intra-group transactions in isolation. The increasing interdependence of management services, technology, digital platforms, and marketing intangibles calls for an integrated approach that aligns profit allocation with actual value creation, supported by robust documentation and continuous monitoring of OECD guidance and international case law.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte provides leading professional services to nearly 90% of the Fortune Global 500® and thousands of private companies. Our people deliver measurable and lasting results that help reinforce public trust in capital markets and enable clients to transform and thrive. Building on its 180+ year history, Deloitte spans more than 150 countries and territories. Learn how Deloitte’s over 470,000 people worldwide work together every day to make an impact that matters at www.deloitte.com

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities. 

© 2026. For information, contact Deloitte Global.