Profit split method

The profit split method divides the combined profit from a related-party transaction between the entities involved in proportion to each one's relative economic contribution, typically used when both hold valuable intangibles.

ByHoang TruongUpdated July 11, 2026

FrameworkOECD Transfer Pricing Guidelines

See it move

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A manufacturer and a distributor jointly generate a combined operating profit of €500,000. The group allocates it using relative development spend: the manufacturer spent €240,000 and the distributor €160,000, a total of €400,000. The manufacturer's 60% share gives it €300,000; the distributor's 40% share gives it €200,000, and the two shares add back to the full €500,000.

Where it fits

SubjectManagerial AccountingAdvancedTopicTransfer PricingAdvanced

The formula

LaTeX

\pi_i = \Pi \times \frac{k_i}{K}

Variables

$π_{i}$: Entity i's allocated profit (€)
$Π$: Combined profit (€)
$k_{i}$: Entity i's contribution key (€ (or other allocation base))
$K$: Total of all entities' contribution keys (same unit as kᵢ)

Allocates the combined profit of a related-party transaction between the entities in proportion to their relative contribution.