Limited Risk Distribution Agreements

What to know

  • A Limited Risk Distribution Agreement appoints a distributor to sell products with limited risk. Usually, a distributor selling products bears the risks associated with items like inventory or bad debt. With a Limited Risk Distribution Agreement, risk is shifted from the distributor to the principal.
  • Because the risk has been shifted to the principal, the principal earns more with a Limited Risk Distribution Agreement than it would in a traditional distributor agreement.
  • Often, a Limited Risk Distribution Agreement is used as part of a tax planning or transfer pricing strategy within a group of multinational companies,
  • A Limited Risk Distribution Agreement is also known as a Limited Risk Distributor Agreement.
  • Because of the nature of the risks shifted, a Limited Risk Distribution Agreement is usually entered into for physical, tangible products. 

What to do

  • The Limited Risk Distribution Agreement is usually part of a transfer-pricing strategy within a group of companies. If you don't have a transfer pricing strategy, it makes sense to have one in place.
  • If you've got your transfer pricing strategy sorted, you need to roll out the Limited Risk Distribution Agreement. 
  • You'll need to know the following to enter into a Limited Risk Distribution Agreement:
    • How and where the products are supplied. Outside the US, Limited Risk Distribution Agreements usually follow Incoterms to define how and where the products are supplied. Incoterms are the International Chamber of Commerce (ICC)'s rules for the facilitation of international trade,
    • The warranties the principal provides to the distributor,
    • The territory your distributor is responsible for, and whether they are the exclusive distributors for that territory,
    • Responsibility for registering products, setting prices and discounts, and marketing and sales,
    • What you expect for reporting,
    • How the intellectual property of your products (including the trademark of the principal) should be treated,
    • Payment terms, and
    • Dispute resolution and the other items that usually frame an agreement.

Further Resources

For an article discussing a definition of a Limited Risk Distribution Agreement and explaining when you'd use it, see our article Definition of a Limited Risk Distribution Agreement.

Legal Information

Finally, a note on how you can use the information on this page. This information is not to be considered legal advice and is not a substitute for advice from qualified legal counsel. Material aspects of this information may change at any time and without further notice.

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