A transaction which is entered into by and between two unrelated and well-informed parties, that is, those who have no connection prior to the transaction and act on equal footing and bargaining power in terms of the information available to each of them about the deal.The two parties transact independently in good faith and each for its own benefit and best interest, and without one influencing the decision of the other. This results in reaching at a fair market value for the subject matter of the transaction (product or service being exchanged). Each party attempts to get the best deal conditions.

If two parties deal at an arm’s length, they have no financial link between them. For example, a company may buy a service from its subsidiaries at an arm’s length.

Such a transaction is also referred to as an arm’s length principle (ALP).