[gamblor956]

Within a single country, legal, since ultimately the same tax is paid and Corp 2 isn't lying about its expenses. (Corporate income taxes are usually flat rates, not progressive/step rates, and most corporate groups file a single consolidated return for the entire group.)

Across borders, it would be a huge violation of transfer pricing laws and result in huge penalties. But the marketing part of it would still be legal.

What you've described is actually pretty similar to how Coke/Pepsi is sold: Company 1 (Coke/Pepsi) makes the syrup, which they sell for inflated prices to Company 2 (the bottler/distributor), which then sells it to a store (Company 3) for a less-inflated wholesale price, and the store usually sells it at very small markup as a loss-leader.