What is intercompany lending? Why is this relevant to you? We will discuss this from a tax perspective. And more importantly, how we can support your company.
What are intercompany / intra group loans?
Intercompany loans are loans from one entity to another, within the same company. Intercompany lending offers multiple advantages, such as quickly shifting cash between entities or avoiding bank fees and spreads. In addition, you can determine the terms and conditions yourself, as long as they are commercially sound (in line with the arm’s length principle) and do not depend on the terms and credit applications of banks/ commercial lenders. The loan should have an appropriate business rationale and be of interest for both entities/ sides to the transaction.
Why should you pay extra attention to intercompany lending?
There is an increasing interest in intercompany financing from the tax authorities. This is partially due to the guidelines published by the OECD. Chapter X of the Transfer Pricing Guidelines provides specific guidance on financial transactions, such as intercompany loans.
It is very well possible that the use of intercompany loans causes tax problems or other issues if not handled properly. The entity receiving the loan will have interest expenses, while the issuing entity will have interest income. This is subject to tax rules. The main challenge here may be that the interest rates should be market driven in accordance with an at arm’s length price. Intercompany loans are subject to specific principles to derive at the at arm’s length price, which are laid down in the OECD Guidelines mentioned above. An important aspect of the new guidelines is the inclusion of more methods to determine the at arm’s length interest rate of intercompany loans, such as credit default swaps and economic modelling.
Other benefits and solutions of intercompany loans challenges that we offer include
- Avoiding the risk of non-deductible interest costs for the receiving entity, while the interest is taxed at the issuing entity;
- focus on more important tasks, by being in control and avoiding time-consuming audits;
- easy explanation to stakeholders, such as the bank / commercial lender;
- a robust tax policy and tax efficiency.
Intra group loan agreement based on IBOR interest rate?
If you have intra group loans and/or agreements based on IBOR interest rates (e.g. LIBOR or EURIBOR), you should take action. IBOR will be (partially) abolished on 31 December 2021. We can provide support in updating the intercompany loans that are based on IBOR interest rates.
How can our Transfer Pricing services support you with your intercompany loans?
- Meets the transfer pricing compliance requirements
- Prepares robust transfer pricing documentation
- Sets an at arm’s length price for your intercompany loan
- Conducts an analysis and benchmark study including credit rating (if required)
- Ensures that you are not faced with any surprises
- Sets up a monitoring process and risk control mechanisms
- Ensures that you can quickly provide your input to the treasury department
- Sets up a transfer pricing policy and related mechanisms that allow you to quickly assess what interest rate and terms should apply to new intercompany loans
- Provides answers so you can easily answer questions you may receive on your intercompany loans
- Explains the background to our analysis and documentation so that you are comfortable explaining if questions arise
- Allows you to balance compliance, your risk profile and cost efficiency
- Explains the pros and cons of potential solutions, so you can make an informed decision about which solution suits you best.
- Design and analysis of the cash pool structure, the terms & conditions and the transfer pricing policy (to be) applied.
- Determining the remuneration of the cash pool leader.
- Documenting the risk exposure of, and the remuneration for, the cash pool participants and relevant cross guarantees.
For our technical readers; we can apply multiple methods and use various databases when determining interest rates. Methods include a CUP analysis for loan and bond data, Yield curve analyses, economic models to determine interest rates and fund analysis costs.