Financing & treasury
Arm's length interest rate
An arm's length interest rate is the rate that unrelated, independent parties would have agreed for a comparable loan, given the borrower's credit standing, the facility's tenor and currency, and prevailing market conditions, and it forms the benchmark against which every intercompany financing arrangement is tested by tax.
Deriving the rate starts with a standalone credit rating for the borrower, built from its financial ratios, industry position and repayment capacity, adjusted where relevant for implicit support from the wider group. That rating is then matched to comparable bond or loan data with similar tenor, seniority and currency to build.
The resulting range, typically expressed as an interquartile band with a median, gives groups room to select a defensible point without appearing to cherry-pick an extreme. Rates should be refreshed periodically, since market conditions, credit spreads and the borrower's own financial position can shift materially between.
In practice
What matters when applying arm's length interest rate
- Build a standalone credit rating before pricing
- Match comparables on tenor, currency and seniority
- Use an interquartile range rather than a single point
- Refresh the rate periodically as markets move
- Document the full methodology for audit defence
Frequently asked
Common questions
How is the rate calculated?+
By combining a standalone credit rating for the borrower with comparable third-party bond or loan data matched on tenor, currency and seniority, producing a defensible interquartile range rather than a single arbitrary figure.
How often should rates be refreshed?+
At least annually, and whenever the borrower's credit profile or market conditions change materially, since a stale rate set years earlier is unlikely to withstand scrutiny during an audit or review.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.