Financing & treasury
Intercompany loan
An intercompany loan is a financing arrangement between two entities of the same corporate group, typically a parent lending to a subsidiary or between sister companies, where the interest rate, tenor, currency and covenants must be set as if the parties were unrelated, independent third parties dealing at arm's length under.
Tax authorities routinely challenge intercompany loans where the rate looks too high, too low, or where the debt itself appears to lack genuine commercial substance for the borrower. A robust analysis considers the borrower's standalone credit rating, the loan's specific terms, and truly comparable third-party lending data.
Beyond pricing, groups must document the loan's business rationale, repayment capacity, and whether the debt would realistically be extended by an unrelated bank on similar terms. Weak documentation, informal terms, or debt exceeding the borrower's capacity often trigger recharacterisation risk, interest disallowance.
In practice
What matters when applying intercompany loan
- Set a rate reflecting the borrower's standalone credit profile
- Document tenor, currency, seniority and covenants clearly
- Confirm the borrower has genuine repayment capacity
- Refresh pricing periodically as market conditions shift
- Retain comparable third-party lending evidence
Frequently asked
Common questions
What makes an intercompany loan arm's length?+
The interest rate, tenor and terms must mirror what an unrelated lender and borrower would agree, based on the borrower's own credit risk and comparable market debt, not group-wide convenience or a parent's funding cost.
Can tax authorities recharacterise a loan?+
Yes. If the debt exceeds the borrower's capacity or lacks commercial substance, authorities may treat it as equity, disallowing interest deductions and creating unexpected tax exposure for the group.
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.