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An intercompany loan — a loan between companies within the same group — seems simple, but requires due legal and tax care. Structure the loan on an arm's length basis, with market-standard terms, to avoid problems with the tax authorities, creditors, and directors' liability.
What is an intercompany loan?
Within a group, each company has its own equity, with its own assets and liabilities. To finance investments or cover cash flow problems, group companies lend money to each other: the intercompany loan (intra-group loan). This occurs not only in large corporations but also in smaller holding structures.
Record the loan as a business asset
Even between related parties, you must record the loan in writing and on a businesslike basis: the principal amount, a market-rate (at arm's length) interest rate, the repayment schedule, the term, collateral, and the consequences of default. An unbusinesslike or vague loan leads to disputes, especially if things go wrong or during an audit.
Pay attention to the tax aspects
The tax authorities scrutinize intra-group loans. Non-arm's length interest or conditions may be subject to tax adjustments, and a loan deemed non-arm's length can have specific consequences for the deductibility of a write-down. Therefore, discuss the tax implications with your advisor.
Creditors and directors' liability
An intercompany loan must not unduly disadvantage other creditors. If you lend money from a company that is consequently unable to pay its creditors, the board risks liability. Therefore, always assess whether the loan is responsible and document the decision-making process.
Frequently Asked Questions
Do I need to record a loan within my group?
Yes. Also document intercompany loans in writing and on a businesslike basis, with market-based terms, to avoid tax and legal problems.
What does 'at arm's length' mean?
That you apply terms that would also be customary between independent parties, such as a market-rate interest.
Can I be held liable as a director?
Yes, if the loan disadvantages other creditors. Assess whether the loan is responsible and document the decision-making.
Arranging an intercompany loan properly?
Our legal experts draft business loan agreements . View our financial lawor corporate lawteam, or schedule a free consultation.
