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Loans and guarantees: the Ringo Starr of intercompany transactions?

Intercompany Agreements

21 February 2022

Is it our imagination, or do financial transactions tend to get the least attention amongst intercompany transaction types?

9 times out of 10, when we work with a new client and review their draft TP policies, loans and guarantees are not addressed.

Why is that? Is it because TP advisers consider that loans are lower risk – notwithstanding the OECD’s 2020 guidance on financial transactions, as incorporated in the 2022 TP guidelines?

From a legal perspective, we would say that out of all intercompany transaction types, the role of contractual terms is probably most direct and immediate in the case of intercompany loans and guarantees. For example:

  • It’s virtually impossible for a director of a local subsidiary to comply with his or her legal fiduciary duties as a director, unless they are clear about the terms of intercompany debt. How else could they manage liquidity at entity level, and their duties to third party creditors?
  • The same applies to auditors signing off financial statements at entity level.
  • It’s also virtually impossible to deduce the key terms of a loan (repayment, interest, ranking, security) from conduct alone. It would be like paying insurance premiums and then trying to work out the amount of insurance cover you’ve just bought.
  • From the perspective of a director of a lending entity, reliance on an ‘implicit’ parent company guarantee is a high-risk activity. How could you, as a director, explain after the event why this was reasonable? It’s much easier just to put in place a written guarantee.

What’s your experience? Do you regard financial transactions as ‘unloved’ in the TP world? If you can shed any light, we would love to hear from you.

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Article by
Paul O’Regan

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