Intercompany lending: risks and rewards

In the corporate sphere, loans between companies in the same group have established themselves as a frequent tool for resolving one-off liquidity needs without resorting to external financing.

Despite their apparent simplicity, these transactions have tax and legal implications that must be approached with rigour to avoid adjustments or penalties in a possible tax inspection.

In this article, ECIJA Advisory analyses the risks and advantages of intercompany loans, providing keys to structure them correctly and comply with current regulations.

What are intercompany loans

Intercompany loans are internal financial transactions that allow the transfer of liquidity between related companies. They are commonly used in complex corporate structures.

This type of financing is formalised by means of a contract, which sets out conditions such as interest rate, terms and collateral. Although banks are not involved, its formalisation must comply with certain legal and tax requirements.

The purpose is usually to improve cash flow and the efficient redistribution of resources within the group, without resorting to external financing.

Advantages of intercompany loans

Among the main advantages of intercompany lending is the possibility to access quick liquidity with conditions adapted to the group's needs.

Avoiding financial intermediaries saves on processing costs and bank fees, which makes this modality very attractive for many companies.

In addition, these loans strengthen the financial cohesion of the group and allow resources to be managed centrally.

Regulations applicable to intercompany loans

When related companies are involved, transfer pricing regulations come into play, as set out in the Corporate Income Tax Act 27/2014.

The loan conditions must be comparable to those that would be agreed between independent companies, under the principle of free competition. This prevents these mechanisms from being used to manipulate tax benefits.

The contract must be perfectly documented to demonstrate the commercial nature of the loan and prevent the tax authorities from reinterpreting it as a capital contribution.

Taxation of intercompany loans

Interest accrued on loans between companies must be taxed for corporate income tax purposes. In addition, there may be a withholding obligation.

In fiscally consolidated groups, the withholding obligation may not apply, as taxation is handled in a unified manner within the group.

Proper tax planning helps to avoid penalties and to optimise the tax burden in compliance with the law.

Structure of the intercompany loan agreement

A loan contract between companies of the same group should contain key elements such as: date, identification of the parties, amount, terms, interest and guarantees.

Clauses on revisions, defaults and amendments should also be included to ensure legal certainty throughout the transaction.

Even if there is trust between the parties, formalisation is essential to avoid accounting or tax problems in the future.

Interest rates in intercompany loans

The interest rate should be in line with market values, especially if related companies are involved. This ensures that the transaction is fiscally acceptable.

A below-market interest rate could be adjusted by the tax authorities, leading to tax contingencies and penalties.

It is recommended to use comparability studies or benchmarks to justify the interest rate applied.

Risks of intercompany loans

One of the main risks of intercompany loans is non-compliance with formal requirements, which may lead to their being challenged by the administration.

If the reality of the loan is not proven, it could be considered as a disguised capital injection, with all the tax consequences that this entails.

There is also a risk of default, which may affect the solvency of the group and lead to internal litigation.

Differences between linked and non-linked loans

Loans between unrelated companies are not subject to transfer pricing rules, so the terms can be more freely agreed.

Even so, there must be a contract that supports the transaction and covers all essential aspects to avoid tax disputes or reviews.

In related companies, the documentary and tax requirements are greater, which requires more rigorous attention in the design of the loan.

How to make a loan between companies in the same group

To make a loan between companies of the same group correctly, one must begin with an analysis of the needs and financial capacity of the parties.

Then, a detailed contract is drawn up that reflects the market conditions, including interest, term, repayment form and guarantees.

It is advisable to have legal and tax advice to comply with regulations and avoid contingencies.

Recommendations for the management of intercompany financing

Good management of intercompany loans involves following criteria of transparency, accounting consistency and documentary rigour.

The use of these operations as mechanisms to move profits without economic justification should be avoided, as this could be considered tax avoidance.

It is essential to keep all documentation relating to the contract and its execution, such as transfers, interest and internal communications.

Important clauses in intercompany loan contracts

The clauses in intercompany loan contracts should cover possible unforeseen events or future modifications.

Some of them are: interest rate revision, extension of terms, early termination, and consequences for default.

Clear and detailed drafting prevents conflicts and facilitates internal and external auditing.

ECIJA Advisory, specialists in intercompany loan agreements

At ECIJA Advisory we help to structure and document loan transactions between companies of the same group with security and legal compliance.

We have a team specialised in intercompany financing, taxation and corporate regulation, which allows us to accompany you at every stage of the process.

If your organisation needs to structure an intercompany loan, contact ECIJA Advisory to ensure an efficient and legally compliant execution.