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Intercompany Financing in the crosshairs

What can we learn from the wave of Dutch court cases on intercompany loans

Over the past few years we have witnessed an increase in disputes and litigation dealing with intercompany loans. In the Netherlands, for instance, the focus of the authorities has been on intercompany financing provided in the context of acquisition structures, such as through shareholder loans. This fits in a trend of tax authorities increasingly challenging the interest deductibility or arm’s length nature of intercompany loans, especially when used in leveraged acquisition structures.

What lessons can be learned from these disputes, which elements of Group financing arrangements are challenged and can we define best practices as a result thereof?

The level of scrutiny of intercompany financial transactions is expected to only increase going forward, and not only in the Netherlands, as a result of the 2020 release of the OECD Guidance on the transfer aspects of financial transactions, but also in response to the Covid 19 pandemic support measures, and resulting push for additional tax income by the authorities.

OECD Guidance

In February 2020, the OECD finally published its first formal guidance on the transfer pricing aspects of financial transactions with the release of Chapter X of the OECD TP Guidelines.

For intercompany loans, one of the most important aspects of the guidance revolves around the framework to be used in determining whether, and under what economically relevant conditions, a related-party funding transaction has been concluded.

In other words, the accurate delineation of a transaction is considered crucial for the transfer pricing analysis and to ultimately establish an arm’s length price for the intercompany financing, just like for any other controlled transaction.
For intercompany loans, it is thus important that not only the pricing is at arm’s length, but that also the overall transaction is structured at arm’s length (terms and conditions applied, risks involved, parties involved, options realistically available, and, potentially, also the volume).

What are the main learnings from the Dutch cases?

In recent years we have witnessed the Dutch tax authorities increasingly scrutinizing the use of intercompany financing. The arguments and challenges made in these cases are just as relevant for any other intercompany financing transactions and valuable lessons can be learned therefrom.

One of the common transfer pricing arguments made is that the shareholder loans relied upon are not at arm’s length in the sense that the transaction as such should not be recognized as debt funding, as it would not occur, under similar terms and circumstances, between unrelated parties, including, inter alia,

  • No support for debt serviceability; the cash flow forecasts available are insufficient for the borrower to service the debt;
  • Contractual terms or limitations: the terms and conditions agreed upon, are inconsistent with what would have been agreed upon between unrelated parties (exotic features, very long term, etc.);
  • The outcome of the credit rating analysis performed, particularly when substantial risk or highly speculative ratings are concluded upon; and
  • Lack of good quality comparables in the benchmark set.  


It can be expected that intercompany financial transactions, such as loans, will be the subject of intense scrutiny by tax authorities. Transfer pricing documentation will be the first line of defense in case of an audit. The guidance in Chapter X of the OECD Guidelines should be leveraged to assess the robustness or completeness thereof. The guidance however is quite comprehensive, including multiple economically relevant characteristics of a financing transaction and not just the interest rate applied. So what does this entail in practice and how to keep it manageable? A multi-phase approach is typically recommended for that purpose.

Phase 1 – Take Inventory
  • Take inventory of intercompany financing present and whether these are all documented (loan agreements) and supported from a transfer pricing perspective.
  • If required, prepare transfer pricing analyses and documentation for transactions not covered yet.
  • Take inventory of financing transactions outstanding over past years
  • Verify existing agreements
  • Verify support documentation in place (e.g, local files)
  • Check transfer pricing benchmarks / methods performed
  • Where needed, prepare documentation, particularly for transactions deemed more risky in nature or based on materiality.
Phase 2 – Identify Sensitivities

Based on the guidance in chapter X identify potential sensitivities in current intragroup financing arrangements:

  • Alignment of treasury substance with Group financing structures
  • Consistency in policies (credit ratings, pricing approaches or benchmarks, delineation of transactions)
  • Governance around risk management and control
  • Documentation prepared and details provided
Phase 3 – Elevate

Based on the sensitivities identified elevate existing procedure and documentation to align with current requirements:

  • Detailed and consistent credit rating policies in the Group
  • Tailoring finance transactions to the specific requirements and needs of Group companies
  • Ensure treasury substance is aligned with purported transactions
  • Develop treasury TP governance and policies to ensure proper risk management is performed and consistently documented
  • Implement tooling to ensure consistency and, more importantly, allow for efficiencies in conducting the required analyses, for instance, credit rating analyses, cash pool pricing, loan pricing, etc.

Following phase 3 it will be a matter of ensuring that the relevant TP treasury framework and procedures are consistently followed and documented, allowing for robust support for the transfer pricing positions taken in the intra-group financing arrangements.

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