Transfer pricing of loans and guarantees
Produced in partnership with Joel Cooper, Rachit Agarwal and James Dalley of DLA Piper
Transfer pricing of loans and guarantees

The following Tax guidance note Produced in partnership with Joel Cooper, Rachit Agarwal and James Dalley of DLA Piper provides comprehensive and up to date legal information covering:

  • Transfer pricing of loans and guarantees
  • Application of UK’s transfer pricing rules to loans
  • Special considerations for loans
  • Special considerations for guarantees
  • Example 1—loan from US parent
  • Example 2—financing arrangements following management buyout
  • Example 3—intra-group guarantee
  • Withholding tax and transfer pricing adjustments
  • Practical approach to thin capitalisation
  • Base erosion and profit shifting (BEPS) and other anti-avoidance

Application of UK’s transfer pricing rules to loans

The UK has specific rules in its legislation which should be read together with HMRC published guidance on intra-group loans. Under the UK’s transfer pricing rules generally, where an intra-group loan exceeds the amount that the borrower would or could have borrowed from an independent lender, a company may be considered to be ‘thinly capitalised’. This suggests that the company does not have adequate equity capital to support the additional debt. In such a case, the interest on the excessive part of the intra-group loan maybe disallowed. For more details, see Practice Note: What happens when the transfer pricing rules apply?

In addition, the interest expense on the intra-group loan may come under scrutiny where the terms of the intra-group loan differ from those that would have been agreed with or between independent lenders, eg because the term of the loan is longer than it otherwise would be, the borrower restrictions are too generous or the security package given by the borrower would be insufficient at arm’s length. It is therefore important that all terms and conditions of the intra-group loan are reviewed from an arm’s length perspective as it could have an impact on its pricing for tax purposes.

Where the UK transfer pricing rules do apply, compensating adjustments and balancing payments