Arm`s Length Loan Agreement

Issues agreed between the parties in intra-corporate transfer pricing situations should be confirmed by written agreements clearly indicating the purpose of the agreement, as well as the rights and obligations of the parties. At least the date of signature of the loan, the amount of capital lent by the group company, the interest conditions applied, the method of payment of interest and the conditions under which the loan is due should be included in the financing contracts. If the group company is in fact insolvent, it generally cannot borrow funds from third parties under standard conditions. The financing of such an entity by borrowing through intra-group lending arrangements and under standard terms is not necessarily in line with the att-length principle. Our own studies show interesting regional differences in the range between credit interest rates and bond interest rates. In the euro area, the dispersion of borrowing rates relative to borrowing rates has increased significantly since the end of 2012, while US markets have virtually no mark-up in terms of borrowing rates relative to borrowing rates. One explanation is that the increased participation of U.S. companies of all sizes in the bond market has made credit prices more competitive. What is certain is that credit premiums to private companies are very different in the two regions of the world, as we have seen in the euro area.

That has changed. With effect from 22 March 2013, the rules on small capitalisation have been adapted to take account of the arm`s length principle, with Note 2 replaced by the new draft interpretative note. As a result, a company is expected to comply with the new rules at the end of the year, on or after March 31, 2013. This type of sales asserts that both parties are acting in their own interest and are not subject to pressure from the other party; In addition, it assures others that there is no agreement between the buyer and the seller. In the interest of fairness, both parties generally have equal access to information related to the transaction. As a general rule, the worse the creditworthiness, the weaker the balance sheet and the worse the future prospects of the borrowing company, the higher the risk that the lending company takes when granting the money. . .

.

Comments are closed.