What is an intra-group loan?

What is an intra-group loan?

Hive-ups and intra-group loans Intra-group loans often arise on group reorganisations involving a transfer of business and assets from a subsidiary to its parent – known as a ‘hive up’. So the subsidiary has effectively made a loan of that amount to the parent and can demand (re)payment of that loan at any time.

What is intra-group interest?

Intra-group financial transactions are an essential part of the operations of multinational enterprises. The essential requirement in intra-group financing is that the group companies that act as lenders get an arm’s length return on the lending and the borrowing companies pay an arm’s length interest.

How is arm’s length interest calculated?

To determine the arm’s length rate, the corporate lender must consider all relevant factors, including the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender for comparable loans between uncontrolled parties.

Can a subsidiary make a loan to its parent?

the grant of an interest-free on demand loan by a subsidiary to a parent or other sister company could constitute a distribution, because of the interest foregone on the loan by the subsidiary.

Can a parent company lend money to its subsidiary?

There is usually a ‘top’ holding company and then many subsidiaries. The parent (from the sources of external equity, retained profits and bank or other debt) can subscribe both equity and/or debt to finance the subsidiary. It could also persuade a bank (or other lender) to lend directly to the subsidiary.

Are intercompany loans financial instruments?

If the intercompany financing was previously considered a debt instrument by the lender, but now meets the definition of an equity instrument (that is, it is accounted for as an investment in a subsidiary), the intercompany financing becomes part of the parent/lender’s investment in the subsidiary.

What is an arm’s length loan?

An arm’s length transaction is a contract between two parties who don’t have a relationship with one another – whether that’s a family tie, a business connection, etc. Both parties are confidently able to act in their own self-interest.

Can a subsidiary guarantee a parent?

An upstream guarantee, also known as a subsidiary guarantee, is a financial guarantee in which the subsidiary guarantees its parent company’s debt.

Is a loan a distribution?

Loans are not taxable distributions unless they fail to satisfy the plan loan rules of the regulations with respect to amount, duration and repayment terms, as described above. In addition, a loan that is not paid back according to the repayment terms is treated as a distribution from the plan and is taxable as such.

How subsidiaries are funded?

There are ultimately just three main ways companies can raise capital: from net earnings from operations, by borrowing, or by issuing equity capital. Debt and equity capital are commonly obtained from external investors, and each comes with its own set of benefits and drawbacks for the firm.

How are subsidiaries financed?

While a financial institution may use a finance subsidiary to issue stock, a consumer company can set up a finance subsidiary in the form of a captive finance company to provide financing. To treat another company as its subsidiary, the parent company must own more than 50 percent of that company’s interests.

What is an intra-group financing transaction?

The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.

What is the binding private ruling for intra-group loans?

This binding private ruling is valid for a period of one year from 12 March 2020. 1. Summary This ruling determines the income tax and dividends tax consequences of the redemption of intra-group loans by way of set-off against dividends payable. 2. Relevant tax laws

Do tax authorities focus on intra-group financing transactions of energy firms?

As energy firms discover and exploit new reserves which require significant amounts of financing, tax authorities have increased their focus on the intra-group financing transactions of such companies.

How to eliminate intra-group loans as far as possible?

The group wishes to eliminate the intra-group loans as far as possible. The steps to implement the proposed transactions are as follows: Co-applicant A will declare a dividend to the applicant equal to the balance of loan 1, which will be left outstanding on loan account.