• Type: Publication series
  • Date: 6/27/2013

Uniqueness of loans in transfer pricing 


Teodora Alecu

Director, Transfer Pricing

Most subsidiaries of foreign companies, irrespective of the industry in which they operate, struggle with working capital shortages. Thus, the financing needs of almost every company have significantly increased during the past few years. In these circumstances, intra-group loans have played a crucial role in supporting businesses survive and grow over time. 


Gratiela Bogaciu

Tax consultant, Transfer Pricing


At the same time, the tax authorities in many countries have started focusing more on auditing this type of transaction from a transfer pricing perspective. There have been several cases (in other EU states) where the tax authorities have challenged the interest rates charged within intra-group loans.

They have argued that an independent party would not have agreed to lend money for such a low level of interest, and consequently ruled that the real interest rate on the loan should be higher. Hence the lender has been required to pay additional profit tax on its revenue from the loan, based on the increased interest rate set by the tax authorities.

There is some debate about the approach to be taken to defining the arm’s length character of interest rates charged within intra-group loans. The arm's length principle, the basis of transfer pricing, requires that transactions carried out between related parties are made under terms, circumstances and conditions which are comparable to those that would have been agreed upon by independent parties. However, is this rationale applicable to all types of intra-group transactions no matter what?

Typically, intra-group financing transactions should be analyzed considering both the unique economic profile of financial transactions, as well as the controlling position that the parent company [the lender] holds towards its subsidiaries [the borrowers]. The credit and default risks attached to loans between related parties may significantly differ from those related to ordinary loans granted to third parties/banks that assume a lower level of control. This should be taken into account when analyzing the market character of these financial transactions. Quantification of the differences may become crucial, in some cases, to make financial transactions fully comparable, but this can also be very difficult.

Nevertheless, practice will prove whether the Romanian tax authorities will follow in-depth analysis approaches, as seems to be the case in other jurisdictions.