Intra-group loans, how does it works ?


The concept of transfer pricing has been a recurrent theme when it comes to establishing fair competition and tax rules at the international level. To tackle this issue, the OECD established various guidelines such as the Transfer pricing guideline and the action plan on base erosion and profit shifting. Those international guidelines and action plans tried to establish key principles for intra-group transactions, especially on a cross-border basis. The most relevant of those was the arm’s length principle. It ensures that intra-group transactions are set up on conditions that would not put transactions between independent and non-related companies at a disadvantage. In this article, we shall examine the two main steps a company has to take in order to ensure compliance with the arm’s-length principle. The first one being the commercial and financial relationship between the parties, and the second one being the comparison between the transaction and other similar transactions between firms unrelated to the companies evaluated.

Analysis of the commercial and financial relation between the parties

The European and international rules

Due to its very often cross-border character, the issue of the arm’s-length principle when it comes to intra-group loans has been the subject of international and European regulations and recommendations. First among those is the so-called BEPS action plan (for Base Erosion and Profit Shifting) published by the OECD. This document considers that the application of the arm’s-length principle is essential in order to avoid base erosion and profit shifting. It explains that companies are linked when one company has direct or indirect control of another company’s capital of directorship. Alternatively, two companies are linked when the same people are involved in the directing of two companies or when they control the capital of both. The OECD has also given guidelines as to what constitutes a loan.

By observing the European Union policy on intra-group financial transfer and profit shifting, one can see that it is fully in line with the objectives of the OECD. Before the BEPS action plan, the EU had published the FICOD directive, which aimed at regulating the investment firms, insurance undertakings, and credit institutions which formed a conglomerate. Among other things, the FICOD directive defines what a financial conglomerate is, while also explaining the concept of intra-group transactions.

Moreover, a report from the ESAs gives various examples of the transactions that need reporting, thus ensuring more clarity in the application of the rules surrounding intra-group transactions. The report also considers the arm’s-length principle to be not only necessary for determining the price of a transaction but also the nature of transaction. It is thus important to make sure that an intra-group loan possesses some characteristics such as the presence or absence of a fixed repayment date or the obligation to pay interest.

The Luxembourgish rules

In its 1967 law on income tax (LIR), Luxembourg has provided a description of how the arm’s-length principle should be applied. If it predates the OECD guidelines, it remains however remarkably similar in its outlook. Of crucial importance for one wishing to comply with Luxembourgish rules on the arm’s-length principle, is a circular letter by the Director of Direct Taxation (Directeur des contributions) from 2016. This circular gives extensive explanations on the methods to be used when analyzing the relation between two contracting parties in an intra-group loan. This document stresses that the first element to consider is the analysis of the role the contracting parties plays within a company group. The specifications of the transaction must be clearly established, such as the assets that will be used. The letter also explains that the contractual provisions must be confronted with the actual behavior of the parties. All those steps can be described as functional analysis.

Comparison between the transaction and similar transactions between independent parties

The international and European rules

One of the main technique prescribed by the OECD for comparing an intra-group transaction to a transaction between independent parties, is the comparable uncontrolled price method (CUP). In essence, this is a bench-marking method whereas the arm’s-length interest in a controlled loan is tested against the data of other loans. Those loans will need to have the same credit rating and similar contract terms in order for the comparison to be efficient. If they have similar characteristics to the intra-group loan, the arm’s-length interest rate can also be calculated based on alternative transactions. Interestingly, the OECD guidelines also give non-comparative methods to price an intra-group loan, such as the cost of funding approach.

Moreover, the previously mentioned report by the ESAs aims at improving the harmonization of the intra-group transaction and risk concentration templates. The ultimate objective is to make comparability easier during intra-group transactions. Whilst making this process easier for supervisory authorities and financial conglomerates alike, this harmonization also proves to be beneficial for companies in cutting reporting costs during cross-border intra-group transaction.

The Luxembourgish rules

Article 56bis of the 1967 LIR law describes the way one should compare an evaluated intra-group transaction to an independent transaction. A peculiarity of Luxembourgish law is that it has two acceptations of what a comparable transaction is. In addition to a comparative approach where the independent transaction between to third parties is used as a benchmark to evaluate the intra-group transaction, the law also permits a comparative approach whereas an independent transaction involving one of the parties to the evaluated transaction can be used. The first method is referred to as an externally comparable transaction and the other as internally comparable transaction, because one of the party to the evaluated transaction is involved in the independent transaction. This kind of classification is absent from the international rules mentioned above.


The application of the arm’s-length principle for intra-group loans has been the subject of a slew of international and national regulation, in an attempt to create a fairer competition and global tax environment. Whether at the international or national level, it is interesting to note that great attention is given to the minutiae of the arm’s-length principle and how it should be used in practice. It seems that the elaboration of rules around intra-group transactions is very much not a top-down evolution but rather a collective effort at various levels. If the OECD succeeds in imposing a worldwide minimum corporate tax rate, it remains to be seen what its effect will be on intra-group transactions regulation.

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