Intragroup financing: the review starts before the interest rate

A loan between group companies needs an economic rationale and terms that can be explained. The interest rate is only part of the assessment, alongside repayment capacity, risks and tax treatment.

Clarify the need and repayment capacity

Funding seasonal inventory, an investment and recurring losses involves different circumstances. A useful starting document explains what the money will fund and where repayment is expected to come from. Budgets should reflect the business, rather than exist only to support a contract already agreed.

For example, in a hypothetical equipment financing arrangement, project receipts may arrive later than the proposed repayment dates. Discuss that mismatch before signing. If repayment depends on refinancing, selling an asset or additional support, make that assumption visible.

Assess the full package of terms

Article 11 of the Romanian Fiscal Code requires related-party transactions to follow the arm’s length principle. Comparing an interest rate with a bank offer alone can overlook important differences. Currency, maturity, security, seniority and the borrower’s profile need to be considered together.

Chapter X of the OECD Transfer Pricing Guidelines provides a framework for examining financial transactions between associated enterprises. It distinguishes the economic assessment of financing from simply choosing a percentage. Applying the framework requires facts and comparisons relevant to the transaction date and circumstances.

A transfer pricing assessment does not settle deductibility on its own. Borrowing-cost rules and, for cross-border payments, withholding tax should be checked separately. Corporate-law and contractual restrictions that could affect the provision or repayment of funding also need their own examination.

A checklist for useful financing records

• Document the funding need, amount and intended use.
• Prepare cash-flow forecasts and explain sensitive assumptions.
• Describe the currency, maturity, security and each party’s rights.
• Explain the method and information used to assess the terms.
• Check deductibility, withholding and applicable reporting separately.
• Track the use of funds, payments and genuine contractual changes.

Repeated extensions or a material change in the borrower’s circumstances may require the original assumptions to be reassessed. Records should reflect what actually happens, including delays and renegotiations, while preserving the history of decisions. Updating the file does not mean rewriting past events. It means showing which information changed, when it became available and how the parties responded.

For a discussion of your circumstances, prepare the draft agreement and the borrower’s cash-flow forecasts. These help define the review needed before the parties commit to the proposed terms.

This article provides general information, not individual advice. Financing terms and their tax consequences require assessment against the specific circumstances and rules in force.