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Intercompany loans

Insights
26th Nov 2024

What are Intercompany Loans?

An intercompany loan is a financial arrangement between two or more related companies. These loans are often used to manage cash flow, finance operations, or transfer funds within a corporate group.

Why are Intercompany Loans Used?

Intercompany loans are a common tool in corporate finance for several reasons:

  • Cash flow management - to optimise cash flow within a group, funds can be transferred from surplus companies to those in need.

  • Tax efficiency - depending on the specific tax jurisdictions involved, intercompany loans can be structured to minimise tax liabilities.

  • Financing operations - to finance specific projects or operations, companies can borrow from their affiliates.

  • Flexibility and speed - can be tailored to specific needs and circumstances, potentially with lower interest rates than external borrowing, quicker to arrange and reduced cost.

Tax efficiency - potential for tax benefits, such as interest deductions.

Disadvantages and potential risks

Under UK law, it's crucial for intercompany loans to be conducted on an arm's length basis. This means that the terms and conditions of the loan should be comparable to those that would be agreed between independent parties. Risks can include :-

  • If a company becomes insolvent, creditors may challenge non-arm's length transactions - allegations may be made that they were unfair or preferential and a liquidator may seek to claw back funds transferred under non-arm's length transactions.

  • Directors have a duty to act in the best interests of the company - non-arm's length transactions could be seen as a breach of this duty.

  • Intercompany loans can have significant tax implications.

To mitigate risk it's important to be able to demonstrate underlying reasons for the loan arrangement, consider appropriate interest, security, warranties, covenants and default clauses in the loan agreement.

Legal work required

  • Negotiation - the terms of the loan agreement with the borrower.

  • Due diligence - conduct due diligence on the borrower's financial health and creditworthiness.

  • Drafting the loan agreement and any security documents - a comprehensive arm's length loan agreement that addresses all relevant legal and commercial issues.

  • Tax advice - consult with tax advisors to ensure compliance with tax laws and regulations in all relevant jurisdictions.

  • Regulatory compliance - adhere to any relevant regulatory requirements.

  • Closing - complete the loan transaction, including the disbursement of funds and execution of the loan agreement.

Contact us

By leveraging our expertise, we can help you navigate the complexities of intercompany loans and protect your business interests.

Get in touch

If you would like to speak with a member of the team you can contact us on:

020 3540 4444


Nicholas Johnson

Partner - Corporate law

Nicholas is a Partner in our Corporate and Commercial team. He mainly operates out of Bedford, Peterborough, and London.

Nicholas qualified as a solicitor in 1995 with a City law firm. Since then he has gained significant experience in the City,...

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