Intra-group financing : The influence of the parent-subsidiary relationship in the pricing of intra-group loans

This master thesis examines the issues surrounding the pricing of intra-group loans. The main focus of the thesis is the process of establishing an interest rate and the assessment of the credit risk in an intra-group context. In order to expose the common problems associated with the pricing of intra-group loans the thesis has examined case law from two different jurisdictions, Canada and Sweden, which have been put in relation to the OECD guidelines and Swedish national legislation. The purpose of the master thesis has been to determine whether the establishing of an interest rate and the assessment of the credit risk of an intra-group loan should be made taking into account the parent-subsidiary affiliation or relationship and whether or not this is a deviation of the arm’s length principle. A general assumption is that, if a transaction is carried out between related parties, the price could be different from a price deriving from negotiations between two unrelated parties on the open market, due to their commercial or financial relations. A common feature in case law, regarding the establishing of an appropriate interest rate on intra-group loan, has been whether or not the parent-subsidiary should be included in the assessment of the credit risk. Much of the support available to taxpayers in resolving transfer pricing issues are relating to goods and services and not financing transactions. The main reason is the unique economic profile of financial transactions. Financial transactions are affected by different factors why it is difficult to develop usable transfer pricing policies. Establishing economically justifiable transfer pricing policies while attempting to properly reflect taxable income and prevent penalties from international tax authorities, has resulted in transfer pricing challenges that are unique to intra-group financing. According to Swedish law, interest is regarded as a deductable cost within corporate tax. However, in recent cases, the Swedish tax authorities have been questioning, the deduction right as well as the level of interest on intra-group loans. As of today, there are few national and international guidelines on this area thus it is of interest to examine and address the issues surrounding intra –group loans.