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IC Loans - Fundamentals

What It Is (General)

Intercompany loans are debt instruments between related entities within a corporate group. They allow cash-rich entities to lend to those with funding needs, optimizing the group's overall liquidity while potentially reducing external borrowing costs. IC loans must comply with transfer pricing regulations to ensure arm's length terms.

What It Means for Our ICP

How Treasury Teams Think About It

IC loans are a liquidity management tool - getting money into a country or subsidiary with the ability to pull it back. The goal is often to centralize cash at an in-house bank entity (like a Netherlands BV) and then disperse through loans or pools.

"The whole idea around cash optimization - our goal was how much and how quickly can we get money back into the central entity, because from there it could be sent anywhere else internationally." - Gurjit (Uber experience)

Key principle: All IC loans must satisfy the arm's length principle - they must look like agreements between independent third parties, not related companies.

"In the eyes of the local tax authority, these are considered loans that are not to your own company. It's supposed to look like a real agreement, as if you're borrowing from a bank." - Gurjit

Arm's Length Requirements

  • Interest rates must be reasonable (what a bank would charge)
  • Can't have open-ended loans (must have maturity date)
  • Terms must be documented in formal loan agreements
  • Applies even if both entities are in the same country

Interest Rate Structures

Fixed Rate: - Simple flat rate (e.g., 3%) - Doesn't change over loan life

Floating Rate: - Benchmark rate + spread (margin) - Benchmark: LIBOR, EURIBOR, CDOR, SOFR, etc. (depends on currency) - Spread: Fixed amount added (e.g., 1.25%) - this is where the "arm's length" margin comes from - Rate refreshes on first business day of each month - Published by central banks, pulled from Bloomberg

"Whatever your interest rate is on the first day of that month was going to be the interest that's charged for the rest of the month." - Gurjit

FX Exposure Decisions

Companies choose where to hold FX exposure: - Centralize at lender: Borrower receives and repays in local currency; lender holds FX risk - Push to borrower: Borrower exposed to FX movements

"Some companies will say we want to centralize the FX exposure to the lending company. So the borrower should not be exposed - they borrow a million rupees, they pay back a million rupees." - Gurjit

Typical Loan Terms

Element Typical Approach
Term 3 years (with amendments to extend)
Structure Revolving credit facility (draw as needed up to limit)
Interest payment Annual settlement by Dec 31, or upon principal repayment
Unpaid interest May be added to principal (capitalized)
Maturity Must have end date (arm's length requirement)

Loan Workbook Structure

Treasury teams typically track in Excel: - Lender - Which entity is lending - Borrower - Which entity is borrowing - Country - Jurisdiction of borrower (determines tax treatment) - Currency - Currency of the loan - Maturity date - When loan expires - Loan balance - Actual amount borrowed (accrues interest) - Notional - Credit facility limit (max they can draw) - Interest rate - Current rate (fixed or floating) - Interest paid - Cumulative interest paid - Interest outstanding - Accrued unpaid interest - Withholding tax rate - From tax team - Thin cap limit - Debt-to-equity limit for country

Monthly Process

  1. Update benchmark rates from Bloomberg (first business day)
  2. Calculate interest for the month on each loan
  3. Track any new loan draws during the month
  4. Send report to accounting teams
  5. Accounting confirms bank movements match loan draws
  6. Book accounting entries for loans

Annual Process

  • Settle all accrued interest by December 31st
  • May require documentation and regulatory approvals in some countries
  • November: Post report identifying all interest to be settled

How They Talk About It

  • "Arm's length" - Terms that independent parties would agree to
  • "Benchmark rate" - Published interest rate (LIBOR, SOFR, EURIBOR, etc.)
  • "Spread" / "Margin" / "Surcharge" - Fixed amount added to benchmark
  • "Notional" - Maximum credit facility amount
  • "Loan balance" / "Outstanding principal" - Actual borrowed amount
  • "Thin cap" - Thin capitalization (debt-to-equity limits)
  • "Withholding tax" - Tax withheld on interest payments between countries
  • "In-house bank" - Central entity that lends to subsidiaries

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