Arm’s length character of interest rates on intercompany loans


In recent years, the Belgian Tax Authorities (BTA) have intensified their focus on the (intercompany) financing arrangements of MNE groups.  Some recent Belgian case laws offer valuable insights into the approach that the BTA and the Courts adopt when assessing the arm’s length character of intercompany financing conditions. Stay informed and adapt strategically!

Judgment of the court of first instance in Leuven dated 26 August 2022 [Link]


  • The BTA contested the interest rate applied to two shareholder loans (mezzanine financing- convertible into capital) provided by the shareholder to a Belgian entity in 2016 for funding the acquisition of a stake in a related entity. The contention was that the applied interest rate was deemed excessive and not at arm’s length.
  • The taxpayer substantiated during the tax audit the arm’s length character of the applied interest rate by using an internal Comparable Uncontrolled Price (CUP) method. Firstly, by citing the comparability of a third-party offer during the 2016 loan issuance, integral to the commercial negotiations for related company’s acquisition. Secondly, underscoring the comparability of a third-party offer received in 2021 to refinance the original shareholder loans.
  • The BTA rejected both used internal CUPs based on the following arguments (accepted by the court):
    • The first offer was not made by an independent party since the offer was integral to a broader framework of commercial negotiations to acquire a related company.
    • The second third party-offer was found not comparable considering i) the group’s structure and scale underwent significant changes ii) BTAs high-level debt capacity and credit risk analyses revealed a substantial decline in the shareholder’s creditworthiness from 2016 to 2021 which deemed to have a material impact on the interest rate. 
  • The BTA substantiated their position through a corroborative approach, conducting two benchmark studies- an internal CUP with an external bank loan (adjusted for comparability) and an external CUP. Additionally, they effectively challenged the accurate delineation of the transactions as mezzanine loans.

This judgment underlines the importance of accurate delineation and the sufficient substantiation of the arm’s length character of loans. The BTA and the court place a strong emphasis on accurate delineation, meticulously assessing whether the conditions of controlled transactions align with those of uncontrolled transactions under similar circumstances.

Judgment of the Dutch-speaking court of first instance in Brussels dated 20 July 2023 [Link]


  • In this case the BTA challenges the arm’s length character of the applicable interest rate on a loan provided to a Belgian entity. More specifically, the assumed stand- alone credit rating of the Belgian entity and the impact thereon of group membership (so called ‘passive association’ or ‘implicit support’) scrutinized. 
  • For the determination of the interest rate, the group’s transfer pricing policy and the loan agreement refer to the corporate rating as applied by the rating agency Standard & Poor’s (the ‘S&P method’). 
    • This method determines a borrower’s stand-alone credit rating using a comprehensive scorecard that integrates both qualitative (business risk) and quantitative (financial risk) elements.
    • The stand- alone credit rating is assessed based on the S&P methode and consequently notched up based on S&P’s passive association.
  • At the heart of this dispute is the deviation of S&P’s methodology as implemented by the Group. More specifically, not all qualitative elements from the S&P method were considered by the taxpayer. Additionally, the BTA asserted that the analysis outcome was materially impacted by the entity’s elevated indebtedness, which stemmed directly from substantial intercompany debt incurring high interest costs. 

This judgment underlines the importance of a transparent and a comprehensive credit rating analysis, where the chosen method is correctly applied. Additionally, attention should be paid to the properly support the intercompany debt quantum to ensure it does not weaken the credit rating assessment and subsequent interest rate applied. 

 Key takeaways and considerations

  • It is highly recommended to prepare transfer pricing documentation before engaging in an intercompany financing arrangement, as substantiating the arm’s length nature ex post could be more challenging.
  • In determining the arm’s length character of an intercompany financing arrangement, it is crucial to emphase accurate delineation, meticulously assessing whether the conditions of controlled transactions align with those of uncontrolled transactions under similar circumstances. 
  • When determining a relevant credit rating, it is recommended to adhere to the chosen credit rating methodology. Unjustified deviations from the methodology may arouse suspicion from tax authorities. It is therefore recommended to document and accurately analyse the credit rating assessment by following all steps and necessary qualitative and quantitative criteria.
  • Have a critical look at the potential impact of an intragroup leverage and interest rate on the credit rating outcome. In case the credit rating analysis is dependent on financial parameters such as leverage ratio, it should be assessed whether the results of the quantitative credit rating analysis is adversely impacted by the level of intercompany debt and interest expense. A robust debt capacity will help in supporting the debt leverage of the borrowing entity.