External financing is increasingly more difficult to obtain. How does it impact transfer pricing policies?


According to the latest update of the quarterly bank lending survey of the European Central Bank (“ECB”), the loan application rejection rate within the Eurosystem continued to increase during the first quarter of 2024, albeit at a slower rate than the previous quarter. In addition, Euro area banks reported a small further net tightening of their credit standards for loans or credit lines to enterprises. From a transfer pricing perspective, this raises the question whether intra-group borrowers would also be able to attract similar debt amounts in the open market. Documenting and substantiating the debt capacity of an intra-group borrower is essential from a transfer pricing perspective.

Market observation

Quarterly evolution of the increase in rejected loan applications within the Euro area


Source: The euro area bank lending survey – First quarter of 2024, series key: BLS.Q.U2.ALL.O.E.Z.B3.RA.D.WF4

The above graph depicts the variations in the net increase of rejected loan applications over the last 8 years. Whilst it is clear that the peakof the increase (2022-2023) seems to have ended, the increase continues.

Intercompany loans and debt capacity

Whenever entering into intercompany financing transactions, it is crucial to consider the relevant transfer pricing aspects, such as applying an arm’s length interest rate and considering the level of debt of the borrower.

A borrower’s debt capacity relates to the financial capacity of the borrower to carry the burden of the intercompany loan. In line with the expectations of banks, an intra-group borrower should be able to service the debt it assumes, i.e. it must be able to meet its interest payment obligations and to repay or refinance the loan at maturity (so-called “could test”). Also, the level of debt attracted by the borrower must be at arm’s length, meaning that an independent party operating in similar circumstances would also be willing to attract such level of debt (so-called “would’ test). When the borrower meets both these tests, the intercompany loan is better protected under the arm’s length principle when challenged by tax authorities.

Key takeaways and considerations

  • Throughout the Euro area, the ECB noted that the rejected rates continued to increase.
  • Multinational undertakings generally finance group affiliates through intra-group loans. To be at arm’s length, it is important to substantiate that the intra-group borrower could and would attract a similar level of debt at similar terms and conditions.
  • The debt capacity of a borrower is assessed by reviewing whether the borrower could service the debt (pay back and / or refinance) and whether an independent company would assume a similar debt in similar circumstances.

Please feel free to get in touch with David Ledure or Maxime Dessy to discuss this matter.