TPG2020 Chapter X paragraph 10.161

Category: D. Financial guarantees, D.1. Accurate delineation of financial guarantees, OECD Transfer Pricing Guidelines (2017), TPG2020 Chapter X: Financial Transactions | Tag: , , ,
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Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and to reduce the interest rate on any existing borrowing capacity of the borrower. In such a situation there may be two issues – whether a portion of the loan from the lender to the borrower is accurately delineated as a loan from the lender to the guarantor (followed by an equity contribution from the guarantor to the borrower), and whether the guarantee fee paid with respect to the portion of the loan that is respected as a loan from the lender to the borrower is arm’s length. The conclusion of an analysis of such transactions may be, taking into account the full facts and circumstances, that the evaluation of the guarantee fee should be limited to a fee on the portion that has been accurately delineated as a loan, and the remainder of the loan granted should be regarded as effectively a loan to the guarantor followed by an equity contribution by the guarantor to the borrower.






Related Guidelines

  1. TPG2022 Chapter X paragraph 10.162This section elaborates on the effect of group membership on determining the arm’s length price of financial guarantees, building upon the principles laid out in Section C.1.1....
  2. TPG2022 Chapter X paragraph 10.160Alternatively, Chapter I analysis may indicate that the purported financial guarantee is not providing any benefit to the borrower but merely recognising the benefit that the guaranteed party would have obtained in any case by being part of the MNE group. In such...
  3. TPG2022 Chapter X paragraph 10.159Where the effect of an intra-group guarantee as accurately delineated is to reduce the cost of debt-funding for the borrower, it might be prepared to pay for that guarantee, provided it was in no worse a position overall. In considering the borrower’s overall...
  4. TPG2022 Chapter X paragraph 10.88The following paragraphs present different approaches to pricing intra-group loans. As in any other transfer pricing situation, the selection of the most appropriate method should be consistent with the actual transaction as accurately delineated, in particular, through a functional analysis (see Chapter II)....
  5. TPG2022 Chapter X paragraph 10.168Likewise, the financial capacity of the guarantor to meet its obligations requires an analysis of the correlation between the guarantor’s and borrower’s businesses. In situations where the guarantor and the borrower operate under similar market conditions, an adverse market event that affects the...
  6. TPG2022 Chapter X paragraph 10.158From the perspective of a lender, the consequence of one or more explicit guarantees is that the guarantor(s) are legally committed; the lender’s risk would be expected to be reduced by having access to the assets of the guarantor(s) in the event of...
  7. TPG2022 Chapter X paragraph 10.166The examination of financial guarantees under accurate delineation needs also to consider the financial capacity of the guarantor to fulfill its obligations in case of default of the borrower. This requires an evaluation of the credit rating of the guarantor and the borrower,...
  8. TPG2022 Chapter X paragraph 10.14In determining the arm’s length conditions of financial transactions, the same principles apply as described in Chapters I-III of these Guidelines for any other controlled transaction....
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Related Case Law

  1. Germany vs “C A GmbH”, February 2019, Bundesfinanzhof, Case No I R 73/16C A GmbH managed an unsecured clearing account for a Belgian subsidiary. After financial difficulties in the Belgian subsidiary, C A GmbH waived their claim from the clearing account and booked this in their balance sheet as a loss. However, the tax office disallowed the...
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  3. France vs. Soladi, April 1998, CAA No. 94NC00880In the Soladi case the court deemed it to be an “abnormal act of management” to provide an explicit financial guarantee free of charge, unless direct actual benefit for the entity providing this support can be justified. Click here for translation...
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