Intercompany loans: arm’s length interest and non-arm’s length loans
TGS Innovised — De Voorwaarts
Updated: 30 September 2026
- First establish whether, for tax purposes, there is a loan at all rather than equity.
- Support the interest rate with a credit rating of the borrower and a comparison with similar loans.
- With a non-arm’s length loan, a later write-down is not tax-deductible.
- Put the loan in writing and actually comply with the terms.
An intercompany loan between a holding company and an operating company or foreign subsidiary may seem simple, but it is one of the biggest transfer pricing risks for SMEs. On this page, you can read in three steps how to structure an intercompany loan at arm’s length, which mistakes are common and what a non-arm’s length loan is under Dutch tax law. This page belongs to the article Transfer pricing for SMEs.
The framework for intercompany loans
Financial transactions within a group are governed by:
- Article 8b of the Dutch Corporate Income Tax Act: the arm’s length principle;
- Chapter X of the OECD Transfer Pricing Guidelines (2020): financial transactions;
- The Transfer Pricing Decree 2022 (in Dutch): the Dutch view, with an extensive section on financial transactions;
- Case law on the non-arm’s length loan (onzakelijke lening), the sham loan and the participating loan;
- Interest deduction limitations, including Article 10a and Article 15b (earnings stripping).
Step 1: is it really a loan?
Before you set an interest rate, it must be clear that there is a loan and not equity. The Dutch Tax Administration looks at factors such as:
- Repayment obligation: is there a term, and are repayments actually made?
- Interest: is it paid, or only accrued?
- Debt capacity: could the borrower have borrowed this amount from a bank?
- Security and covenants: have they been agreed, and are they complied with?
If an independent lender would not grant the loan, or not on these terms, (part of) the loan may be treated as capital. The interest is then not deductible.
Step 2: the borrower’s creditworthiness
The interest rate depends on the risk. The Transfer Pricing Decree 2022 calls for:
- A stand-alone credit rating of the borrower, based on its own financial position.
- An assessment of implicit group support: independent parties take into account that a group will not let an important subsidiary fail. This may improve the rating.
- An interest rate comparison with comparable loans (CUP), for example bonds or bank loans with the same rating, term, currency and seniority.
Control over risk: the lender must actually be able to control the credit risk, with the necessary expertise, decision-making and financial capacity. If not, the lender is entitled, according to the Decree, only to a limited (risk-free) return.
Illustration (fictitious)
| Step | Outcome |
|---|---|
| Stand-alone rating of the operating company | B+ |
| After implicit group support | BB− |
| Comparable loans BB−, 5 years, EUR | 5.6% – 7.0% |
| Interest rate chosen (median) | 6.3% |
Step 3: document and implement
- Record the loan in a written agreement stating the amount, term, interest rate, repayment schedule, security and the consequences of default.
- Actually comply with the terms: pay the interest, repay according to schedule and review the terms on renewal.
- Document the rating and the benchmark at the time the loan is entered into.
Common mistakes with intercompany loans
| Mistake | Risk |
|---|---|
| Current account grows for years without interest or repayments | Recharacterisation as capital; a notional interest charge or a write-down is not accepted |
| Fixed “group interest rate” for all entities | Not at arm’s length for entities with a different risk profile |
| Loan to a subsidiary in financial difficulty, without security | Non-arm’s length loan: a later write-down is not tax-deductible |
| Guarantee or surety without a fee | Adjustment through a guarantee fee; a surety may also be non-arm’s length |
| Cash pool without a clear allocation of the benefit | Dispute about the remuneration of the pool leader and the participants |
| Interest-free loan from a foreign parent to the Dutch subsidiary, with notional interest deducted in the Netherlands | Since 2022, a downward adjustment is not allowed if there is no corresponding upward adjustment at the lender (Articles 8ba et seq. of the Corporate Income Tax Act) |
| Interest deduction limitations overlooked | Earnings stripping: net interest deductible up to the higher of 24.5% of tax EBITDA or € 1 million (from 2025); in addition, Article 10a for certain base erosion |
| No link with the financial statements | Valuation of the receivable in the financial statements differs from the tax position; questions from the auditor |
For more on the earnings stripping rule, see the Dutch Tax Administration (in Dutch).
The non-arm’s length loan in brief
A loan is non-arm’s length (onzakelijk) if an independent party would not have accepted the credit risk, not even at a high interest rate or with security. The consequence: a write-down or loss on the loan is not tax-deductible, because it falls within the shareholder sphere. According to the Transfer Pricing Decree 2022, this may also apply to the non-arm’s length part of a loan, if the interest cannot be set at an arm’s length level.
For SME holding companies that finance their operating companies, this is one of the most important risks. It arises mainly with loss-making subsidiaries.
Checklist for intercompany loans
- Draw up an overview of all intercompany loans, current account positions and guarantees.
- Test the debt capacity and the terms of each loan.
- Determine a credit rating, with support for any group support.
- Support the interest rate with a benchmark.
- Put everything in writing and actually comply with the terms.
- Assess the interest deduction limitations.
- Align the tax position with the valuation in the financial statements.
Frequently asked questions about intercompany loans
How do I determine an arm’s length interest rate for an intercompany loan?
What is a non-arm’s length loan in the Netherlands?
Can an intercompany loan be interest-free?
More on transfer pricing
Would you like us to review your intercompany loans?
Contact our international tax specialists.