Intercompany loans & thin capitalisation — what part of this actually needs a professional?
Some of it, yes — and we will say so on the call if that is the honest answer. The parts that are worth paying for are the ones where a missed election, a missed deadline or an unverified threshold costs more than the fee: Thin-capitalisation rules cap the deductible interest by reference to capital structure; transfer pricing tests the rate against comparable borrowings with similar security, term and currency.
What if I have already filed and got it wrong?
That is a common starting point. We re-derive the position, identify whether an amendment or a disclosure route is the right vehicle, and tell you which one preserves the relief that is still available. The order matters more than the speed.
How long will it take?
It depends on the documents rather than on us. Once the pack is complete most filings turn around inside a fortnight; anything that needs a certificate from a tax authority runs on that authority's timetable, which we tell you at the start rather than at the end.
Why was our intercompany interest disallowed when we actually paid it?
Because an intercompany loan has to survive two separate tests and paying the money answers neither of them. The first asks how much debt the borrower could realistically have carried given its own capital structure — interest on borrowing beyond that limit is simply not deductible, however commercial the arrangement felt. The second asks whether the rate charged is one an independent lender would have agreed. A loan can pass one and fail the other. When either fails, the cash has left the borrower and the deduction has not arrived, so the group pays the tax and the interest both.
How do we set the interest rate on a loan to a group company?
By reference to what the borrower would have paid an unrelated lender for a comparable borrowing, not by reference to what the group finds convenient. Comparable means matched on the things a lender actually prices: the term, the currency, the security offered, the repayment profile, and the borrower's own ability to service the debt as a standalone business. A rate lifted from the parent's own cost of funds is a common starting point and rarely the right answer, because the parent and the subsidiary are not the same credit. The analysis is written down at the time, not reconstructed when it is questioned.
What does thin capitalisation actually mean for our group?
It means there is a ceiling on how much of the borrower's funding can be debt owed to related parties before the interest stops being deductible. The test looks at the balance sheet — the relationship between that debt and the company's equity — rather than at whether the borrowing was sensible. So a subsidiary funded almost entirely by parent loans can be paying interest at a perfectly defensible rate and still lose part of the deduction, purely because of how the funding was structured. The point to take from it is that the shape of the funding is a tax decision made at the moment the money goes in.
Does a parent guarantee change the rate our subsidiary should pay?
It changes the analysis, so it has to be dealt with explicitly rather than ignored. If the borrower is only able to borrow at a given rate because the parent stands behind it, the pricing has to reflect what the borrower could have achieved and what the support is worth, instead of quietly attributing the parent's credit strength to the subsidiary for free. Groups run into difficulty when the guarantee exists in practice but appears in no document, or appears in a document and is never priced. Either way, the comparable borrowings used to justify the rate should be ones with similar security behind them.
Can we lend to our overseas subsidiary in our own currency?
You can, but the currency is one of the things that prices the loan, so it cannot be treated as an administrative preference. A borrower that earns in one currency and services debt in another carries an exposure an independent lender would have charged for or refused, and the benchmarking has to use borrowings denominated the same way rather than whatever data is easiest to find. The choice also affects the borrower's accounts, because movements on the balance flow through them. Decide the currency when the facility is documented and record why, rather than letting the treasury payment run decide it.
Is a running intercompany account treated as a loan?
Usually yes in substance, which is the problem, because it is rarely documented as one. A balance that builds up from costs paid on a subsidiary's behalf and never settles is funding, and once it behaves like funding the questions that apply to a loan apply to it: what rate should it carry, was any rate charged at all, and could the borrower have carried that much debt. Leaving it as an undocumented account does not avoid the analysis; it just means there is nothing on file when it comes. Converting it into a written facility with terms is usually the cleaner outcome.
What is Form 5471 and who has to file it?
The information return a US person files about a foreign corporation they own or control, in one of several filer categories that determine which schedules apply. It is not a tax computation, which is exactly why it gets missed — and why the penalty regime is severe. The consequence people underestimate is that a missing 5471 can keep the limitation period open on the whole return, not merely on the foreign company's figures. See Form 5471.
Branch or subsidiary — which should we use to expand?
A branch keeps one taxpayer: results consolidate at home, losses are usable sooner, and the exposure is that the branch is a permanent establishment whose profit the host country taxes, sometimes with a branch tax on repatriation. A subsidiary is a separate taxpayer with limited liability and local rates, at the cost of withholding on dividends home and transfer pricing on everything between them. The deciding facts are usually expected losses, liability and exit plans. See branch against subsidiary.
