Intercompany Loans, Guarantees & Cash Pooling: TP Documentation

Intra-group finance — loans, guarantees, cash pooling — is benchmarked on a different question than goods or services: what would an independent party have charged, or accepted, in this position? The lender’s question is the independent-lender test (what rate would an unaffiliated lender charge this borrower, on this credit, in this market?); the guarantor’s question is the genuine-benefit test (did the guarantee give the borrower something it could not get, or could get only at more cost, on its own?). Each test has a benchmark, a safe harbour in the Indian case, and a documentation pack.

Intercompany loans: the independent-lender test

The arm’s length interest rate is the rate an independent lender would charge the borrower — with the borrower’s credit standing, the loan’s currency, tenor and security — in the relevant market. The analysis:

1. The credit profile. The borrower’s creditworthiness as if standalone: the financials, the leverage, the coverage, the security offered. Where the borrower would not obtain debt from an independent lender at any rate, the question is what it would pay for the funding it actually got — the analysis moves to the borrower’s cost of comparable external borrowing, with the group-support effect considered.
2. The benchmark. The rate built from: the reference rate for the currency (the lending rate — MCLR for INR, SOFR/EURIBOR/SONIA for the major currencies) plus a credit spread for the borrower’s rating/position. The spread is the examined number: the benchmark is the borrower’s own external debt (where it exists) or the external debt of comparable companies at comparable ratings, with the difference between the group loan’s terms and the external terms analyzed.
3. The India safe harbour. The safe harbour regime prescribes the circumstances for intra-group loans: for INR loans, the SBI 1-year MCLR as on 1 April plus a spread of 175–625 bps by credit rating; for foreign-currency loans, the currency reference rate (SOFR, EURIBOR, SONIA, etc.) plus 150–600 bps. See the safe harbour guide for the current tiers and the Form 3CEFA election. Where the loan’s terms fall within the harbour, the rate is a prescribed position — no benchmark fight.

The TPO’s recurring challenge is the group-support effect: the borrower’s external rating is low, but the group’s implicit (or explicit) support makes the funding cheaper — and the TPO’s position is usually that the standalone borrower (without the support) is the right reference, which pushes the rate up. The analysis must address the support question explicitly: is there an explicit guarantee (priced as a guarantee, separately), an implicit support (the group’s reputation — analyzed, not assumed), or neither?

Guarantees: the genuine-benefit test

A guarantee is charged where it gives the genuine benefit — where the guaranteed borrowing is cheaper (or possible) because of the guarantee. The OECD framework:

1. Would the borrower obtain the financing without the guarantee? If yes, on the same terms — the guarantee adds nothing, and no fee is arm’s length (a guarantee that changes nothing is not a service).
2. If not — what is the incremental protection worth? The fee is the difference between the borrowing cost with the guarantee and the cost without it (the two cases, both benchmarked) — or, where the borrowing is impossible without the guarantee, the fee is the incremental cost of the alternative funding, analyzed.
3. The quantum. The fee is expressed as a percentage per annum of the guaranteed amount, benchmarked against independent guarantee fees for comparable credit positions — the rating of the guarantor and the borrower, the tenor, the guarantee structure (full/partial, on-demand/conditional).

The India safe harbour prescribes: a fee of at least 1% per annum of the amount guaranteed for the eligible intra-group guarantee — the prescribed floor that ends the incremental-protection fight where the circumstances are met (see the safe harbour guide). The “at least” direction matters: the harbour is a floor for the chargeable position, and the file that charges below it on an eligible guarantee has priced below the prescribed arm’s length.

The no-benefit case is the defence, not the exception: where the guarantee is for a borrower whose independent credit already supports the borrowing at the borrowed rate, the correct position is no fee — documented with the two benchmark cases (with and without the guarantee), which is exactly the analysis the examination asks for when the fee is challenged.

Cash pooling: the net position

A cash pool nets the group companies’ daily balances — the surplus entities’ balances fund the deficit entities’, and the pool’s bank account holds the net. The TP treatment follows the economics each participant actually gets:

Participant position	The economic content	The TP treatment
Net depositor (its balance funds others)	A deposit — earns the deposit interest	Interest on the net balance at the arm’s length deposit rate (the bank rate for equivalent deposits, or the pool’s stated rate benchmarked)
Net borrower (its deficit is funded)	A loan — pays the borrowing interest	Interest on the net balance at the arm’s length lending rate (the independent-lender analysis on the net position)
The pool master / the bank relationship	The master arranges and bears the bank-relationship costs	The master’s service (where it is a genuine service to the participants) at cost plus the arm’s length mark-up — or the LVAS treatment where it is purely administrative

The discipline: the interest is on the net position, per day (the daily netting, the average net balance over the period, the rate), and the participants’ gross movements are not the base. A pool priced on gross movements prices transactions that netted to zero. The pool agreement (the netting mechanism, the interest mechanism, the master’s role) and the daily netting data are the documentation.

The documentation pack, per instrument

Instrument	The pack
Loan	The loan agreement (amount, tenor, currency, security, the rate mechanics); the credit analysis (the borrower’s standalone profile); the benchmark (reference rate + spread, the comparable debt); the group-support analysis; the safe harbour position where elected
Guarantee	The guarantee deed (scope, amount, tenor, on-demand/conditional); the genuine-benefit analysis (the two benchmark cases); the fee benchmark or the safe harbour floor; the no-benefit conclusion where the fee is nil
Cash pool	The pool agreement (netting, interest, the master’s role); the daily netting data and the average net balances; the deposit/lending rate benchmarks; the master’s service analysis

Across all three, the same three documents carry the weight: the agreement that matches the economics (see intercompany agreements), the benchmark with its comparables stated, and the safe harbour election (Form 3CEFA) where the prescribed position is used — because the harbour’s protection runs only to the elected, documented position.

See also

• India safe harbours
• Intercompany agreements
• India TP overview