Tax Opportunities Associated with Intra-group Lending

Treasurers need to consider what tax techniques are available, such as standalone technologies or treasury centres, to enhance intra-group lending.

Best practice

When addressing the tax issues associated with intra-group lending, the key considerations are ensuring that: first, the tax relief is obtained for the financing costs; and second, any costs associated with withholding taxes on interest are minimised.

And in many cases this is where the story ends - the company treasurer believes that they have secured full relief for their financing costs, suffered no withholding tax costs and feel happy that they have achieved their overall objective of minimising the group's post-tax costs of funds.

But have they actually achieved that objective?

Depending on the group's approach to tax planning, the answer could be "no" as there a whole range of opportunities for using tax techniques to enhance intra-lending for example taking an interest receipt out of the charge to tax.

Some treasurers may say "Never again!", as they are reminded of the complicated structures their group has implemented involving chains of entities going through various jurisdictions and all to take an interest receipt out of the charge to tax. And then a month after implementation, the tax director walks into the treasurer's office and tells them that something has changed somewhere so the structure no longer works.

Does it need to be this hard? In my opinion, the answer to this question is no.

Looking at what's happening across Europe today, it is clear that groups are still undertaking tax planning in the intra-group financing arena with the planning being based around both standalone technology and treasury centres.

Standalone Technology

Take into consideration the standalone technology currently around: one of the more popular opportunities in Europe involves using the Belgian notional interest deduction regime. This regime allows a Belgian (finance) company to claim an interest rate based deduction, which is computed by reference to the equity of the company. Therefore, in essence an equity-funded company with otherwise taxable receipts becomes, for tax purposes, a debt funded company taxed on only a small interest margin.

This is not complex technology, but is relatively easy to implement and expected to be around for a number of years to come.

Another popular area for intra-group funding involves Luxembourg, where the regime governing the tax treatment of hybrid instruments makes it a useful location for (European) inbound financing. In essence, the Luxembourg company acts as a "transformer" between two jurisdictions, for example US as lender and UK as borrower, and thus enables a tax mismatch to be created between those jurisdictions

While such opportunities are more complex than the Belgian notional interest deduction, the complexity derives from the features of the hybrid instrument rather than other factors such as multi-entity or multi-jurisdictional

The Netherlands has always been a key player in terms of intra-group financing technology. While some would say that the Netherlands has "quietened down", there remains much talk, particularly in terms of the proposals that would exclude intra-group interest, both receivable and payable, from the charge to tax. If enacted, a new regime along these lines would be an interesting alternative to the Belgian notional interest deduction.

The technologies outlined above offer a broad flavour of what's currently around in the European financing arena, and so it is always worth considering what's available, taking into account, of course, a group's specific facts and circumstances.

Treasury Centres

The key point is that establishing a treasury centre will give rise to significantly more commercial issues than standalone opportunities, given that it will involve moving at least some of a group's treasury activities.

The extent of any commercial issues will, however, depend on the nature of the activities to be transferred, for example using a treasury centre solely for intra-group lending will be much more straightforward than using it for cash pooling or hedging activities. And this is also the case when it comes to tax - the more activities transferred, the more complicated the tax analysis will be.

This being said, the use of treasury centres for intra-group financing has become increasingly popular in recent years. When measured against some of the more complex standalone technologies, using a treasury centre is likely to be more straightforward. For example, the treasury centre makes plain vanilla loans to group companies with the tax benefit being derived from the tax rate arbitrage between the treasury centre and the group borrower. As a result, low tax jurisdictions such as Switzerland and Ireland are popular locations for treasury centres.

Conclusion

There are still plenty of opportunities around which will enable a group to enhance its intra-group lending, whether this be using standalone technology, a treasury centre, or a combination of the two.

While enhancing intra-group lending via tax techniques has become more challenging in recent years, treasurers and finance professionals should always consider when make new intra-group loans what enhancement opportunities are available to help them further reduce their group's post-tax cost of funds.

Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries.

Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams

For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421.