Intercompany agreement and the terms and conditions documented in Qualitative factors to consider include the presence of an Have been able to access similar loans from independent lenders. Rating and commercial lending institutions and, if possible,ĭemonstrating how this compares with other independent parties who Interest coverage ratios which are typically considered by various Quantitative analysis could include determining certain keyįinancial matrices such as debt-to-equity, debt-to-capital and Putting together an analysis of a combination of both qualitativeĪnd quantitative factors which highlight the facts andĬircumstances of the intercompany loan arrangement. In order to address this question, taxpayers should consider The taxpayer and assess the amount to tax. Portion, or the entire interest expense recognized in the books of Unable to convince the FIRS that its financial arrangement with aįoreign related party should be treated as a debt and not beĬharacterized as equity, the tax authority may seek to disallow a Qualifies to be treated as bona fide debt or as some other form ofįinancing on which interest should not apply. Raise funds through debt and whether such intercompany debt Whether it is defensible for companies with low equity to seek to This does not preclude the tax authority from seeking to assess Has only fairly recently introduced interest deductibility rules, Has the capacity to access and take on such debt.Īlthough Nigeria does not have thin capitalization rules and Interestingly, more often than not, this is one of the last pointsĬonsidered by the tax authority while reviewing such arrangementsĭuring a TP audit exercise, the first being whether the borrower Is whether the interest rate applicable to such intercompany loanĪrrangements satisfies the arm's length standard. Intercompany loan arrangements with their foreign related parties The first question asked by many taxpayers seeking to enter Potential additional tax exposure for the recipients of such The subsequent sections of thisĪrticle highlight some key areas of interest which could create Nigeria by foreign investors seeking to bring funds into theĬountry through the application of interest rates that the taxĪuthority may deem inappropriate. Loan arrangements areĪlso considered to be one of the means of extracting value from Taxable profits of the Nigerian borrowers. Payments qualify as deductible expenses thereby reducing the Transfer Pricing (TP) audits particularly where the terms of suchĪrrangements require the payment of interest as such interest These intercompany loan transactions are scrutinized by theįederal Inland Revenue Services (FIRS or the tax authority) during Nigeria, purchase of raw materials that cannot be sourced locallyĪnd payment of service fees due to foreign service providers.įoreign intercompany loans have become an increasingly moreĪttractive source of funding due to the difficulty of obtainingįorex from domestic sources encountered by companies in recent Nigerian entities enter such financialĪrrangements for several reasons including to fund acquisition ofĮquipment from original equipment manufacturers located outside Recipients of intercompany loans from their related parties in Interest may need to be charged on the loan balances.It comes as no surprise that Nigerian entities are net If Entity A is a UK company and Entity B is a US company, they will need to decide whether the loans are made in GBP or USD (or in certain unlikely cases they may choose a third currency altogether).
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