Browse all rules ↓

Intragroup financing arrangements

Applies
FY2024 onwards
Reviewed
Rule
P2-IFA-2024.1
By

When is intragroup interest excluded from GloBE Income?

When a low-tax entity's expense to a high-tax group lender is expected to raise its costs with no matching rise in the lender's taxable income.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.7, Intragroup Financing Arrangements

The computation of a Low-Tax Entity's GloBE Income or Loss excludes any expense attributable to an Intragroup Financing Arrangement that can reasonably be anticipated, over the expected duration of the arrangement, to increase the amount of expenses taken into account in calculating the GloBE Income or Loss of the Low-Tax Entity without resulting in a commensurate increase in the taxable income of the High-Tax Counterparty. An Intragroup Financing Arrangement is any arrangement entered into between two or more members of the MNE Group whereby a High-Tax Counterparty directly or indirectly provides credit or otherwise makes an investment in a Low-Tax Entity.

An anti-avoidance rule. It stops a group raising a low-tax jurisdiction's Effective Tax Rate by loading it with interest that no jurisdiction taxes. It adds the expense back; it creates no income.

Four conditions, all required

The conditions, in order

  • An arrangement between members of the MNE Group under which one directly or indirectly provides credit to, or invests in, another
  • The recipient is a Low-Tax Entity and the provider a High-Tax Counterparty
  • The arrangement can reasonably be anticipated, over its expected duration, to increase the expenses in the Low-Tax Entity's GloBE Income or Loss
  • Without a commensurate increase in the taxable income of the High-Tax Counterparty

Low-tax and high-tax are tested without the arrangement

A Low-Tax Entity is one located in a Low-Tax Jurisdiction — where the group has Net GloBE Income and an Effective Tax Rate below the Minimum Rate — or in a jurisdiction that would be one if its rate were determined without regard to the income or expense the Entity accrues under the arrangement. A High-Tax Counterparty is defined the same way in reverse. So an arrangement cannot lift its own borrower out of the rule.

An arrangement is read objectively and as a whole

It includes any agreement, plan or understanding, enforceable or not, and every step that gives effect to it. A back-to-back loan through an intermediary is caught where the intermediary borrowed in order to on-lend, even if the original lender did not know where the money was going. A treasury or financing centre that manages the group's working capital, whose borrowing and lending are separate and independent, is not.

Over the expected duration

The test looks forward over the life of the arrangement, judged objectively and taking the parties' financing needs into account. A short loan put in place to finance a long-term investment may reasonably be expected to remain for an extended period.

No commensurate increase in taxable income

A receipt does not increase the counterparty's taxable income to the extent it is eligible for an exclusion, exemption, deduction, credit or other tax benefit calculated by reference to the amount received. The Commentary's example: a lender with carried-forward excess interest capacity under an interest limitation rule, not otherwise expected to be used, that it can set against the interest as soon as it is received.

The ordinary loan is not caught

Where the lender is taxed on the interest in the ordinary way, the fourth condition fails and the expense stays in GloBE Income or Loss — subject only to the arm's length requirement of Article 3.2.3.

Order of testing

  1. 1

    Inputs requiring your determination

    The five questions are asked one at a time, in the order of the conditions. An unanswered question is never read as a no.

  2. 2

    An arrangement within the MNE Group

    Credit or an investment provided, directly or indirectly, by one member to another.

  3. 3

    A Low-Tax Entity

    The recipient, tested without the arrangement's own income and expense.

  4. 4

    A High-Tax Counterparty

    The provider, tested the same way.

  5. 5

    An increase in the expenses of the Low-Tax Entity

    Reasonably anticipated over the expected duration of the arrangement.

  6. 6

    A commensurate increase in the taxable income of the High-Tax Counterparty

    Where there is one, nothing is excluded.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A lender sheltered by carried-forward interest capacity

A parent in a 25% jurisdiction lends to a subsidiary in a 9% jurisdiction, which accrues EUR 8 million of interest. The parent has unused interest capacity carried forward that it can set against the interest at once, so its taxable income does not rise. The EUR 8 million is left out of the subsidiary's GloBE Income.

Computed

The expense of EUR 8,000,000 attributable to the Intragroup Financing Arrangement is excluded from the computation of the Low-Tax Entity's GloBE Income or Loss for FY2026, as determined: a High-Tax Counterparty has provided credit to, or invested in, a Low-Tax Entity, and the arrangement can reasonably be anticipated, over its expected duration, to increase the expenses of the Low-Tax Entity without a commensurate increase in the taxable income of the High-Tax Counterparty (Article 3.2.7). Based on the determinations you supplied.

Workings

Expense excluded from the Low-Tax Entity's GloBE Income or LossArticle 3.2.7 — as supplied; added back to Financial Accounting Net Income or Loss
EUR 8,000,000

Decided by the a commensurate increase in the taxable income of the high-tax counterparty

An ordinary shareholder loan, taxed in the lender's hands

The same loan where the parent is taxed on the interest in full at 25%. There is a commensurate increase in its taxable income, so the interest stays as an expense of the subsidiary.

Computed

The expense of EUR 8,000,000 attributable to the Intragroup Financing Arrangement is not excluded for FY2026, as determined: the arrangement can reasonably be anticipated, over its expected duration, to produce a commensurate increase in the taxable income of the High-Tax Counterparty, so Article 3.2.7(b) is not met. It is taken into account in the ordinary way, subject to the arm's length requirement of Article 3.2.3. Based on the determinations you supplied.

Decided by the a commensurate increase in the taxable income of the high-tax counterparty

A loan between two low-taxed entities

A finance company in one low-tax jurisdiction lends to an operating company in another. The lender is not a High-Tax Counterparty, so the arrangement is outside the definition.

Computed

Article 3.2.7 does not apply, as determined: the Constituent Entity that provides the credit or investment is not a High-Tax Counterparty. A loan from one Low-Tax Entity to another is not an Intragroup Financing Arrangement as defined. The expense is taken into account in computing GloBE Income or Loss in the ordinary way, subject to the arm's length requirement of Article 3.2.3. Based on the determinations you supplied.

Decided by the a high-tax counterparty

A borrower in a high-tax jurisdiction

A loan into a subsidiary whose jurisdiction is above the Minimum Rate with or without the interest.

Computed

Article 3.2.7 does not apply, as determined: the Constituent Entity that receives the credit or investment is not a Low-Tax Entity, even with the arrangement's own income and expense left out of its jurisdiction's Effective Tax Rate. The expense is taken into account in computing GloBE Income or Loss in the ordinary way, subject to the arm's length requirement of Article 3.2.3. Based on the determinations you supplied.

Decided by the a low-tax entity

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Is there an arrangement between two or more members of the MNE Group under which one of them directly or indirectly provides credit to, or otherwise makes an investment in, another? An arrangement includes every step that gives effect to it — a back-to-back loan through an intermediary counts, where the intermediary borrowed in order to on-lend. A group treasury centre's separate and independent lending does not.

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader