When analyzing financial transactions between affiliated parties, it is essential to consider the economic context or the economic rationale for the existence of such intercompany dealing. There is, in most cases, a logical intention. Financial intercompany transactions can appear for many different reasons, e.g.:
1. Intercompany loans/receivables can arise due to active funding (i.e., with actual cash flows), i.e., if a company provides funding to an affiliated company for:
- Working capital needs
- Cash pooling
- Capital expenditures
- Acquisition of shares
- Dividend payments
- Capital contributions
- Repayment external debt
- On lending to other affiliates, etc..
2. Intercompany loans/receivables can also arise when payments (for the above events) are left outstanding or when payments are made on behalf of others (i.e., without actual cash flows)
3. Intercompany loans/receivables can take many forms. Here are some examples of the most common types:
- Shareholder loan (also referred to as funding loan and typical in case of share acquisitions)
- Cash pool loans/deposits (working capital related)
- Current account loan (for intercompany trading and services)
- Loan notes (often used when dividends are left outstanding)
- Back-to-back loans (often used to pass on external bank debt within a multinational group)
The above many variations, hopefully, clarify why it is essential to understand the rationale behind intercompany financial transactions. The form already tells the intent of the parties. It can also help assess the transaction’s arm‘s length nature. For example, suppose one uses a short-term intercompany loan to fund an acquisition. In that case, this should trigger an alarm, as investments are typically long-term and should attract terms that belong to such an event.
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