Inter-Company Loan Documentation: The Compliance Gaps That Surface in Due Diligence
August 5, 2026
For many multinational groups, the inter-company loan book is the largest lending portfolio they will ever manage, and the least formally administered. Loans between group entities are created by accounting entries rather than agreements, priced by habit rather than benchmarking, and rolled over year after year without anyone signing anything. None of this attracts attention while the group is stable. The gaps surface at precisely the moments when they are most expensive: a sale process, a tax audit, a refinancing, or the liquidation of an entity that turns out to owe money nobody can fully evidence.
In our experience administering inter-company lending structures for multinational groups, the documentation problems that emerge in due diligence are remarkably consistent. This article sets out the gaps we see most often, explains why they carry real financial consequences rather than merely administrative ones, and describes the disciplines that keep an inter-company loan book clean enough to survive scrutiny at short notice.
How Inter-Company Loans Drift Out of Order
The drift begins innocently. A parent funds a subsidiary’s working capital and the transfer is booked to an inter-company account. Trading balances accumulate between entities and, at some point, someone reclassifies a persistent balance as a loan. A cash pool sweeps liquidity daily and the resulting positions grow into material lending relationships that were never designed as such. In each case the economic substance of a loan exists before, and often without, the legal form of one.
Time then compounds the problem. Agreements that were signed a decade ago no longer reflect the balance, the currency, or the entities involved after intervening reorganisations. Interest accrues in the ledger but is never actually paid, or is charged at a rate someone chose years ago and nobody has revisited. Maturities pass silently and the loan continues as if the date had never existed. The loan book that results is not wrong in any single obvious way. It is simply unable to answer basic questions: what are the terms, who approved them, and can you show me?
Where the Gaps Become Expensive
Due diligence is the most unforgiving venue. In a sale process, the buyer’s advisers will request the agreement behind every material inter-company balance, evidence that interest has been charged and settled in line with its terms, and confirmation of how the positions will be repaid or capitalised at completion. Balances that cannot be evidenced become points of negotiation, and points of negotiation in a sale process have a way of converting into price adjustments, escrows, indemnities and delay.
| From the field. In one carve-out transaction we supported, the data room request for inter-company loan agreements could be met for fewer than half of the material balances. Several positions had grown out of trading accounts and had never been documented at all; others were covered by agreements referencing entities that no longer existed after an earlier reorganisation. The gaps did not kill the transaction, but they consumed weeks of legal effort at the worst possible moment, and the buyer’s advisers used every undocumented balance as leverage. Documentation that would have cost days to maintain cost far more to reconstruct under deal pressure. |
Tax authorities are the second venue, and their interest has sharpened considerably. The OECD Transfer Pricing Guidelines now address financial transactions explicitly, and tax administrations increasingly examine whether inter-company loans are priced at arm’s length, whether the borrower could plausibly have obtained the funding from an independent lender, and whether the arrangement should be respected as debt at all. A loan with no documentation, no interest actually paid, and no realistic prospect of repayment invites recharacterisation as equity, with consequences for interest deductibility and withholding tax that can reach back through open tax years. Interest limitation rules in many jurisdictions, and the arrival of the global minimum tax under Pillar Two, have only raised the stakes on getting the debt side of the balance sheet right.
The third venue is quieter but just as real: refinancing and lending relationships. External lenders reviewing a group’s position will look through to material inter-company exposures, and structural subordination questions become much harder to answer when the intra-group positions themselves are informal. A related and frequently overlooked issue is legacy benchmark language. Inter-company agreements written before the IBOR transition often still reference rates that have ceased to exist, leaving the applicable interest rate genuinely uncertain as a matter of contract.
The Gaps We See Most Often
Across due diligence exercises and loan book reviews, the same findings recur:
- Material balances with no written agreement at all, existing only as ledger entries.
- Agreements that no longer match reality: wrong balance, wrong currency, expired maturity, or parties that have merged or been dissolved.
- Interest rates set arbitrarily or never benchmarked, with no file supporting an arm’s length position, or legacy IBOR references never amended.
- Terms not followed in practice: interest accrued but never settled, repayments made outside the agreement, maturities rolled without documentation.
- Withholding tax positions applied without the treaty documentation and residence certificates needed to support them.
- No central register, so nobody can state with confidence how many loans exist, what they total by entity and currency, or which board approvals sit behind them.
Each item looks administrative in isolation. Together they describe a lending book that cannot withstand adversarial review, and inter-company positions are reviewed adversarially more often than most groups expect.
Building a Loan Book That Survives Scrutiny
The fix is a discipline rather than a document. It starts, as with most treasury clean-ups, with a complete inventory: every inter-company position above an agreed threshold, reconciled between the lending and borrowing entities, with its agreement, rate basis, maturity, approval trail and settlement history attached. Positions that turn out to be undocumented are then either formalised, capitalised, or settled, as a deliberate decision rather than by default.
From there, four standing disciplines keep the book in order. Standard loan agreement templates, maintained centrally, so that documenting a new position is a matter of days rather than a legal project. A benchmarking process for interest rates, refreshed on a defined cycle and documented in a form a tax authority can review, so that the arm’s length position is evidenced rather than asserted. An annual review that compares the terms of every agreement against what actually happened, because an agreement that is ignored in practice can be worse than no agreement at all. And genuine administration: interest calculated and actually settled on schedule, whether in cash or through the group’s netting process, maturities diarised and actively managed, and every amendment papered at the time rather than reconstructed later.
Structure, once again, does much of the heavy lifting. Groups that centralise inter-company lending through an in-house bank replace a tangle of bilateral positions with a hub-and-spoke structure in which every entity faces a single counterparty, under a single documentation framework, with interest calculation, settlement and reporting handled as a routine process. The number of positions falls, the consistency of terms rises, and the due diligence question changes from an archaeology exercise into a report that can be produced on request.
A Quick Diagnostic: Six Questions for Your Next Treasury Meeting
| ☐ | Do we hold a central register of every inter-company loan, reconciled between lender and borrower entities? |
| ☐ | Could we produce a signed, current agreement for every material balance within 48 hours? |
| ☐ | Is there a documented arm’s length benchmarking file behind every interest rate, refreshed on a defined cycle? |
| ☐ | Is interest actually settled in line with the agreements, rather than accruing indefinitely in the ledger? |
| ☐ | Have all agreements been reviewed for expired maturities, dissolved entities and legacy IBOR references? |
| ☐ | If a sale process started next month, would the inter-company loan section of the data room be ready, or a project? |
If the answer to two or more of these is no, the loan book will eventually be reviewed by someone whose interests are not aligned with yours, and it is far cheaper to fix it before that happens.
Frequently Asked Questions
What documentation should an inter-company loan have?
At a minimum: a signed agreement identifying the parties, principal, currency, interest rate basis, payment dates and maturity; board or delegated approvals on both sides where required; a benchmarking file supporting the interest rate; and evidence that interest and repayments have actually been settled in line with the terms. For cross-border positions, the treaty and residence documentation supporting any withholding tax position belongs in the same file.
Do inter-company loans really need an arm’s length interest rate?
In most jurisdictions, yes. Transfer pricing rules generally require intra-group financing to be priced as it would be between independent parties, and the OECD guidance on financial transactions has given tax authorities a much more detailed framework for challenging rates, and in some cases the characterisation of the instrument itself. The practical standard is not just charging a defensible rate but being able to show how it was determined.
What happens when undocumented loans surface in due diligence?
They become negotiating leverage for the other side. Typical outcomes include completion price adjustments, escrows or indemnities covering the tax exposure, conditions requiring the positions to be formalised or settled before closing, and delay. The direct legal cost of reconstructing documentation under deal pressure is usually the smallest part of the bill.
Can an in-house bank or netting structure reduce the documentation burden?
Substantially. An in-house bank converts a web of bilateral loans into positions against a single hub entity under one framework agreement per participant, while a netting process gives interest and principal settlements a routine, auditable mechanism. The documentation requirement does not disappear, but it becomes standardised and centrally administered rather than scattered across the group.
FTI Treasury has provided inter-company loan administration, in-house banking and netting services to multinational corporations for over 30 years. The disciplines described in this article, including centralised loan registers, standardised documentation, interest administration and settlement processes, are core elements of the operating models we run for clients. If you would like to discuss how your inter-company loan book compares to current best practice, contact our team.
Related Services: Inter-Company Loan Administration | In-House Banking | Netting