Where companies obtain debt from a third party lender (or, indeed, an affiliated lender) the loan is sometimes supported by a guarantee from an affiliate of the borrower. The guarantee normally takes the form that in the case of default, the affiliate will cover the payment. The guarantor is normally the parent company or a substantial trading entity. Where guarantees are required the arm's length principle would suggest that a guarantee fee would be charged by the affiliate to the borrower, on the basis that if a third party was to give such a guarantee, it would expect to be compensated in some way. This is because the guarantee generally creates the benefit that the loan has a lower rate of interest and/or a larger sum can be borrowed. HMRC guidance is at INTM413110–INTM413130 and there is OECD guidance in the OECD Guidelines 2022, Chapter X, Section C.
The transfer pricing rules on loans (see B4.150) have always been intended to apply to guaranteed loans. This arises from basing the legislation around 'provision by means of a transaction
Web page updated on 17 Mar 2025 13:41
