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Best practices for handling of Inter-company loans?

Robert Band's Profile

inter company loans best practicesWhat is the best practice for a consolidated group to move money from the "haves" to the "have-nots" so as to minimize the number of inter-company loan accounts on each sister company's balance sheets and avoid confusing inter-company reconciliations.  

Is it best for cash from the "haves" to flow up to a holding company (one inter-company account per sub) and then down to the "have-nots"?  



Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

This can get pretty complicated given tax considerations. The slide deck below (note flowchart on page 13) has information/recommendations on Foreign Holding Companies that may help.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

When companies reach a more complex size, they typically do implement centralized financing entities and/or regional treasury centers that act as financing "hubs" that borrow from surplus cash entities and re-lend to the deficit cash entities. However, this is usually driven by more strategic considerations to maximize group investment yields and minimize group financing costs, and not because there are inter-company accounting reconciliation problems. If there are reconciliation problems, something sounds amiss with the accounting system that should be able to reconcile the most intricate network of inter-company loans. So, you first need to fix the accounting system before you would undertake a hub structure.

If a company does pursue a hub structure and if they haven't previously, companies also implement multilateral netting systems to efficiently transact monthly payments between affiliates and minimize f/x transactions costs.

While Treasury is responsible for managing these activities, as Bob noted, they must consult with their Tax colleagues to consider the tax implications, primarily to minimize withholding taxes and set transfer pricing policies for the inter-company interest rates. This interaction is more intensive when a new financing entity structure is considered and the two groups work to develop mutually agreeable financing guidelines. Once the setup is completed, Treasury manages things based upon the agreed guidelines and policies.

(Accountant) |

Do short term inter-company loans denominated in foreign currency subject to exchange rate risk from the consolidation perspective?


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