The financing transaction presents complexities when carried out between related parties. There are a series of regulations such as article 28, section XXVII of the Income Tax Law, or article 76, section XII thereof. The main points start from the maximum ratio of three to one between debt and equity, the treatment of interest as dividends when the interest rate is subject to the profitability of the company, to demonstrate that with or between independent third parties, the same consideration would have been agreed and whether such funding should really be considered debt.
This last point is discussed in the IMEF Transfer Pricing Committee, based on the recently published OECD Transfer Pricing Guidelines 2022. Also, the current proposal to amend the comments to Article 9 of the OECD Model Tax Convention has been discussed.
Based on this, to delimitate the transaction adequately and define when the funding should be considered as a loan or as an operation of a different nature, the arm’s length principle should be applied. In this case, it would imply the concretion of two minimum elements.
- The economic facts follow the legal reality of the contract.
- The respective perspectives and realistic options available to each of the parties at the time of the agreement are taken into account.
In this sense, the following should be considered as paramount when deciding on the funding of an entity through a loan: “determining a rate under the risk assumed, the term and the guarantees offered; a reasonable leverage level of the debtor; operating flows that make sense with the estimated payment capacity of the debtor; a contract that reliably reflects the reality of facts, circumstances, agreements, and risks assumed; and that the parties carry out a thorough analysis of all the realistic options available.”
Source: El Universal 10/03/21
