An intercompany loan is a financing arrangement between two entities of the same group, in which one lends a defined amount to the other under stated terms. Unlike an ordinary current account, it has a principal, a maturity, a repayment schedule and an interest rate set in advance by contract.
The financing logic is simple: the group borrows once, externally, at the best rate its consolidated position commands, then redistributes internally. A subsidiary that would borrow at 7 percent on its own can be financed at 4 percent by a parent that borrows at 3.5, which is precisely the arbitrage.
That rate is the point tax authorities examine. The arm's length principle requires the rate to correspond to what the borrower would obtain from an independent lender given its own credit standing. Too low, and profit is being shifted to the borrower; too high, and it is being shifted to the lender. In France, article 39-1-3 of the tax code caps the deductibility of interest paid to related parties, and thin capitalisation rules limit deduction where intragroup debt is disproportionate to equity.
The documentation requirement follows: a written contract, evidence of the rate's justification, and consistent accounting on both sides. The loan is an intercompany transaction like any other, so principal and accrued interest must appear symmetrically, and both must be removed through intercompany elimination at consolidation.
What breaks at close is rarely the principal. It is the accrued interest: computed on different day counts, on a balance that moved during the period, or accrued by one side and not the other. The intercompany flow reconciliation agent compares both sides before the consolidation package is submitted. See also shareholder current account for the informal counterpart.
