Intercompany loan agreements: a practical checklist for group companies

Moving money between companies in the same group can feel like an internal transfer. The paperwork still needs to explain which company owns the money, which company owes it back and on what terms. “We will sort it out at year end” leaves the finance team and directors with questions that may become harder to answer later.

An intercompany loan agreement is a written record of lending between companies. It should reflect the arrangement actually intended, rather than being used to give a retrospective label to an unexplained balance.

First establish what the payment is

Is the transfer a loan, a payment for services, a dividend, a capital contribution or repayment of an existing balance? Those are different transactions. Ask the accountant and legal adviser to confirm the treatment where it is uncertain. Avoid choosing a loan agreement simply because it is the most readily available document.

GOV.UK emphasises the separate status and finances of a company. That distinction remains useful when several companies have common owners. Record the exact legal names and company numbers, not just trading names or a shorthand group name.

Prepare the commercial terms

Check each company's position

Prepare a short explanation of the arrangement from both sides. For the lender, explain the use of funds, expected repayment and effect on its own cash needs. For the borrower, explain the funding requirement and realistic repayment source. Ask advisers about the approvals, directors' duties, conflicts, solvency and any existing finance restrictions that apply.

Common ownership does not answer those questions. Nor does a signature cure a transaction that should not have been entered into. Keep the commercial assessment beside the approval records so a later reader can understand the decision.

Do not guess the tax treatment

HMRC's transfer-pricing guidance explains the arm's-length principle and notes that the rules can apply to connected UK entities, with exemptions relevant to many smaller businesses. The application of an exemption or the treatment of a particular loan needs advice. It is not safe to assume that all UK group loans are outside the rules.

Ask the tax adviser about the proposed interest terms, accounting treatment, tax deductions and any cross-border issues. Do not copy a tax conclusion from an unrelated agreement.

An example of an avoidable mismatch

A holding company advances money for equipment expected to generate cash over several years, but the draft agreement says the loan is repayable on demand. That may or may not be appropriate. The point is to notice the mismatch before signing and ask whether the repayment terms reflect the commercial plan and the lender's needs.

After signing, record drawdowns, interest calculations, repayments and variations consistently in both companies' records. Reconcile the balances regularly, and keep evidence of any later agreement to change the terms.

Choose the right starting point

Inspect the company-to-company loan agreement and its options. The group and ownership topic brings the related material together. If security is proposed, read how a loan, guarantee and security document differ before discussing the full package with your advisers.