You may wish to note a private tax ruling published on 20 January 2025 (ref. 0111-KDIB1-3.4010.704.2024.1.JKU), which deals with the requirement to update loan interest rates in accordance with updated benchmarking studies.
Under the facts of the case, the Applicant had intercompany loans which had to be reported for transfer pricing purposes. At the inception of the loan contracts, their interest rate was within the range resulting from the relevant benchmarking study. The Applicant wished to update its initial benchmarking study after three years in accordance with corporate income tax legislation. However, the Applicant did not intend to adjust the initial loan interest rate even if it turned out that it was no longer within the scope defined by the initial benchmarking study.
One of the arguments was that that was the business practice of third parties on the market, such as banks, as they do not change their margins/interest rates in existing loans even if market margin/interest rates have gone up or down.
The tax authority did not agree with the Applicant. In the ruling, it makes a point of noting that loan interest rates should be at arm’s length at all times, which in that particular case meant the rate had to be within the range resulting from the updated benchmarking study.
As such, the Applicant should update the interest rate on its existing loans so as to make sure it follows the results of the updated comparability analysis.
This ruling is important insofar as, according to tax authorities, the mere fact that loan terms were at arm’s length at the time of contracting does not relieve the taxpayer from having to adjust them according to benchmarking study updates.
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