Tax dispute regarding low interest rate

Our tax law team represented a client in a tax dispute where the tax authorities have challenged the interest rate of the loan granted to the client by the associated party. Tax authorities argued that the interest rate which varied from 1.8% to 3% is not in line with the arm’s length principle. Our tax team had to prepare transfer pricing documentation, which was drafted according to the Transfer Pricing Guidelines or Multinational Enterprises and Tax Administrations provided by the OECD.

Documentation was based on arguments that under the legal doctrine and foreign case-law it is necessary to look not only to the interest rate but also to the other conditions of the loan agreement and overall situation. The fact that loan agreements in question were secured with additional guarantees should be relevant as well. Our law firm successfully convinced the tax authorities that the interest rate charged is in line with the arm’s length principle and should be treated as fair market value. It was the first case where the tax authorities agreed that a relatively low-interest rate for consumer loans meets market conditions.

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