Saudi TP for Loans, Guarantees and Cash Pooling

A loan needs more than a market interest rate

An intercompany financing review begins by identifying the actual arrangement. The question is not only whether the quoted rate resembles a bank rate. It is whether independent parties in comparable circumstances would provide and accept that amount of funding on those terms.

The amended Transfer Pricing Bylaws’ comparability and method provisions apply alongside Chapter 8 of ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024. Sections 8.1–8.4 address loans, guarantees, cash pooling and receivables arrangements. These require attention to both sides’ functions, risks, financial capacity and realistically available alternatives.

Establish debt capacity and the transaction’s character

Section 8.1 considers the borrower’s financial position and ability to service the funding. Repayment expectations, maturity, ranking, security, business forecasts and the use of proceeds help establish the substance of the arrangement. Calling a perpetual unsupported balance a loan does not establish that an independent lender would advance the full amount.

Where the terms cannot be brought into line with the arm’s-length principle, the guideline discusses disregarding or recharacterising all or part of the financing. This is a fact-dependent conclusion, not a rule that every loss-making borrower must be funded entirely with equity.

Dariba recommendation: document the credit decision when funding is approved. A later interest benchmark cannot substitute for evidence that repayment was reasonably expected and that the borrower could support the advance.

Price the actual credit exposure and contractual terms

Currency, tenor, repayment profile, fixed or floating interest, subordination, collateral and prepayment rights affect pricing. Section 8.1 also requires attention to creditworthiness and the borrower’s alternatives. A group borrowing rate may be informative; it does not automatically price a different subsidiary’s unsecured long-term advance.

An internal bank loan is a potential comparable only after examining its differences. A secured facility benefiting from guarantees cannot simply be compared with an unguaranteed subordinated shareholder loan.

Dariba illustration: a SAR 20 million balance outstanding for a full year at an assumed 6% simple annual rate produces SAR 1.2 million interest. This is arithmetic, not a ZATCA benchmark or an opinion that 6% is appropriate. Actual day counts, movements and the supported pricing terms determine the charge.

Annual review does not mean automatic annual repricing

The guideline requires annual verification of the financing facts and circumstances, including matters such as the borrower’s creditworthiness. Material changes can require reconsideration of the analysis and, where justified, adjustments.

That does not mean an arm’s-length fixed-rate loan must automatically reset to today’s market rate every year. Consider the contract agreed at inception, the parties’ rights, whether independent parties could or would renegotiate, and any actual refinancing or amendment. Equally, leaving a short-term advance unpaid indefinitely may undermine the original short-term character.

Dariba recommendation: distinguish an annual evidence review from a contractual repricing event. Record both the changes identified and why they do or do not alter the existing arrangement’s arm’s-length treatment.

Guarantees: identify a benefit for which an independent party would pay

Section 8.2 distinguishes explicit guarantees from benefits arising merely from group membership. An explicit commitment may improve pricing, provide access to funding or increase borrowing capacity. Its value must be assessed against the borrower’s position without that commitment and the guarantor’s actual exposure and ability to perform.

Passive association with a financially strong group does not by itself create a separately chargeable guarantee service. Conversely, a signed guarantee is not necessarily worth the entire reduction in the borrower’s interest expense.

Where the guarantee enables borrowing beyond the borrower’s own capacity, the guideline requires closer analysis of the financing’s substance. A fee for the full nominal balance should not be assumed before considering whether part of the arrangement is in substance funding through the guarantor and an equity contribution.

Cash pooling: reward functions and allocate participation benefits

Section 8.3 distinguishes physical transfers from notional pooling. Identify the balances, actual bank arrangements, guarantees and the pool leader’s role. Interest on participant balances and remuneration for coordinating the pool are distinct questions.

The guideline explains that a coordinator’s reward should reflect its limited functions. A leader actually controlling and bearing more significant risks may warrant different compensation. Neither the treasury title nor legal ownership of a bank account establishes entitlement to all pooling benefits.

Benefits should reflect participants’ contributions and realistically available alternatives. Persistent debit or credit balances may become long-term funding, requiring different terms from an overnight sweep. A single group-wide spread can conceal these differences.

Receivables arrangements depend on recourse and collection risk

Section 8.4 addresses financing against receivables and transfers of receivables. Determine who owns the claims, collects the debts, bears customer default and has recourse against another group member. The discount or fee should reflect those actual rights and risks.

Dariba analysis: a transfer labelled a sale may perform a financing function if the transferor retains the relevant risk and must make the purchaser whole. Conversely, genuine risk transfer should not be priced as though the recipient merely advances cash against fully secured claims. Retain the agreements, debtor information and functional analysis supporting the characterisation.

A supportable price does not settle deductibility or withholding

Saudi CIT deductibility remains a separate test. Article 9(2) of the Income Tax Implementing Regulations limits qualifying loan charges using its stated income-and-expense formula, subject to its exceptions. An arm’s-length rate does not remove that limitation. Head-office charges also require consideration of Article 10(10).

The character of an actual cross-border payment determines its withholding analysis; a guarantee fee should not automatically inherit the treatment of loan interest. Applicable treaty relief requires its own conditions. Zakat financing rules likewise have their own scope and calculations.

Dariba recommendation: reconcile the supported financing charge to the books, TP disclosure, CIT adjustment and relevant withholding records. Explain any difference by its actual legal basis instead of forcing every regime to produce the same number.