IRS Issues Legal Advice Memorandum on Implicit Support in Intercompany Loans

The IRS recently released a generic legal advice memorandum that explains the agency’s position on the effect of group membership in determining the arm’s length rate of interest chargeable for intragroup loans. 

The legal advice memorandum – AM 2023-008 --  concludes that if an unrelated lender would consider group membership in establishing financing terms available to a borrower, and third-party financing is realistically available, the IRS may adjust the interest rate in a controlled lending transaction to reflect group membership.

Generic legal advice memoranda constitute legal advice, signed by executives in the National Office of the Office of Chief Counsel, and are issued to IRS personnel to provide authoritative legal opinions on certain matters, such as industry-wide issues. This memorandum provides non-taxpayer-specific legal advice on the application of IRC Section 482, and it states that the advice should not be used or cited as precedent. However, the memorandum provides insight into the Office of Chief Counsel’s position on the role of implicit support in establishing an arm’s length interest rate in intragroup loans.


The memorandum provides an example to anchor its analysis of the topic. In the example, a foreign parent company directly owns 100% of the equity of a U.S. subsidiary. The U.S. subsidiary owns operating assets and operates businesses essential to the group’s financial performance. The assumption in the example is that if the U.S. subsidiary’s financial condition were to deteriorate, the foreign parent would likely provide financial support to it to prevent a potential default. 

The example states that the U.S. subsidiary plans to obtain capital through an intragroup loan from its foreign parent. An independent rating agency has determined that the foreign parent has a credit rating of A, whereas the U.S. subsidiary has a BBB rating when the implicit support of the corporate group is taken into account. As an independent entity – that is, without considering the group credit profile and the foreign parent’s implicit support – the U.S. subsidiary would have a credit rating of B. In the example, the A credit rating corresponds to an interest rate of 7%, the BBB credit rating corresponds to an 8% interest rate, and a B rating would result in a 10% interest rate. The foreign parent lends to the U.S. subsidiary at an interest rate of 10%, and the loan is not supported by an explicit guarantee from the parent.


The starting point of the analysis is Section 482 and the regulations thereunder, which grant the IRS broad authority to adjust the results of a transaction between controlled taxpayers to comply with the arm’s length standard. In the context of intercompany lending, this means that the IRS may adjust the interest rate charged so that it is an arm’s length rate, which is generally the rate that would be charged in independent transactions between unrelated parties. The regulations specify that to determine an arm’s length interest rate, “[a]ll relevant factors shall be considered, including … the credit standing of the borrower.” 

The memorandum concludes that the IRS may adjust the interest rate of the foreign parent’s loan to the U.S. subsidiary to 8%, the arm’s length interest rate the U.S. subsidiary would pay to an unrelated lender based on its BBB rating (if the implicit support by the foreign parent is taken into account). This rate reflects the amount the U.S. subsidiary would be willing to pay at arm’s length considering the alternatives available to it. In other words, “the controlled borrower should never accept an interest rate greater than the 8% [at which] it could borrow from the market. In short, the lender may not charge a higher interest rate based on a controlled relationship with the borrower, because an uncontrolled borrower would not accept a higher interest rate than what it could obtain from an uncontrolled lender.”

BDO Insight

The guidance provided in the IRS memorandum is largely consistent with Chapter X of the OECD transfer pricing guidelines, released February 11, 2020, which provides guidance on the transfer pricing aspects of financial transactions. The IRS memorandum summarizes the agency’s long-held position on its review of intercompany loans, particularly those to U.S. borrowers. 

The IRS position on implicit support is reflected in Eaton Corp v. Commissioner, No. 2608-23, which is pending in U.S. Tax Court. In that case, although the IRS took the position that interest rates paid by certain U.S. borrowers should be adjusted downwards to consider implicit support, it also disallowed some deductions related to explicit intercompany financial guarantees executed with respect to the related intercompany borrowings. 

Given the above, it will be important for multinational entities, particularly non-U.S.-based groups, to review their intercompany loan agreements and evaluate whether the implicit support derived from group membership is reflected in the interest rates charged to related borrowers.  Borrowers should also consider whether any existing intercompany financial guarantees are still warranted, and if so, whether they should be adjusted to first consider implicit support before the application of explicit support.