Lending to a subsidiary is often the quickest way to fund it and the easiest way to get cash back, because loan repayments do not depend on distributable profits. In return, interest deductions are capped by EBITDA-based rules in the EU, UK, UAE, US and India, and both loans and cash pools must be priced at arm's length. India adds exchange control: a foreign parent's loan is an external commercial borrowing with its own limits and reporting.
Interest limitation: the 30% of EBITDA model
The EU Anti-Tax Avoidance Directive caps net borrowing costs at 30% of EBITDA, and the main markets have converged on the same figure. Germany applies it through the Zinsschranke with a EUR 3 million net interest threshold and an escape for companies whose equity ratio is close to the group's. The UK corporate interest restriction uses 30% of tax-EBITDA with a £2 million de minimis. The UAE allows the higher of AED 12 million or 30% of tax-adjusted EBITDA. The US federal limit is 30% of adjusted taxable income, and from 2025 depreciation and amortisation are again added back, which raises capacity for asset-heavy businesses.
India's version is narrower in scope but bites on exactly the cross-border case. Under section 177 of the Income-tax Act, 2025, an Indian company paying more than INR 1 crore of interest on debt from a non-resident associated enterprise, including bank debt guaranteed by the parent, loses the deduction for interest above 30% of EBITDA, with an eight-year carry-forward.12345678
India: parent loans are external commercial borrowings
A loan from a foreign group company to an Indian subsidiary is an external commercial borrowing. Amendments notified on 16 February 2026 replaced the old all-in-cost ceiling with market pricing for most ECBs, set the borrowing limit at the higher of USD 1 billion or 300% of net worth, and standardised the minimum average maturity at three years. These points come from law-firm commentary and should be checked against the RBI text before a facility is signed.
Every ECB needs a loan registration number before drawdown and cash-flow based reporting afterwards. Missed reporting can lead to the borrower being treated as untraceable and reported to the Directorate of Enforcement, which matters when the loan later needs to be repaid or converted.910
Cash pooling and the arm's length principle
In a cash pool, members' credit and debit balances are swept to or netted by a pool leader. The OECD Transfer Pricing Guidelines expect each member to receive or pay an arm's length rate on its position, which shares out the pool's synergy benefit, after the leader is paid for what it does. Tax authorities increasingly test whether long-standing debit balances are really loans that should be priced and documented as such.
Company law also applies. A German GmbH that sweeps cash up to its parent is protected only if its repayment claim against the parent is fully recoverable, so pool agreements need credit monitoring and termination rights; otherwise the sweep can breach capital maintenance and expose the managing directors personally.111213
| Market | Rule | Cap | Threshold or exemption | Source |
|---|---|---|---|---|
| EU (Germany, France) | ATAD Article 4 | 30% of EBITDA | Member State option up to EUR 3 million | EUR-Lex, Directive (EU) 2016/1164 |
| Germany | § 4h EStG (Zinsschranke) | 30% of tax EBITDA | Net interest below EUR 3 million; group equity escape | gesetze-im-internet.de |
| United Kingdom | Corporate interest restriction | 30% of tax-EBITDA (fixed ratio) | £2 million de minimis | HMRC CFM95140 |
| UAE | General interest deduction limitation | 30% of tax-adjusted EBITDA | AED 12 million | PwC (secondary) |
| United States (federal) | IRC section 163(j) | 30% of adjusted taxable income | Small business exemption, USD 32 million gross receipts for 2026 | IRS |
| India | Section 177, Income-tax Act, 2025 | Interest above 30% of EBITDA | Applies only above INR 1 crore of AE interest | Income Tax Department |
Decisions to make
- Will the subsidiary's net interest exceed the local de minimis threshold?245Below EUR 3 million in Germany, £2 million in the UK or AED 12 million in the UAE the EBITDA cap does not bite, which often makes modest intercompany debt efficient.
- Is the Indian subsidiary borrowing from, or with a guarantee from, a non-resident group company?8Guaranteed bank debt is treated as associated enterprise debt for India's 30% of EBITDA rule.
- Does the Indian loan meet the ECB limits, maturity and reporting rules?910An ECB outside the framework is a FEMA contravention, and repayment and interest remittances depend on proper registration.
- Is a German subsidiary's cash pool claim against its parent fully recoverable?1213If not, upstream sweeps can breach capital maintenance and create personal liability for the managing directors.
- How is the pool's benefit shared and documented?11Rates on member balances must be arm's length, and the leader's return must match its functions.
Documents usually needed
- Intercompany loan agreement with interest, maturity, security and subordination terms
- Transfer pricing benchmark for the interest rate or guarantee fee
- Cash pool agreement with credit monitoring, cap and termination provisions
- Interest limitation computation for each relevant country and year
- For India: ECB loan registration number, Form ECB 1 and Form ECB-2 filings
- Board minutes approving the borrowing and any guarantee
Common mistakes
- Assuming intercompany interest is fully deductible because the rate is arm's length, without testing the EBITDA cap
- Forgetting that a parent guarantee of a bank loan can bring the debt within India's associated enterprise rule
- Drawing a parent loan into India before obtaining the loan registration number
- Letting cash pool debit balances run for years without repricing or documenting them as loans
- Sweeping a German GmbH's cash to a parent whose ability to repay has not been checked
Questions businesses ask
Is 30% of EBITDA the same everywhere?
The percentage is common but the base and thresholds differ: tax EBITDA in Germany and the UK, tax-adjusted EBITDA in the UAE, adjusted taxable income in the US, and in India the rule applies only to interest on debt from non-resident associated enterprises above INR 1 crore.24568
Has India removed the interest rate cap on foreign parent loans?
Commentary on the February 2026 amendments says the all-in-cost ceiling was replaced by market-based pricing for most ECBs, while ECBs under three years remain subject to the trade credit ceiling. Confirm with the RBI text.9
Can a German subsidiary repay a shareholder loan when it has no profits?
Repaying a shareholder loan is outside the GmbH capital maintenance prohibition, so it does not depend on distributable profits, although insolvency law can still challenge repayments.12
What this guide does not yet confirm
These points need checking with a qualified local professional before you rely on them.
- The official UAE Ministerial Decision on interest limitation could not yet be checked; UAE figures are from PwC.
- The RBI's 2026 ECB amendment and Master Direction could not yet be checked; India ECB points are from law-firm commentary.
- India's rules on hedging and on trade credits were not researched.
- France's interest limitation (article 212 bis CGI) and Saudi Arabia's interest deduction rules could not yet be checked.
- The OECD Chapter X text was read from a secondary reproduction; country cash pooling practice (for example German case law on the fully recoverable test) was not researched.
- US state conformity to section 163(j) was not researched.
Sources and review status
Each statement is numbered to the source it was checked against. We use official sources where we can, and each statement says whether it was checked against an official or a secondary source. Sources last checked on 19 October 2026. None of it has been professionally reviewed yet: it is research checked against official and secondary sources by WONE Global, not legal or tax advice.
Under ATAD, exceeding borrowing costs are deductible in the period incurred only up to 30% of the taxpayer's EBITDA. Article 4(1); exceeding borrowing costs are net interest expense. Member States may add carry-forward, group-ratio and standalone-entity reliefs.
Reused from tx-financing-and-repatriation-001.
In Germany, interest expense that exceeds interest income is deductible only up to 30% of the business's tax EBITDA (verrechenbares EBITDA), and the restriction does not apply where net interest expense is less than EUR 3 million. Zinsschranke, section 4h(1) and (2)(a) EStG, applied to corporations through the Corporation Tax Act. Non-deductible interest is carried forward; unused EBITDA capacity is carried forward for five years.
A German business that belongs to a group escapes the interest limitation if its equity ratio is at least equal to the group's equity ratio, with a shortfall of up to two percentage points disregarded. Escape clause in section 4h(2)(c) EStG; equity ratio is equity divided by total assets at the end of the previous financial year. A separate exemption in section 4h(2)(b) covers businesses that are not part of a group.
The UK corporate interest restriction limits deductions for net tax-interest expense by default to a fixed ratio of 30% of tax-EBITDA, with no restriction where net tax-interest expense is below a £2 million a year de minimis. Applies to groups including those that borrow from shareholders or other related parties. A group ratio method is available as an alternative. Restricted interest is carried forward indefinitely; unused interest allowance can be carried forward for up to five years.
Under the UAE general interest deduction limitation rule, net interest expense is deductible up to 30% of tax-adjusted EBITDA, the rule does not apply where net interest expense does not exceed AED 12 million, and disallowed amounts can be carried forward to the next ten tax periods. Federal corporate tax. Banks, insurance businesses and certain other regulated financial services entities are excluded. A separate specific interest deduction limitation rule denies interest on related-party loans used for purposes such as paying dividends to a related party or redeeming share capital, unless the lender is taxed on the interest at 9% or more.
Secondary source. The Ministry of Finance announcement found by search refused automated access, so the official decision text could not yet be checked.
Under US federal tax law, deductible business interest expense cannot exceed the sum of business interest income, 30% of adjusted taxable income and floor plan financing interest. Section 163(j) of the Internal Revenue Code (federal). Businesses that are not tax shelters with average annual gross receipts of USD 25 million or less over the previous three years, adjusted for inflation to USD 32 million for 2026, are generally exempt. State conformity varies and was not researched.
For tax years beginning after 31 December 2024, the One Big Beautiful Bill Act lets US taxpayers add back depreciation, amortisation and depletion when calculating adjusted taxable income for the section 163(j) limit. Federal. From tax years beginning after 31 December 2025, business interest subject to section 163(j) also includes interest capitalised during the year, with limited exceptions. Certain CFC inclusions are excluded from adjusted taxable income.
Under section 177 of India's Income-tax Act, 2025, where an Indian company pays interest exceeding INR 1 crore in a year on debt from a non-resident associated enterprise, the excess interest disallowed is the lower of the interest above 30% of EBITDA and the interest paid to associated enterprises. Central law. Debt from an unrelated lender counts if an associated enterprise guarantees it or deposits matching funds. Disallowed interest may be carried forward for up to eight tax years. Banking and insurance businesses, IFSC finance companies and certain notified NBFCs are excluded. Formerly section 94B of the Income-tax Act, 1961.
Under India's external commercial borrowing framework as amended on 16 February 2026, an eligible Indian borrower may have outstanding ECBs up to the higher of USD 1 billion and 300% of its net worth, pricing is to be in line with market conditions instead of a fixed all-in-cost ceiling, and the standard minimum average maturity is three years. Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (RBI, central). Borrowers regulated by financial sector regulators are outside the net-worth limit. ECBs with an average maturity under three years remain subject to the trade credit cost ceiling. ECBs with a loan registration number obtained before 16 February 2026 stay under the old framework except for reporting.
Secondary source. The RBI notification and Master Direction pages could not be reached; the details are from law-firm commentary and must be confirmed against the RBI text.
An Indian ECB borrower obtains a loan registration number through Form ECB 1 and reports drawdowns and debt servicing on Form ECB-2 within seven calendar days after the month in which they occur. Reporting under the 2026 amendments as described in commentary; a borrower with an active LRN that fails to report for four consecutive quarters and cannot be traced may be reported to the RBI and the Directorate of Enforcement.
Secondary source; confirm against the RBI Master Direction on reporting.
Under the OECD Transfer Pricing Guidelines, cash pool members are remunerated through arm's length interest rates on their debit and credit positions, which allocates the pool's synergy benefits among members, generally after the cash pool leader's remuneration has been calculated. OECD Transfer Pricing Guidelines (2022), Chapter X (financial transactions), paragraph 10.143; paragraph 10.121 adds that the pool leader should be compensated for the functions it performs.
Secondary reproduction of the OECD text; the OECD publication itself could not yet be checked.
The German capital maintenance rule does not apply to payments made under a domination or profit transfer agreement, to payments covered by a fully recoverable counter-performance or repayment claim against the shareholder, or to the repayment of a shareholder loan. Section 30(1) sentences 2 and 3 GmbHG. The fully recoverable claim exception is the basis on which upstream loans and cash pool sweeps from a GmbH are assessed.
German GmbH managing directors are personally liable to the company for payments made out of the assets needed to maintain share capital in breach of section 30, and a shareholder resolution does not release them where the payment is needed to satisfy creditors. Section 43(3) GmbHG; section 43(2) makes directors who breach their duties jointly and severally liable for the resulting loss.
Questions on this topic
11 statements on intercompany loans and cash pooling
