On 19 December 2023, the Central Board of Direct Taxes (CBDT) in India announced significant changes to the safe harbor rules for intragroup financing arrangements. These updates, outlined in Notification No. 104/2023, will take effect on 1 April 2024 and apply to the upcoming assessment year 2024-25 (corresponding to the financial year 2023-24).
Key changes include:
- Intragroup loan definition: The updated definition of an “intragroup loan” now includes loans extended to any associated nonresident enterprise, deviating from the previous restriction to wholly owned nonresident subsidiaries in Indian rupees (INR). However, financial entities or businesses involved in regular lending or borrowing operations are excluded from this broader definition. Additionally, the requirement for the loan to be denominated in INR has been eliminated.
- Operating income/expenses: The definition of operating items has been altered to include income or losses from the transfer of assets or investments, provided that the depreciation is part of operating expenses. Previously, such gains or losses were not considered operational. Consequently, when a depreciated capital asset is sold, any resulting gain or loss is now accounted for within the operating income or cost base.
- Intragroup loans in INR: The recent amendment eliminates the explicit reference to CRISIL, indicating that the credit rating used is now not limited to CRISIL’s ratings. Previously, INR loan interest rates were determined by the one-year Reserve Bank of India (RBI) lending rate, with an additional adjustment based on the credit rating from “CRISIL” (Credit Rating Information Services of India Limited) of the associated enterprise.
- Intragroup loans in foreign currencies: The revised regulations now state that the interest rate for intragroup loans denominated in foreign currencies is established by the reference rate of the relevant foreign currency as of September 30 in the financial year. This represents a shift from the earlier approach, which tied the rate to the six-month London Interbank Offered Rate (LIBOR) of the corresponding foreign currency as of September 30 in the financial year.
- Basis point adjustment: The new system introduces a two-tiered structure based on the loan amount. Up to an equivalent of INR 2.5 billion, the additional basis points over reference rates range from 150 for high credit ratings to 400 for lower ratings. Beyond this limit, the basis points can increase to a maximum of 600, addressing the heightened risk associated with larger loans. This approach recognizes diverse risk levels in lending, providing a more personalized and risk-aware strategy. These changes not only comply with global financial standards but also integrate a risk assessment component into transfer pricing, potentially leading to decreased disputes and improved transparency in compliance for multinational enterprises in India.
- Reference rates and credit ratings: Definitions provided for key currencies and agencies. Multiple credit ratings use the lowest for risk assessment.
