Inter-Company Loans, Guarantees & Cash Pooling: Income-tax and FEMA Implications Explained

Inter-company funding is now a regular part of doing business in modern corporate groups. Whether it’s a foreign parent funding an Indian subsidiary, an Indian company supporting its foreign subsidiary, or group entities sharing liquidity through cash pooling, these inter-company loans and guarantees are no longer rare “special” events they are routine transactions within a corporate family.

But every loan, guarantee, or cross-border transaction within a group sits under two powerful lenses:

• Income tax (including transfer pricing and tax implications), and
• FEMA Compliance the Foreign Exchange Management Act, RBI regulations, and FEMA rules

Handled well, these arrangements can be clean, compliant, and tax-efficient. Handled casually, they can result in FEMA breaches, disallowance of interest, tax authorities scrutiny, and expensive regularisation.

This guide explains in simple terms how inter-company loans, guarantees, and cash pooling work from an income-tax and FEMA perspective when Indian companies are involved especially in cross-border loans and foreign investment structures and highlights why it’s often prudent to consult an experienced tax consultant in Gurgaon for structuring and compliance.

Understanding Inter-Company Loans Within a Group

Inter-company loans are simply borrowing or lending of money within a corporate group for example:

• A foreign parent gives a rupee loan or foreign currency loan to its Indian subsidiary.
• An Indian subsidiary gives a loan to its foreign subsidiary or foreign entity outside India.
• Loans between group companies both incorporated in India.

While domestic loans primarily need to comply with the Companies Act and Income Tax Act, cross-border loans must also comply with FEMA regulations issued by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act.

You cannot treat these like casual “book entries”. Once a person resident in India or person resident outside India is involved, FEMA requirements and tax implications both get triggered.

FEMA Basics: Why Cross-Border Inter-Company Loans Are Sensitive

Whenever money moves outside India or comes in from abroad, FEMA kicks in. The idea is to regulate:

• Foreign investment (equity, preference shares, etc.)
• Borrowing or lending in foreign currency or Indian rupees
• External Commercial Borrowings (ECB) and trade credit
• Overseas Direct Investment (ODI) and direct investment abroad

Under FEMA regulations, you cannot freely:

• Give a loan to a foreign subsidiary from India, or
• Take a loan from a foreign investor or foreign equity holder,

…unless the structure fits into approved routes (like ECB, ODI, or specific FEMA rules) and you comply with FEMA conditions, including the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

The Reserve Bank of India and Government of India issue frameworks, and your Authorised Dealer (AD) Bank ensures compliance with foreign exchange management rules when you remit or receive funds.

Read more: FEMA Compliance Requirements: Everything You Need to Know [2025]

Common Structures: Loans Into India vs Loans From India

Let’s look at two typical directions:

1. Loans to an Indian Company (Inbound Funding)

Examples:

• Foreign parent → Indian subsidiary
• Foreign financial institution outside India → borrowing company in India

These may fall under:

• External Commercial Borrowings (ECB) in freely convertible foreign currency or INR
• Trade credit / credit for imports into India or loans for payment of imports into India
• Rupee loans from foreign equity holders under specific routes

Key FEMA points:

• Must be within ECB or other RBI frameworks in effect from time to time, following the Official RBI External Commercial Borrowing (ECB) guidelines.
• Need reporting (e.g., ECB returns and loan registration number) through your AD bank in India.
• End-use restrictions may apply (for example, limits on investment in real estate or certain investment uses).
• Interest rate, tenure, and other pricing terms must meet RBI caps.

2. Loans From an Indian Company to a Foreign Subsidiary (Outbound Funding)

Examples:

• Indian subsidiary → foreign subsidiary
• Indian company → foreign entity where it has overseas direct investment (ODI)

These are governed by overseas direct investment rules and foreign investment norms:

• Typically allowed only if there is direct investment (equity) in that foreign subsidiary.
• Limits often linked to a percentage of the Indian company’s net worth and governed by the automatic route or prior approval depending on the case.
• Reporting to RBI through the AD bank, plus monitoring of remittance and repayment.

The key message:

Every inter-company loan crossing borders must comply with FEMA regulations, be routed via a bank in India (AD bank), and follow RBI and foreign trade policy rules.

Recommended: Overseas Direct Investment (ODI) Under FEMA In India - 11 Key Points To Be Considered 

Income Tax Act & Transfer Pricing: Pricing, Interest & Withholding

On the income tax side, two major themes come up:

• Deduction and taxation of interest, and
• Transfer pricing on loans and guarantees between group companies.

Transfer Pricing on Inter-Company Loans

When the lender and borrower are related (associated enterprises), transfer pricing provisions under the Income Tax Act apply.

That means:

• The pricing of the loan (interest rate, guarantee fee, etc.) must be at arm’s length.
• If you charge too low interest on a loan to a foreign subsidiary, the tax officer may treat some notional income as transfer pricing adjustment.
• If you pay too high interest to a foreign parent, the excess may be disallowed.

The impact of transfer pricing is not just on tax; it also affects financial statements and tax reporting.

Withholding Tax on Interest

If an Indian borrower pays interest to a foreign investor or foreign parent:

• It usually must deduct withholding tax at applicable rates (possibly reduced under tax treaties).
• Failure to deduct can lead to disallowance of interest, interest on TDS default, and penalties.

So, while designing cross-border loans, make sure the tax implications both in India and abroad are understood.

Inter-Company Guarantees & Cash Pooling – Tax & FEMA Nuances

Beyond direct loans, groups often use:

• Corporate guarantees (e.g., Indian parent guaranteeing loan of a foreign subsidiary), and
• Cash pooling structures where group cash is centralised and then allocated.

Guarantees

Under FEMA:

• Guarantees given by an Indian company or person resident in India to support overseas direct investment must follow fema rules and sometimes require prior approval or reporting.

Under Income-tax and transfer pricing:

• A guarantee by a parent or shareholder is treated as a chargeable transaction.
• The foreign subsidiary may need to pay a guarantee fee at arm’s length to the Indian guarantor.

Cash Pooling

For cash pooling, especially with overseas branch, bank or financial institution, or subsidiaries of Indian banks, you need to check:

• Whether the arrangement amounts to borrowing and lending under FEMA.
• Whether each transaction (sweeps in or out of the pool) is compliant and properly documented.
• Whether the interest adjustments and cross-charges pass transfer pricing tests.

These structures often touch multiple laws, including Companies Act, FEMA, and Income-tax Act, and require careful design.

FEMA vs Income-tax: Same Loan, Different Questions

It helps to remember that FEMA and Income Tax look at the same inter-company loan from different angles:

• FEMA / RBI ask:
• Is this loan permitted?
• Is it within allowed limits and sectors?
• Has the company complied with FEMA regulations and reporting?
• Is the borrowing entity eligible to receive foreign direct investment or loans under the automatic route?
• Income Tax asks:
• Is the pricing (interest, fees) at arm’s length?
• Is withholding tax properly deducted and deposited?
• Is the interest expenditure allowable to the borrowing company?
• Are there any thin capitalisation or other restrictions?

To be safe, your structure must be acceptable under legal and tax standards on both sides - you can’t be compliant with one and ignore the other.

Know more: Unlock Potential Benefits To NRIs Under FEMA And Income Tax Act In India

Practical Compliance Checklist for Inter-Company Loans

Here’s a simple checklist when planning or reviewing inter-company loans involving India:

• Identify the Parties Clearly
• Is the lender a person resident outside India or person resident in India?
• Is the borrower an Indian subsidiary, foreign subsidiary, or foreign parent?
• Determine the Route
• For inbound loans: Does it fall under ECB, trade credit, or other fema framework?
• For outbound loans: Is there valid overseas direct investment?
• Check RBI / FEMA Eligibility
• Are you eligible to borrow or lend under FEMA regulations?
• Do you need prior approval, or is it under automatic route?
• Have you obtained necessary loan registration number or filed required forms?
• Fix Arm’s Length Pricing
• Use transfer pricing methods to set interest pricing and guarantee fees.
• Benchmark against market rates for similar risk and currency.
• Ensure Tax Deduction & Reporting
• Apply correct withholding tax rate (domestic + treaty).
• Reflect the interest and loans correctly in income tax returns and financials.
• File Form 15CA with the income tax authorities for cross-border payments, as required under Indian tax regulations, to report remittances and certify that tax has been applied correctly.
• Route Through AD Bank & Maintain Documentation
• All remittance and receipt should go via AD bank in India who is authorised to deal in foreign exchange.
• Maintain sanction letters, board resolutions, agreements, and RBI filings.
• Monitor Limits & Renewals
• Keep an eye on caps per financial year, utilised limits, and any changes issued by RBI or Government of India from time to time.

Conclusion: Inter-Company Funding Needs a 360° View

Inter-company loans, guarantees and cash pooling might feel like internal housekeeping “within a corporate group”, but under Indian laws, they are serious cross-border financial transactions.

You must see them through three lenses at once:

• FEMA / RBI – Is the structure legal from a foreign exchange standpoint?
• Income-tax & transfer pricing – Is the pricing fair, compliant, and properly taxed?
• Corporate and commercial sense – Does it genuinely support business in India or outside India, not just act as a paper route?

Handled with planning and proper documentation, inter-company loans are a powerful and fully legitimate tool. Done casually, they can trigger questions from both RBI and the tax authorities, leading to regularisation, interest, and penalties.

At DSRV India, we help groups design and review inter-company funding structures, ensuring that loans, guarantees, and cash pooling arrangements meet both Income-tax and FEMA expectations, while staying commercially practical. We often work alongside experienced chartered accountant firms in Gurgaon to provide end-to-end compliance and advisory support.

Thinking of funding your Indian subsidiary or foreign subsidiary through an inter-company loan? Or already have loans and want to check if they must comply with FEMA and tax rules properly?
Let’s review them once, so your legal and tax starting point is strong before the next transaction moves.