Dear Reader, Corporate Guarantees are an inevitable part of intra group financing. Such guarantees from group companies add tremendous value by making available debt funds at a considerable lower price and many other allied benefits attached to it. While arriving at an arm's length compensation for guarantee fees remain a challenge, it is important to evaluate the withholding tax implications for paying such guarantee fees. If you are a company that has received corporate guarantees and would like to effectively plan taxes, then this article is for you. With efficient tax planning, an MNE group could bring down their global effective tax rate (ETR) substantially. Payment of corporate guarantee fees could be one such element that would further rationalize MNE group's ETR. We have expressed our opinion on how the group could plan ETR through achieving benefits out of payment of such corporate guarantee fees. Trust you will find it useful. Happy reading !!!

2. 1
Corporate Guarantees: Applicability of TDS
Background:
 Typically a bank gives loan to any person only after relying on security or a guarantee
 Incase of an Indian Subsidiary (Sub Co) of a Foreign Parent Company (F Co), F Co provides a
guarantee to the bank and this is how Sub Co gets access to funds
 In this case, the Sub Co is required to pay Corporate Guarantee Fees to the F Co
 As the payment is made by Sub Co to F Co, it is important to analyze the withholding tax implications
(TDS) on such payment
 In part 2 of this article, we will highlight determination of arms length nature of guarantee fees that
needs to be maintained as per transfer pricing regulations
Assumptions:
Before we proceed it is important to note the following assumptions for understanding the situation:
1. F Co is tax resident of country with which India has entered in to Double Taxation Avoidance
Agreement (DTAA)
2. F Co does not have a PE in India as per Article 5 of DTAA
3. F Co has requisite Tax Residency Certificate (TRC), a No PE certificate and Indian PAN
Taxability of Guarantee Fees as per Income- tax Act, 1961 (the Act):
 Interest is defined in Section 2(28A) of the Act
 Interest to include any service fee or other charges in respect of money borrowed
 The definition does not seem to limit the interpretation of interest to payment only incase of
borrower-lender relationship but also includes any other charges and service fees, which makes the
definition wide
 Therefore, Corporate Guarantee Fee is a part of interest pay out and withholding tax or TDS would
need to be determined as per Section 195 of the Act
Taxability of Guarantee Fees as per DTAA
 Article 11/ 12 of the DTAA covers payment of interest clause by source country (Sub Co) to resident
country (F Co)
 DTAA defines interest as ‘income from debt claim’
 The term debt claim is not defined in the DTAA or the OECD commentary, however one may take a
view that payment made towards guarantee fees may not be interest unless there is underlying claim
for money lent
 As there is no debt attached to payment of guarantee fees, one could take a view that guarantee fees is
not an interest
 Further, as we have assumed a ‘No PE’ status of F co in India, no income would be taxable in India as
business profits
 Also such corporate guarantees could be categorized as other income which is generally taxable in the
county of residence (i.e. F Co’s country). However, specific reference is to be made under each treaty.
Conclusion:
 It is important to analyze in case to case basis applicability of above mentioned analogy
 Further, it is beneficial to obtain a written opinion from an expert so that management could take such
positon while paying corporate guarantee fees
 A lower withholding tax certificate could also be obtained from the respective tax authorities holding
the above mentioned view in order to obtain certainty on the position.

3. Preface
2
About Authors
Akshay Kenkre ACA, B.Com
CA. Akshay Kenkre, Managing Partner and Founder at TransPrice.
Akshay is a Chartered Accountant with over ten years of practical experience in the field of Transfer
Pricing, International taxation, Finance and Audits. He is a founder and Managing Partner at
TransPrice, an entity specializing in Transfer Pricing and International taxation.
Akshay has been associated with Bayer Group of Companies in India as a part of Transfer Pricing and
International Taxation team of Bayer operations in India.
He has also been instrumental in advising the Bayer group in India and globally on the various aspects
of Transfer Pricing and International Taxation in Pharmaceuticals, Agro Chemicals and Chemicals,
Engineering, IT and ITES sectors. He has led multiple tax planning initiatives and strategy
implementation for the group.
Early in his career, he was also associated with PwC and Ernst & Young, where he has serviced high net
worth clients in the field of accounting and taxation.
He is a regular contributor to articles on issues and cases in Transfer Pricing. He is also associated as a
specialized tax faculty with Pinnacle Education, where he contributes back to his profession by molding
careers of many CA students.
Mukesh Kumar M, ACA, B.Com
Mukesh Kumar M is a commerce graduate from DG Vaishnav College, Chennai and a Member of ICAI.
He is a national rank holder in the Intermediate Level of Chartered Accountancy examination. He was a
Manager at Ernst & Young where he has worked for almost 7 years (including Articleship). He has
worked both in Assurance and Tax wing of Ernst & Young and has worked on numerous assignments
for various large and multinational companies. He has received various tax ideation award in Ernst &
Young for providing best tax ideas and has also received Excellarator award.
He has worked on all kinds of tax and regulatory assignments including advising on chargeability of
income, deductibility of expenses, applicability of withholding tax on various payments including
payments to non residents, filing expat, corporate and wealth tax returns.
He has also advised various clients on high value transactions and also helped them in representation
before the tax authorities and appellate authorities.
Mukesh has worked on various industries including telecom, manufacturing, trading, software, IT and
ITeS.

4. 4
CA. Akshay Kenkre
Managing Partner
TransPrice Solutions LLP
Address:
Gita Building, 2nd floor,
Plot no. 92, Next to HP Petrol Pump,
Sion (East), Mumbai - 400022
Tel : 022 - 2409 3737/ 409 7171
Mobile : + 91 9819245424
Email : akshaykenkre@transprice.in
info@transprice.in