Debt Capacity at Arm’s Length: A Transfer-Pricing Perspective on the Limits of (Intercompany) Debt Funding

This article explains how “debt capacity” is a crucial concept in transfer pricing, determining the maximum amount of intercompany debt that aligns with what independent parties would agree under market conditions. It highlights the need for both quantitative financial analysis and qualitative assessment to ensure intercompany loans are respected as debt and not reclassified as equity for transfer pricing purposes.