2 Taxation of Financial Institutions § 30.03

A loan between controlled entities must charge an arm’s-length rate of interest.30

Treas. Reg. § 1.482-2(a)(1).

The regulations provide three ways to establish an arm’s-length rate of interest: situs of the borrower, safe haven rates, and the rate charge between independent parties for comparable loans.31

Treas. Reg. § 1.482-2(a)(i)–(iii).

The regulations also cover in great detail when an indebtedness has occurred, such as when long running accounts payables should begin charging interest.32

Treas. Reg. § 1.482-2(a)(1)(iii).

As these types of indebtedness are rare for financial institutions; they will not be discussed further here.

One approach to determining an arm’s-length rate is to establish the interest rate charged between unrelated or uncontrolled entities for comparable debt. The comparability factors explicitly mentioned in the regulations include the date of the transaction, principal amount, duration or maturity of the loan, the collateral supporting the loan (if any), and the ...