In case of multinational enterprise (MNE) groups, the use of guarantees among related entities is a common tool to optimize financing terms. Generally, the KSA Transfer Pricing (TP) Bylaws and the Organisation for Economic Co-operation and Development (OECD) TP Guidelines require that intra-group transactions, including guarantees, be priced at arm’s length — meaning the terms and remuneration should reflect what independent parties would have agreed upon in comparable circumstances. 

As per the KSA TP Bylaws and also the OECD Guidelines, it is critical to analyse the guarantee arrangement between a MNE group and distinguish between explicit guarantees, passive group support, and cases where guarantees enable increased borrowing capacity and / favourable loan terms in order to determine whether an arm’s length price for such guarantee is warranted or not.

This article outlines three common scenarios and their treatment under KSA TP Bylaws and the OECD Transfer Pricing Guidelines.

1. Implicit Support vs. Explicit Guarantees: When No Additional Benefit Exists

In many cases, MNE group members are so financially or operationally interdependent that the parent or related entities of the MNE Group will support the borrower entity of the same MNE group, even without a formal guarantee to discharge the obligations of the borrower entity. Certain situations that warrant the automatic intervention of the MNE Group entity (guarantor) are given below:

• Clauses of the loan agreement warrants the intervention of the MNE group entity even without the explicit guarantee,
• Reputational concerns for the MNE parent entity,
• Or there exists potential risk of credit rating of the entire MNE entity to downgrade if any of the MNE group subsidiary defaults etc.

In such situations, providing an explicit guarantee may not materially alter / change the economic risk assumed by the MNE group entity (guarantor) — because the MNE group would likely to have stepped in anyway. As such, no additional benefit arises for the borrower beyond its passive association in the MNE group, and therefore, no guarantee fee should be charged by the MNE group entity (guarantor).

2. Letters of Comfort and Passive Association: No Legal Risk, No Fee

• An explicit financial guarantee creates a legal obligation, i.e., in case of default, the MNE group entity (guarantor) would be required to discharge the liability of the borrower as against the letter of comfort or any other non-binding support does not create legal risk for the MNE group entity (guarantor).
• In such the situation, the borrowing entity’s benefit stems from the passive association with the broader MNE group, rather than from a chargeable service. In such situations, the KSA TP Bylaws and the OECD Guidelines specify that no guarantee fee should be charged for letters of comfort or similar arrangements that are not legally enforceable.

3. Guarantees That Expand Borrowing Capacity: Equity or Debt?

• When a guarantee increases the borrower’s access to debt, it raises additional transfer pricing questions. If a borrower is able to secure a greater amount of funding solely due to the guarantee, then this indicates that part of the loan is not supported by the borrower’s own creditworthiness.
• In such cases, the excess portion of the loan may be recharacterized for tax and transfer pricing purposes as:
  • A loan from the lender to the MNE Group entity (guarantor), followed by
  • An equity contribution from the MNE Group entity (guarantor) to the borrower.
• This distinction is critical for both interest deductibility and guarantee fee pricing. The guarantee fee, if any, should only apply to the portion of the loan that is accurately delineated as a loan to the borrower, while the recharacterized equity portion would not attract an arm’s length remuneration.

As with all financial transactions, by determining whether or not a payment for a guarantee is in accordance with the arm’s length principle, the two-side perspective should be taken into account, since a transaction would not have taken place between unrelated parties if both the parties to the transaction does not benefit from it. (para 8.2 of the KSA Transfer Pricing Guidelines)

The following matrix highlight the importance of analyzing the two-sided perspective behind intra-group financial arrangements. It is not enough to rely on the existence (or absence) of a written guarantee — the actual risk assumed, the benefit conferred, and the legal enforceability all play a role in determining whether a guarantee fee is warranted.

To assess both – the borrowing entity’s obligation and the benefits received by the borrowing entity, the MNE group should examine the following key documents. Collectively, these documents can help delineate which portion of the loan is attributable to borrower entity strength versus the extent of benefits received by the explicit guarantee provided by the MNE group entity (guarantor).

1. Loan agreements of both the borrower and other MNE group members — especially for cross-default or parent guarantee clauses.

2. Credit rating agency reports indicating group-level or implicit support assumptions.

3. Board resolutions or internal memos related to financing strategy or guarantees.

4. Annual reports or public disclosures that reference internal funding support practices.

5. Group treasury policies, showing centralized liquidity or funding structures.

6. Bank communications justifying increased lending based on the MNE group entity’s (guarantor) involvement.

7. Legal opinions clarifying enforceability or nature of commitments.

8. Internal risk assessments or cost-benefit analyses related to the guarantee.

Conclusion

The KSA TP Bylaws and the OECD Transfer Pricing Guidelines require arm’s length remuneration for intra-group guarantees only when such guarantees provide a genuine economic benefit to the borrower that would not have been available absent the guarantee.

If the guarantee does not enhance the borrower’s position or merely formalizes implicit group support, no arm’s length fee is required. This approach ensures that transfer pricing outcomes align with the actual value created and the economic substance of intra-group financial arrangements.

If the existing financing arrangement explicitly includes a guarantee fee to be paid by the borrower to its MNE group entity (guarantor), then rational for charging a guarantee fee must be justified based on whether the MNE group entity (guarantor) assumed real risk and conferred measurable benefit to the borrower entity.

Conversely, if existing arrangement did not include an arm’s length guarantee fee, but the facts indicate that the guarantee resulted in legal obligation to the MNE group entity (guarantor) and conferred measurable benefit to the borrower entity, then ZATCA may challenge the pricing or require a fee to be imputed on such guarantee transactions.

Therefore, whether a guarantee fee was or was not contractually agreed upon must be carefully evaluated in light of the economic realities and the KSA TP Bylaws read with KSA TP Guidelines and also the OECD transfer pricing guidance.

Only by doing so can MNE group’s ensure alignment with arm’s length principles and minimize the risk of audit disputes or adjustments through maintenance robust documentation evidencing the facts.