Back to Back Loan

A loan structure when 'A' deposits a sum of money with a bank in country 'B' on condition that a related agency, branch, edge corporation or bank located in country 'C' will lend an equivalent sum to 'A' or a designee in country 'C'.

Back-to-back loans may be used in order to solve an exchange control or financing problem. However, in the case of certain tax havens, the function of this type of loan is to reduce the taxable base subject to withholding taxes on interest payments, by interposing an intermediary subsidiary company between the recipient and the source of the income.

For example, an intermediary company located in the Netherlands or the Netherlands Antilles may be interposed so as to take advantage of a favourable tax treaty. In such cases the authorities usually require a certain spread or 'turn' on the rates so as to create a small profit which is subject to tax locally.