Plain English
Instead of waiting for customers to pay, a subsidiary can sell its receivables to a group finance or factoring entity for immediate cash, at a discount that reflects the time value of money and the risk that some customers won't pay. Priced correctly, this is a genuine financing and risk transfer service; priced as a token discount with no real risk transfer, it looks more like disguised, unremunerated financing.
Technical definition
Intercompany factoring involves one group entity (the factor) purchasing another's trade receivables, typically at a discount reflecting a financing component (time value of money) and, where risk is genuinely transferred, a credit risk component, requiring functional analysis under OECD Chapter I and X principles to confirm the factor genuinely assumes collection and credit risk rather than acting as a conduit for the originating entity.
Why it matters
Factoring discount rates that do not reflect genuine risk transfer, or where the factor has no capability to actually manage collections or absorb bad debts, risk recharacterisation as a disguised loan with a mispriced financing component only.
How it works in practice
- 01Determine whether the factor genuinely assumes credit and collection risk (non-recourse) or the originator retains risk (recourse).
- 02Benchmark the financing component of the discount against short-term money market rates.
- 03For non-recourse arrangements, separately price the credit risk premium using historical bad debt or credit insurance data.
- 04Confirm the factor has genuine operational capability to manage collections.
- 05Document the discount rate's components and the substance of the risk transfer.
Worked example
Non-recourse factoring discount
A factoring subsidiary purchases EUR 5m of 60-day trade receivables from an operating affiliate at a 3.2% discount, non-recourse. Of the 3.2%, roughly 1.1% reflects the time value of money over 60 days at prevailing short-term rates, and 2.1% reflects a credit risk premium based on the portfolio's historical 1.8% bad debt rate plus a margin, consistent with third-party non-recourse factoring terms observed for similar receivables portfolios. The factor maintains a dedicated collections team, evidencing genuine risk assumption.
Common mistakes
- Labelling an arrangement 'non-recourse' while contractually or in practice reverting bad debts to the originator.
- Pricing the discount as a single unexplained percentage without separating financing and credit risk components.
- Using a factor with no collections capability or credit assessment function.
Audit red flags
- Factor with no staff or systems to manage collections independently.
- Discount rate that never changes despite shifts in the receivables portfolio's credit quality.
- Contractual recourse provisions inconsistent with the stated non-recourse pricing.
Documentation & data
Documents to hold
- Factoring agreement specifying recourse terms.
- Discount rate derivation showing financing and credit risk components.
- Evidence of the factor's collections and credit assessment capability.
Data you need
- Historical bad debt rates for the receivables portfolio.
- Short-term money market rates for the financing component.
- Comparable third-party factoring discount rates.
Who owns this internally: Group treasury or a dedicated factoring entity operates the structure; tax prices and documents the discount rate.
Jurisdiction notes
- OECD
- Chapter I and X principles apply jointly; there is no dedicated factoring-specific chapter, so functional and risk analysis carries the weight of the case.
- European Union
- Factoring is a regulated financial activity in several member states, adding a compliance layer alongside the transfer pricing analysis.
Notes by role
Advisors & consultants
Always test contractual recourse terms against actual practice — mismatches here are the single biggest driver of recharacterisation risk.
CFOs & finance leaders
Genuine non-recourse factoring can be a legitimate way to accelerate group cash flow, but only if the factor entity is properly resourced and priced.
Frequently asked
- Does factoring always transfer credit risk?
- Only if structured and operated as genuinely non-recourse; recourse factoring is closer to a secured loan and should be priced accordingly.
- How is the credit risk premium usually derived?
- Typically from the portfolio's historical bad debt experience or comparable third-party credit insurance/factoring premiums.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapters I and X
OECD, 2022
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
Factoring pricing is a strong example to bring up when asked to demonstrate risk-based, not just rate-based, transfer pricing thinking.
Careers in transfer pricing