Can a Company Lend Money to Its Parent Company?
An Estonian company may lend money to its parent company, but this must comply with the requirements of the Commercial Code. Most importantly, the loan must not harm the company's business operations or threaten the interests of creditors.
Business Purpose Requirement
The loan transaction must have economic substance for the company - meaning the company must derive some benefit from it. The most common way is earning interest. It is important that the loan terms correspond to market conditions, i.e., the same terms that would be applied between independent parties.
Interest Rate Exceptions
In principle, a parent company may be given a loan at a lower interest rate or even interest-free, but only if the company receives at least a comparable benefit to earning interest. For example, this could be an overall increase in group efficiency or other economic advantage.
Practical Considerations
Before granting a loan, the following should be assessed:
Whether the company will remain solvent after granting the loan
Whether the loan is properly documented
Whether the terms comply with market conditions
Whether sufficient transparency and justification are ensured