12.15.5 Fronting loan
A fronting loan is a loan by a parent company to its subsidiary through a financial intermediary, usually a large international bank. You can read the detail in your textbook, but the essential points about a fronting loan are:
- The bank is a 'front' for the parent, hence the name.
- The bank makes a profit by charging the parent for being a front.
- The parent company circumvents host country regulations on the repayment of the loan by the subsidiary on the assumption that the host country is less likely to stop repayment to an international bank than to an MNE.
- There may be tax advantages if the subsidiary is based in a tax haven. Figure 12.5, which is from page 679 of your textbook, illustrates the cycle of events in a fronting loan.
Figure 12.5 An example of the tax aspects of a fronting loan
Source: Hill 2005, p. 679.
Turn now to the reading from Hall (2005) that includes an explanation of the fronting loan cycle.
In your text
Hill 2005, Chapter 20, pp. 676-680.
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