A parent funds its foreign subsidiary in two ways, by equity and by shareholder loan, and those two forms of funding do not come home by the same road. Equity returns as dividends, which presuppose a distributable profit and a shareholder decision. A loan returns as instalments, due on their date whether the subsidiary makes money or not. When the central bank stops allocating currency, both flows block together, and the insured discovers its policy does not treat them alike.
The most useful difference is evidential and it favours the loan. Claiming a blocked dividend requires establishing that a profit existed, that a distribution was resolved by the competent organ, that a transfer application was filed and that it was not served. Claiming a loan instalment requires a contract, an amortisation schedule and a bank statement showing the sum did not arrive. The chain is shorter, wholly documentary, and depends on no corporate decision the state now controls. On a subsidiary whose management the insured has lost, that difference often decides whether the claim is workable at all.
There is nonetheless one condition that cancels that whole advantage, and it is administrative rather than legal. Most exchange control regimes make the allocation of currency for servicing external debt conditional on that debt having been registered with the central bank when the funds entered the country. An unregistered shareholder loan does not exist for the exchange authority: it does not refuse to service it, it does not see it. The investor believes itself creditor of a transferable sum and turns out to hold an internal claim that nothing will get out.
That registration is omitted more often than one imagines, and rarely through negligence. It exposes the loan to local rules on interest, it draws attention to flows a tax department prefers discreet, it imposes formalities at each drawdown. The decision to skip it is taken at financing level, for reasons having nothing to do with insurance, and nobody tells whoever keeps the policies. It is the same domestic defect as an undisclosed holding restructuring, and it produces the same effect: cover that cannot respond for a cause entirely internal to the group.
A second difficulty comes from local tax law and shows itself at the worst moment. Thin capitalisation rules allow an administration to re characterise as equity the portion of shareholder debt exceeding a given ratio to own funds. Such a re characterisation does not only change tax: it turns a due instalment into a distribution conditional on profit, and so removes precisely the evidential advantage described above. An investor that funded its subsidiary ninety per cent by loan for tax reasons has built its position on the most fragile ground.
One must then say what the policy actually covers, because wordings diverge and the vocabulary misleads. Many policies define the insured investment as comprising capital contributions, shareholder loans and reinvested profits, which settles the question. Others target sums owed to the insured by the local company, which is wider still. Others again target only capital and dividends, and leave shareholder debt outside cover. Those three drafts are read in a minute and decide everything, and one must know which was signed before any blockage occurs.
A point of conduct deserves stating because it is counterintuitive and costly to ignore. A non transfer cover responds to an application filed and not served, never to a shortfall observed. An investor whose subsidiary stops applying for transfers because everyone knows nothing gets out has no loss to notify: it has blocked cash and no triggering event. Applications must therefore keep being filed, for dividends as for loan instalments, even knowing they will not be served, because it is the filing that creates the right and not the blockage.
This module closes on three steps, two of which precede the loss by several years. Register the shareholder loan with the central bank when the funds enter, and keep proof of that registration outside the country. Check the ratio of shareholder debt to own funds against local thin capitalisation rules, before an administration does. And file transfer applications for both flows, regularly, including when they look futile.
A Dutch parent funded its production subsidiary in a Central African country with 8 million euros of equity and 46 million euros of shareholder loan, the latter repayable quarterly to 2031. The loan was put in place in 2019 without registration with the central bank, on tax advice. The subsidiary is profitable and solvent; no dividend distribution has ever been resolved or requested, cash being repatriated through debt service. Since March 2025 the central bank has allocated no currency and the instalments no longer leave: 11 million euros are due. The political risk policy defines the insured investment as comprising capital contributions, shareholder loans and reinvested profits. Where does the insured stand?
The policy definition is good and it is the only good news in the file: shareholder loans are expressly within the insured investment, so the question of principle is settled and there is no need to argue that debt is an investment. Everything else runs into the failure to register, and that must be measured before arguments are sought. A non transfer cover responds to a duly filed application that is not served. Yet an application to transfer in respect of servicing unregistered external debt is not duly filed under the exchange regime: the central bank need not examine it, and it does not even refuse it, it rejects it on a point of form or ignores it. The insurer will therefore argue that the blockage results not from a currency shortage but from an irregularity entirely attributable to the insured, and that argument is strong. That the decision was taken in 2019 on tax advice does not improve it: it is domestic, it is deliberate, and nobody told whoever kept the policies. A second weakness is added and it is peculiar to this structure. No dividend distribution was ever resolved or requested, so there exists no alternative flow to claim: the whole repatriation ran through the loan, and the whole file rests on it. An investor that had also requested dividends, however modest, would today have a second route founded on duly filed applications. Three steps are needed, in this order. Find out whether the local regime allows retroactive regularisation of the registration, which exists in several countries subject to a penalty, and apply for it at once: it would not restore the past but it would make future applications regular. Resolve and request without delay a dividend distribution out of available profits, which opens a route of its own, a regular one, and creates a triggering event for the future. And notify the insurer now, setting out the facts without dressing them up, because late notification would add one more ground to those it already holds.
- 01A dividend presupposes a profit and a corporate decision, a loan instalment is due on its date: the second is proved by a contract and a statement, which matters once management of the subsidiary is lost.
- 02A shareholder loan unregistered with the central bank does not exist for the exchange authority: it does not refuse it, it does not see it.
- 03Skipping that registration is decided at financing level for tax reasons, and nobody tells whoever keeps the policies: the same domestic defect as an undisclosed holding company.
- 04Thin capitalisation allows shareholder debt to be re characterised as equity, which removes precisely the loan's evidential advantage.
- 05A non transfer cover answers a filed application, never a shortfall: applications must keep being filed, even knowing nothing will leave.