Dividend discussions usually start from the P&L and retained earnings. This one starts from cash: if the company carries debt, is it better to repay the borrowing than to pay a dividend?

The common answer is to prioritise repayment and reduce or suspend the dividend, and that instinct is sound as far as it goes — repayment cuts interest expense, and therefore both cost and cash out.

The case below assumes a wholly-owned Japanese subsidiary with a European parent, and sets aside the earnings-stripping rules and other international tax provisions in order to keep the arithmetic clean.

The rate differential argument

Anyone who has sat in an FP&A seat working on capital structure will see the other side. Japanese rates, even after recent increases, remain very low by comparison with the United States and elsewhere. So: why repay cheap debt at all? Push that a step further and you arrive at leaving the borrowing in place, paying the cash up to the parent as a dividend, and having the parent deploy it at a higher rate:

Spread = parent’s return − Japanese borrowing rate

With numbers. Dividend ¥1 billion; average French return 3.5%; Japanese borrowing rate 0.8%; debt outstanding ¥1 billion:

¥1bn × (3.5% − 0.8%) = ¥27 million to the group.

Two things the arithmetic hides

Currency. The calculation above is entirely in yen, but the parent invests in euro. Once FX moves against you the spread can invert, and repaying the debt turns out to have been the better decision after all.

Whose result improves. The ¥27 million is a group gain. Standalone Japan, full repayment would have cut interest expense by ¥1bn × 0.8% = ¥8 million. Pay the dividend instead and that saving does not happen. If you are optimising the Japanese entity in isolation, this transaction makes your numbers worse.

The conflict, and how it gets resolved

“Bad locally, good for the group” is a recurring pattern in consolidated organisations. Transfer pricing is tax rather than accounting, but structurally it raises the same tension.

The resolution is unambiguous, and it is a CFO’s job: negotiate it with head office. If your KPI is Japanese net profit, the ask is that contribution to the group result is included alongside it, rather than the local number standing alone.

Group CFOs do look at subsidiary performance, but they are themselves measured on the consolidated result. So a proposal of this kind is usually well received — it makes their number better too.

Timing matters. Put the proposal when the business is performing rather than when it is struggling. The answer to the same question is different depending on when it is asked.