Can intercompany loans be interest free?
(Tax Update) Interest-Free Loans – Are You at Risk?
Dear Valued Clients,
Are you providing interest-free loans between your companies? If so, it's time to take a closer look! The Malaysian Inland Revenue Board (IRB) has ramped up its scrutiny on these transactions, and they’re not playing around.
What’s Happening?
The IRB is closely examining interest-free loans between related parties, including those from directors to their companies. Even if no interest is charged, the IRB considers these loans as generating ''deemed interest income,'' which is taxable.
This could result in an unexpected tax bill, plus a 5% surcharge tax penalty for what the IRB views as unpaid interest.
Why Now?
Although the rules have been in place for years, the IRB is now strictly enforcing them. Under Section 140B of the Income Tax Act 1967 and Public Ruling No. 8/2015 Loan or Advances to Director by a Company, the IRB has the power to retroactively tax interest income on these loans, with a look-back period of up to seven years.
This means you could be liable for back taxes on past transactions.
Legal and Compliance Risks
If you haven't been reporting these loans or justifying their interest-free nature, you could face penalties. The IRB argues that interest-free loans violate the arm's length principle—meaning they're not conducted on terms that independent parties would agree to.
There is also no guarantee that a company making a payment under such a loan will receive a corresponding tax deduction. Deductions are only allowed if the payment meets the 'wholly and exclusively for the production of income' rule.
But it doesn't stop at loans.
The IRB’s scrutiny also covers other financial arrangements such as cash advances, payments on behalf of related parties, long-outstanding trade debts, financial support, and guarantee fees. It’s essential to determine whether these are genuine loans or could be seen as equity instruments.
IRB’s Active Enforcement
The IRB is actively enforcing these rules, sending letters to taxpayers requesting explanations for their interest-free loan arrangements.
If the IRB isn't satisfied with your explanations or documentation, you could face hefty fines and back taxes.
What Should You Do? Best Practices to Follow
To protect your business from these risks, it’s crucial to:
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Keep Proper Documentation
Always have loan agreements in place and maintain clear records justifying any interest-free loans.
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Review Your Financial Arrangements
Conduct a thorough review of all transactions to ensure they are properly classified and reported.
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Seek Professional Guidance
Engage with tax professionals to help navigate these complex rules and ensure your compliance with all tax regulations.
Transfer Pricing and Tax Evasion
Remember, transfer pricing—pricing transactions between related entities to minimize taxes—is a primary method of tax avoidance that the IRB is targeting. Make sure your transactions are compliant with Malaysian laws to avoid being flagged for tax evasion.
Conclusion
With the IRB’s increased scrutiny, it’s more important than ever to ensure your financial practices are in line with current tax laws. Don’t wait until it’s too late—take action now to review your interest-free loans and related transactions to avoid any surprises.
Stay informed, stay compliant, and reach out to us at KTP if you need any assistance navigating these changes.
Thank you for reading our weekly newsletter!
Best regards,
KTP Team
Credit : 'Interest-Free Loans Blitz Is Now Haunting Taxpayers,' as reported by Thannees.com.''
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