What is an intercompany loan?
An intercompany loan is a loan within the same company usually from the parent to the subsidiary or vice versa. This is very common among in a family or group of companies and often easier than acquiring a loan from the bank. Issues such as interest, method and frequency of payment can be decided upon by the parties.
Example: Parent company sends $20,00 to subsidiary to improve their cash management, cover their operating losses or simply because it is an easier and cheaper method of acquiring funds.
What is the tax treatment of such a loan between two NZ tax resident companies?
It is essential for there to be adequate documentation regarding an intercompany loan. This means there must be written documentation of the agreement detailing all the specific arrangements. It will have the following accounting treatment:
The parent:
- Debit Loans receivable
- Credit cash
The subsidiary:
- Debit Cash
- Credit Loans Payable
There is no specific required tax treatment required by the IRD when the intercompany loan is between two NZ tax resident companies. The companies may indicate interest or tax requirements, this is at their own discretion.
What is the tax treatment of an intercompany loan between a NZ tax resident and overseas company?
The IRD have introduced interest limitation rules that require loans between related parties to be priced using a restricted transfer pricing approach. This means that specific rules are applied. The following points will be considered:
- The credit rating of NZ borrowers at high risk of BEPS which is determined by a large group debt % and the borrowing is from low tax jurisdiction.
- The appropriate amount of interest deductible on the debt after having removed features not typically found in 3rd party debt
If you have any concerns regarding intercompany loans, reach out to us below. We would love to help.
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