An interest-free loan between related companies is not automatically a tax problem in Singapore, but the answer depends on where the borrower is and when the loan was made. For a loan between two Singapore companies, neither in the lending business, made on or after 1 January 2025, IRAS has said it will not make a transfer pricing adjustment. The lender still cannot deduct interest on money it borrowed to fund the free loan. Cross-border interest-free loans are treated differently: IRAS will not regard them as arm’s length unless you have reliable evidence that independent parties would lend without interest.
Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.
This guide is for directors and finance teams of Singapore groups who move cash between companies without charging interest and want to know what that means for tax.
Why do interest-free group loans attract attention?
Section 34D of the Income Tax Act 1947 allows the Comptroller to adjust a company’s income, deductions or losses where related parties deal on terms that differ from those independent parties would agree. A loan with no interest is the clearest example of a non-commercial term. Independent lenders charge for the use of money.
In practice, though, IRAS’s approach to an interest-free loan depends on four questions:
- Is it really a loan, or is it equity?
- Is it domestic (both parties in Singapore) or cross-border?
- When was it entered into: before 1 January 2025, or on or after that date?
- Is either party in the business of borrowing and lending money?
These rules are set out in Section 15 of the IRAS e-Tax Guide on Transfer Pricing Guidelines (Ninth Edition), available from the IRAS transfer pricing page. If you need the mechanics of pricing a loan that must carry interest, including the indicative margin and benchmarking, see our separate guide to arm’s length interest on intercompany loans.
Is the advance a loan at all?
Before pricing anything, IRAS asks whether the advance should be treated as a loan or as a contribution to equity. Its guidelines point to features such as:
- whether there is a fixed repayment date, or repayment depends on the borrower doing well;
- whether the borrower is obliged to pay interest;
- whether the lender can enforce repayment, and whether the debt ranks behind other creditors; and
- whether an unrelated bank would have lent the borrower that amount.
Many interest-free group advances have no agreement, no repayment date and no interest. That combination makes them look more like equity. If part of an advance is treated as equity, no interest is priced or deducted on that part.
A loan does not need a written agreement. IRAS also treats intercompany trade balances left unpaid for longer than a third-party supplier would normally allow as loans. A management fee receivable that has sat unpaid for years can therefore become an interest-free loan for transfer pricing purposes.
How does IRAS treat each type of interest-free loan?
| Situation | Transfer pricing position | Effect on the lender’s interest costs |
|---|---|---|
| Domestic loan entered into before 1 January 2025; lender not in the lending business | IRAS applies an interest restriction as a proxy for the arm’s length principle | The lender’s interest expense on funding the loan is limited to the interest it charged, which is nil for an interest-free loan |
| Domestic loan entered into on or after 1 January 2025; neither party in the lending business | IRAS will not make a section 34D adjustment and will not request transfer pricing documentation for that loan | Interest the lender incurs to fund a non-income-producing loan is still not deductible |
| Domestic loan where either party is in the lending business | Interest should be set at arm’s length; an interest-free loan is not regarded as arm’s length without reliable evidence | Normal rules apply to the priced loan |
| Outbound cross-border loan (Singapore company lends to an overseas related company) | Arm’s length interest expected. Where the interest would be passive foreign income and nothing is remitted, IRAS generally makes no adjustment | Interest expense incurred to fund the loan is disallowed as not incurred to produce income |
| Inbound cross-border loan (overseas related company lends to a Singapore company) | IRAS will not impute an interest expense for the Singapore borrower | No deduction (nothing is paid) and no withholding tax, as no interest is paid |
Domestic loans made on or after 1 January 2025
This is the most common SME situation: a Singapore holding company funds a Singapore subsidiary, or one sister company helps another. Where neither company is a bank, finance company, treasury centre or otherwise in the business of borrowing and lending, the parties may charge interest using the IRAS indicative margin (without the usual S$15 million cap) or an arm’s length rate, or may leave the loan interest-free. IRAS has said it will not make a section 34D adjustment on such a loan.
The catch is on the lender’s side. If the lender borrowed from a bank to make the loan, the interest it pays the bank relates to an asset that earns nothing. IRAS’s own example in the guidelines denies the lender a deduction for that interest under section 14(1)(a). Where the lender’s borrowings fund a mix of assets, IRAS commonly apportions the interest using the total asset method, which we explain in our article on interest expense and the total asset method.
Domestic loans made before 1 January 2025
For older domestic loans where the lender is not in the lending business, IRAS continues its earlier approach: it limits the lender’s interest expense claim to the interest the lender charged on the loan. On an interest-free loan, that means none of the related funding cost is deductible. This continues even if the loan is drawn down after 1 January 2025 or matures later, as long as it was entered into before that date.
Watch out for extensions. IRAS treats refinancing, extending the tenor or significantly changing the terms of a related party loan as taking out a new loan. An old loan extended in 2026 becomes a new post-2025 loan from the date of extension.
Cross-border loans
For loans to or from overseas related companies, IRAS expects arm’s length terms regardless of who is in the lending business. Interest-free cross-border loans are not regarded as arm’s length unless you have reliable evidence that independent parties would act the same way. The practical consequences are set out in the table above. Where interest is charged on an inbound loan, the Singapore borrower must also consider withholding tax: interest borne by a Singapore resident is deemed sourced in Singapore under section 12(6), and section 45 generally requires 15% to be withheld unless a treaty rate or exemption applies. Our withholding tax guide covers the filing steps.
What about the interest in the accounts under FRS 109?
Under FRS 109 or SFRS(I) 9, an interest-free loan may be recorded at fair value, with the shortfall treated as a capital contribution or distribution and notional interest recognised over the loan’s life. These are book entries only. IRAS’s e-Tax Guide on the income tax treatment arising from FRS 109 says that, as no interest is actually received or paid, the notional interest income and expense on an interest-free loan are disregarded for tax. Your tax computation should add back or deduct these items so that tax follows the contractual interest, which is nil.
Do you need transfer pricing documentation?
Contemporaneous transfer pricing documentation is generally required under section 34F where a company’s gross revenue from its trade or business exceeds S$10 million, or where documentation was required for the previous basis period. Exemptions apply, including for qualifying domestic loans described above and for loans priced using the indicative margin. Related party loans of up to S$15 million in principal granted or received in a basis period also fall within the exemption thresholds. Our guide to transfer pricing documentation explains the full test.
If IRAS does make a transfer pricing adjustment, section 34E imposes a surcharge of 5% of the adjustment, whether or not any extra tax results. Self-initiated upward adjustments for past years attract the same surcharge unless IRAS grants remission.
A practical review, step by step
- List every intercompany balance. Include formal loans, current accounts and long-unpaid trade balances.
- Classify each one. Record whether it is domestic or cross-border, the date it was entered into or last extended, and whether either party is in the lending business.
- Test loan versus equity. Note repayment terms, enforceability and whether a bank would lend the same amount.
- Trace the lender’s funding. Identify whether bank or other interest-bearing debt funds the loan, and work out the non-deductible interest.
- Decide on interest for future periods. For cross-border loans, set arm’s length terms or document why no interest is justified.
- Paper the loan. Put a short agreement in place stating the principal, currency, repayment date, interest (or its absence) and ranking, and approve it at board level in both companies.
- Align the tax computation. Reverse FRS 109 notional interest, apply any interest restriction and check withholding tax on any interest paid overseas.
Documents to keep
- Loan agreements or board resolutions approving each advance
- Intercompany ledgers and balance confirmations at each year end
- Evidence of whether either party is in the business of borrowing and lending
- Records of the lender’s own borrowings and how they were used
- Interest rate support (indicative margin computation or benchmarking) where interest is charged
- Withholding tax filings and certificates of residence for interest paid overseas
A worked example
Example (hypothetical): A Singapore holding company with a S$3 million bank loan lends S$2 million interest-free to its Singapore operating subsidiary in March 2025, under a signed agreement repayable in three years. Neither company is in the lending business. The holding company also lends S$500,000 interest-free to a related company in Malaysia.
For the domestic loan, IRAS will not make a section 34D adjustment, but the part of the holding company’s bank interest that funds the S$2 million loan is not deductible because the loan produces no income. The holding company apportions its interest using the total asset method. For the Malaysian loan, IRAS will not regard interest-free terms as arm’s length without reliable evidence, and any interest expense that funds that loan is also disallowed. The board decides to charge arm’s length interest on the Malaysian loan from the next financial year, puts a written agreement in place, and notes that the Malaysian side may need to deal with its own withholding tax rules on those payments.
Frequently asked questions
Do two Singapore sister companies have to charge each other interest?
Not for a loan entered into on or after 1 January 2025 where neither is in the lending business. IRAS has said it will not make a transfer pricing adjustment. The lender’s related interest costs are still not deductible.
Is an interest-free loan to an overseas subsidiary acceptable?
IRAS will not regard it as arm’s length unless you have reliable evidence that independent parties would lend on the same terms. Any interest expense used to fund the loan is disallowed.
Our overseas parent lends to us interest-free. Can we deduct notional interest?
No. IRAS will not impute an interest expense for the Singapore borrower, and no withholding tax arises because no interest is paid.
Does the moneylending law affect group loans?
Lending within a corporate group raises a separate licensing question from tax. Our article on whether a company can lend without a moneylender licence covers it.
We extended an old domestic loan this year. Does anything change?
Yes. IRAS treats an extension or significant change of terms as a new loan from that date, so the post-2025 rules apply going forward.
Need help with intercompany loans?
Raffles Corporate Services can review your intercompany balances, prepare loan agreements and board resolutions, compute interest restrictions and adjustments in your tax computation, and handle withholding tax filings on interest paid overseas. Contact us at [email protected] or on WhatsApp at +65 8501 7133. This article is general information, not tax advice.
Kevin Yeo, Raffles Corporate Services