Should interest be charged on intercompany loans within a group of companies? The loans are granted from the controlling company to the various controlled companies to fund business operations in the subsidiaries. These loans are unsecured.
Author: Peter Surtees
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
Your reference to sections 10(1)(hA) is 23K is misplaced. Both sections applied to reorganisation and acquisition transactions and ceased to apply after March 2014. So we need to apply general principles to the question. Except in transfer pricing matters under section 31 of the Income tax Act, not here relevant, there is no obligation to charge interest. Section 7C, also not here relevant, punishes the lender in appropriate circumstances via the donations tax provisions. In the present matter the controlling company is not obliged to charge interest on loans to controlled companies. However, failure to charge interest would render the controlling company vulnerable to being disallowed the interest deduction on its borrowed funds. To take a very simplistic example: controlling company has borrowings of R1 000 000 from its bank, on which it pays annual interest of R100 000. It lends R150 000 to a controlled company for the full year, interest free. SARS might well decide to disallow R15 000 of the R100 000 expense, on the grounds that this amount was incurred for the purpose of making interest-free loans ie not in the production of income. This is the controlling company’s risk. There is a wealth of case law on this topic, by the way, which invariably points this way.