I would like to know the SARS acceptable interest for a company that loans the other company.
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
The decision to, or not to, charge interest in respect of a debt, and the rate thereof, is not a tax related issue. The Income Tax Act doesn’t prescribe that interest must be levied, or the rate at which it is to be levied. In this instance it is clear that the agreement between the directors, the one company, and the other company, the one providing the finance, and that are still negotiating, so to speak, whether interest should be levied on the amount outstanding from time to time and then at what rate.
The deemed dividend, that arises where on the difference between “the market-related interest in respect of the debt”, and “the amount of interest that is payable to” a company “in respect of that debt for that year of assessment”, doesn’t arise in this instance – see section 64E(4) of the Income Tax Act. There is also no indication that the loan is made at the instance of a person connected to a trust – section 7C.
We assumed, for purposes of the guidance, that the companies are both resident in the RSA. If one of them was not, then section 31 would apply, but whilst it requires an arms’ length rate to be used, it is only for purposes of determining the taxable income of the parties, and the deemed dividend.