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Setting Legal and Market-Related Interest Rates on Loans to Corporate Shareholders
- 20 May 2025
- Corporate Tax
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 29 February 2026.
Question :
The client intends to charge interest on a loan advanced to a related party, specifically a corporate shareholder, and seeks to ensure compliance with SARS regulations and the National Credit Act (NCA). The client has referred to a formula for the maximum interest rate as (Repo Rate × 2.2) + 20%, and requests confirmation of its accuracy and applicability.
Answer :
The Problem / Facts:
The client intends to charge interest on a loan advanced to a related party, specifically a corporate shareholder, and seeks to ensure compliance with SARS regulations and the National Credit Act (NCA). The client has referred to a formula for the maximum interest rate as (Repo Rate × 2.2) + 20%, and requests confirmation of its accuracy and applicability.
Analysis of the Tax Issues Identified:
-
Deemed Dividends or Benefits:
Charging an interest rate below market value may result in the differential being treated as a deemed dividend or benefit, potentially attracting Dividends Tax or other tax implications. -
NCA Compliance:
The maximum interest rate must be aligned with NCA regulations. While this is not a direct tax issue, legal compliance under the NCA has implications for the validity of the transaction, which indirectly impacts tax compliance.
Applicable Law:
-
National Credit Act 34 of 2005 and associated Regulations:
This legislation prescribes the maximum interest rates for credit agreements, which must be verified against the latest Government Gazette notices or guidance from the National Credit Regulator (NCR).
Application of the Law to the Facts:
- The interest charged on the loan to the corporate shareholder must be benchmarked against prevailing market rates, in order to comply with the arm’s length principle.
- If the interest rate is below market, there is a potential risk that the difference may be treated as a deemed dividend. However, this risk is generally lower in the case of loans to corporate shareholders.
- Proper structuring and clear documentation are essential to mitigate potential tax and legal exposure.
- Regarding the maximum interest rate under the NCA, the formula (Repo Rate × 2.2) + 20% corresponds with earlier regulatory frameworks for certain unsecured credit agreements. However, it must be confirmed against the most recent maximum interest rates prescribed under the NCA.
- The rate should be verified using the current guidance from the National Credit Regulator or as published in the relevant Government Gazette.
- Important Clarification on Rate Formula: The formula (Repo Rate × 2.2) + 20% generally applies to specific types of consumer credit agreements (such as micro-lending) governed under the NCA. It does not automatically apply to inter-company loans, particularly where both parties are juristic persons exceeding the NCA thresholds. For SARS compliance purposes, what matters is that the interest rate be market-related and reflective of an arm’s length transaction. SARS does not impose a statutory maximum rate but requires that the rate be commercially justifiable.