Intercompany loans are loans made internally within a company to address funding needs in different departments. They can potentially create tax problems, and it is important to originate such loans with care to avoid common tax pitfalls and accounting problems. If an intercompany loan appears to be necessary, a tax accountant can provide advice on how to set up the loan and how to report it accurately on tax documentation.
The issue with intercompany loans and taxes is that while the company may consider it a loan, government agencies may view it as an equity investment. If it is an investment, it must be treated differently by the recipient, and creates a complicated tax situation. Intercompany loans must be conducted at arm's length with a clear loan agreement to demonstrate that it is a loan within the company, not a movement or investment of capital, and the borrower has an obligation to repay it at set terms.
Agreements for intercompany loans should disclose the loan amount, repayment period, and interest. If the loan does not have clear terms, this can arouse the suspicion of government agents. For accounting purposes, the borrower should consider the loan a debt obligation and account for it in its financial disclosures, while the department doing the lending should also list the loan. Borrower and lender must track the loan payments and adjust the loan agreement if it becomes necessary to change the terms because the borrower can no longer service the loan.
Intercompany loans can be a very useful source of fast financing at agreeable terms. This can be important when lack of funds slows project development, a company does not want to access outside credit, or it is necessary to quickly move funds before a project shuts down. Companies should consult their attorneys and lawyers to develop an appropriate contract and define the loan appropriately on tax declarations.
If tax authorities suspect that a supposed intercompany loan is not what it appears to be, they can conduct an investigation. This will include an investigation of accounting paperwork, documentation associated with the loan, and business practices. The tax authorities can charge back taxes if they feel the loan should count as taxable income, and there is also a risk of penalties if evidence indicative of fraud is present. All communications about the loan should be made with the awareness that they may be investigated by the government.