Until 31st December 2024, the IRAS 1 has generally been applying the interest restriction 2 as the arm's length proxy for domestic loans between related parties (in which the lender is not in the business of borrowing or lending). The 7th Edition Singapore Transfer Pricing Guidelines, released on 14 June 2024 by the Inland Revenue Authority of Singapore (IRAS) 3, brings changes to the treatment of domestic related party loans.
Domestic loans (i.e., loans between domestic related parties) entered into or refinanced on or after 1 January 2025 will require arm's length interest rates.
A. Where neither the lender nor the borrower in a domestic loan is in the business of borrowing and lending, the taxpayer may opt to:
- Apply the indicative margin published by the IRAS on such loans (of any principal amount) and be exempt from the preparation of contemporaneous TP documentation; or
- Apply an interest rate determined through an arm's length analysis/benchmarking on such loans (of any principal amount), and prepare contemporaneous TP documentation to substantiate the arm's length interest rate.
This also signifies that the IRAS will discontinue the approach of applying the interest restriction as a proxy for the arm's length principle.
B. Where either lender or borrower in a domestic loan is in the business of borrowing and lending, the taxpayer is required to apply an arm's length interest rate for the domestic loan. If the principal amount of the loan does not exceed S$15 million, the taxpayer may opt to apply the indicative margin and seek exemption from the preparation of contemporaneous TP documentation.
Taxpayers using Singapore as a funding hub and taxpayers with
substantial domestic related party loans (including interest free
loans) should reassess the appropriateness of such intra-group
financing arrangements to ensure relevance to market practices and
arm's length standard.
Feel free to reach out to us at A&M for more details. We would be pleased to have a conversation with you on how we can assist you in optimising the tax effectiveness of your intra-group financing arrangements.
Footnotes
1. Inland Revenue Authority of Singapore
2. To limit the interest deduction for the lender to the amount of interest charged for the domestic related-party loan
3. Inland Revenue Authority of Singapore, "7th Edition Singapore Transfer Pricing Guidelines," 14 June 2024, https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_transfer-pricing-guidelines_7th.pdf?sfvrsn=26bfb1a6_15.
Originally published by 22 October, 2024
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