TNC Business Strategy Research
Singapore 2020 Guideline of Loans to Related Party/ Company Directors (Issue 1)
Guideline of Loans to Related Party/ Company Directors (Issue 1)
Loans to Related Party
Applying the arm's length principle, related party loans should be charged interest rates that reflect the rates charged between unrelated parties under similar circumstances.
If the lender and borrower of the related party loan are both Singapore taxpayers, IRAS will limit the interest expense claimed on such a loan if it is provided interest-free or at interest rates that are not supported by transfer pricing analysis. This practice will not apply if the lender is in the business of borrowing and lending funds (for example, banks, other financial institutions or finance and treasury centres) in which case the arm's length principle should be complied with.
If the related party loan is a cross-border loan, taxpayers should ensure compliance with the arm's length principle.
Indicative margins for related party loans
IRAS has introduced an indicative margin which taxpayers can apply on each related party loan not exceeding S$15 million as tabulated in this table:
|Related party loan not exceeding S$15 million obtained or provided during the period||Indicative margin|
|1 January 2017 to 31 December 2017||+ 250 bps (2.50%)|
|1 January 2018 to 31 December 2018||+ 175 bps (1.75%)|
|1 January 2019 to 31 December 2019||+ 175 bps (1.75%)|
|1 January 2020 to 31 December 2020||+ 200 bps (2.00%)|
The indicative margin is not mandatory. It gives taxpayers an alternative to performing detailed transfer pricing analysis in order to comply with the arm’s length principle for their related party loans.
If taxpayers choose to apply the indicative margin, they will apply the indicative margin on the appropriate base reference rate selected for the related party loan. For example:
- Taxpayer provided a floating rate loan of S$10 million to its related party on 1 February 2018
- Taxpayer used SIBOR as the base reference rate for the related party loan
- Taxpayer chose to apply the indicative margin
- The interest rate for the related party loan will be 1.75% plus the appropriate SIBOR rate
Examples of base reference rates for floating rate loans are:
- SGD Singapore Inter Bank Offered Rate (“SIBOR”)
- USD London Inter Bank Offered Rate (“LIBOR”)
Examples of base reference rates for fixed rate loans are:
- SGD/USD swap rate
- Singapore Government Securities (“SGS”) yield
If taxpayers choose not to apply the indicative margin or if it is not applicable to them, they will have to apply an interest rate in line with the arm’s length principle and maintain contemporaneous transfer pricing documentation.