Client Alert – Update on Interest-Free Loans

In a recent Client Alert, we advised that the General Department of Taxation (“GDT”) had verbally indicated that interest-free loans between related parties would again be permitted after having been “banned” following the issuance of the transfer pricing regulations (Prakas 986).

On 18 March 2019 the GDT issued Instruction Letter 4909, which states that taxpayers having loans from related parties must have the following documentation:

• A loan agreement in which the terms of the loan are clearly stated;
• A business plan describing the need for the loan and the intended use of the funds;
• A document explaining the basis used to determine the interest rate; and
• A Board of Directors’ resolution approving the taking of the loan.

The Instruction Letter goes on to state that the loan must be properly documented in the transfer pricing documentation required by Prakas 986, even if the interest is lower than the market rate.

While this Instruction Letter is less explicit than hoped, we believe it can be interpreted to confirm that the GDT will accept related party loans at either zero or less-than-market-rate interest, provided that the documentation requirements described above are met.

It should also be noted that companies are no longer required to notify the GDT of related party loans.

Readers are reminded that all companies that had related party transactions in 2018 are required to have a transfer pricing report available now to submit to the GDT if requested.

If you have any questions regarding this Client Alert please contact one of the authors, or your usual VDB Loi adviser.

About the authors

Robert Porter, [email protected]: Rob is an experienced tax adviser who has practiced throughout Southeast Asia for many years. His impressive credentials include partnership roles for Big 4 firms Ernst & Young and KPMG in Indonesia and Thailand. He leads VDB Loi’s tax advisory practice in Cambodia, assisting multinational and local clients with their investment and M&A projects, conducting due diligence, and advising on tax structuring.

Tepwinuth Chhim, [email protected]: An ACCA-qualifed adviser, Winuth has 10 years of experience in finance, audit, and tax, including over five years with Big 4 firms PwC and KPMG, and three years as head of finance and accounting for local group companies. His practical insights on the financial accounting process, financial planning, business analysis, and tax planning strategies provide invaluable competencies for his tax advisory work.

VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.

You can find more information on our Cambodia office here.

Kind regards,