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Interest-free loans

Interest-free loans

August 24, 2018

In an earlier client alert your attention was drawn to the likely impact of Prakas 986 (the transfer pricing regulations) on the continued applicability of the General Department of Taxation’s (the “GDT’s”) Instruction 151 which, since 2014, has permitted loans from related parties to be interest-free, if the related loan agreement is registered with the GDT. Clearly this is inconsistent with the new transfer pricing regulations, which require that all transactions be at “arm’s-length” values.

On 21 August 2018, the GDT helpfully issued Instruction 11946 to clarify its position with respect to this inconsistency. Instruction 11946 states that all loan transactions between related parties must bear interest, the rate of which must be determined in accordance with the arm’s length principle, as stated in the transfer pricing regulations. Instruction 11946 also states that loan agreements between related parties bearing interest at market rates do not now need to be registered with the GDT.

The new Instruction does not address its applicability to loans transacted and registered previously under Instruction 151, however we do not believe you should assume that these are grandfathered in, as this would be explicit in Instruction 11946 if it was intended.

What should you do now?

Those of you with existing loans from (or to) related parties should consider immediately amending the related agreements with effect from the beginning of the current (2018) tax year, which for most of you will mean 1 January 2018. The amendment should impose an interest rate on the outstanding loan at a market rate. You should also remember that by the time you file your 2018 annual tax return, at the latest, you must have on hand a transfer pricing report that supports the interest rate chosen as an arm’s length rate, in compliance with the transfer pricing regulations. (Such report must also include analysis and support for all of your related party transactions.)

If you have any questions, or need assistance with your related party loan arrangements or transfer pricing documentation, please contact the undersigned, or your usual VDB Loi adviser.

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.