Dilemma of Related Party Loans, Interests or Not
The capital requirements of an enterprise during its operation are often unable to be solved by relying solely on financial institutions. The first option when an enterprise’s funds are difficult is to mobilize funds from affiliated companies. In practice, many related party lending businesses are created. Such businesses often fail to carry out normal fiscal and tax treatment due to interest, and ultimately bring huge losses or risks to enterprises.
Related Party Loans Charge Interests
Affiliated companies provide funds to target companies, sign agreements and collect interest. Although these companies usually do not have permission to engage in loan business, in practice, if they do not touch the red line of illegal fund raising, the borrowing of funds between companies and individuals is acquiesced. The following key points should be paid attention to in this part of interest account payment and pre-tax deduction:
Invoice of Interest
The party that receives the interest should pay 6% VAT according to the "provide loan service" item in the VAT tax obligation. If it is a small-scale taxpayer, it should pay VAT according to the 3% collection rate, then a VAT invoice should be issued. The loan receiver should recognise an invoice to compliance relative regulation. It should be noted that invoices for loan services cannot be deducted from input VAT by loan receiver, so it is best not to issue special VAT invoices in practice.
Rate of interest
Announcement No. 34 year 2011 of the State Administration of Taxation stipulates the limit for the deduction of interest on loans for non-financial enterprises and individuals: the part that is not higher than the interest rate of similar loans for financial institutions during the same period can be deducted before the current income tax. But in practice, the standard is uncertain, some are implemented according to standard interest rates, some are implemented according to floating rates, and some are implemented according to the tax authorities?own understanding. From our point of view, if a standard can be found as a reference, such as the loan interest rate of other financial institutions. The company’s loan interest rate is not beyond this rate which is satisfied.
Related Party Interest Deduction Limit
The Notice of the State Administration of Taxation of the Ministry of Finance on Tax Policy Issues Related to the Standards for Pre-tax Deduction of Interest Expenses of Corporate Related Parties (Cai Shui [2008] No. 121) this article also sets a special limit on the interest deduction of related parties. When calculating the taxable income, the actual interest payment paid by the enterprise to the related parties shall not exceed the proportion calculated by the following prescribed ratio and the relevant provisions of the tax law and its implementation regulations (5:1 for financial enterprises; 2:1 for other enterprises), deductions are allowed, and the excess is not allowed to deducted in the current and subsequent years.
Deduction of intertest refer to unpaid capital fund
The registered capital of the enterprise may not be in place at one time and may be invested in instalments or in batches. If the funds are not in place, it may borrow externally funds if there is a lack of funds. In this case, can the interest be deducted before tax? The State Administration of Taxation’s Reply on the Issues Concerning the Pre-deduction of Corporate Income Taxes on Interest Expenses incurred by Enterprises?Investors (Guo Shui Han [2009] No. 312) stipulate that, where an enterprise investor fails to pay in full within the prescribed time limit. In the case of capital, the interest incurred by the enterprise’s foreign borrowing is equivalent to the interest accrued on the difference between the investor’s paid-in capital and the capital payable within the prescribed period, which is not a reasonable expenditure of the enterprise and should be borne by the enterprise investor. The burden shall not be deducted when calculating the taxable income of the enterprise.
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