When an intercompany loan is created, it should be fully documented, including the amount of the interest rate to be charged and principal repayment terms. Otherwise, the loan might instead be considered an investment by the issuing business unit in the receiving unit, which can create other tax problems.
Given the extent of these tax concerns, a company using intercompany loans should be prepared to undergo a tax audit that focuses on the underlying reasons for and documentation of these loans.
Intercompany loans are recorded in the financial statements of individual business units, but they are eliminated from the consolidated financial statements of a group of companies of which the business units are a part, using intercompany elimination transactions.
Advantages of Intercompany Loans
Despite the issues just noted, intercompany loans are extremely useful, because no credit application is required, the cash can be made available on short notice, and repayment terms may be much longer than would be required by a commercial lender.
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