What is a good way of structuring an inter-company loan?
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When it comes to structuring money transfers from a Delaware C-Corp to its international subsidiary or parent company, you have 3 options:
1) With invoices/bills (AP/AR): can be administratively costly, need to determine “market price” so the transaction is considered at “arms length.” See more here with Transfer Pricing.
2) As an Intercompany Loan (Currrent Asset/Liability): simple transfers, low-interest rate at AFR (Applicable Federal Rate). This is my top choice in terms of keeping legal, bookkeeping, and tax easy and streamlined.
3) By purchasing Equity: very costly from a tax and admin perspective, since we have to get the lawyers/contracts involved. Once distributions need to be made, they are taxed at a high rate (~15-40%). In my opinion, its the worst option.
Furthermore, you’ll want to set up the two companies for easy reporting consolidation. Here are a few helpful tips:
- Both entities should use QBO
- Both entities should use the exact same Chart of Accounts. Numbering your accounts really helps too!
- When making inter-company transfers, both entities should book the transaction as a mirrored outflow/inflow. For example, if the US sends $100K to China, then the US Company books this as “Account 3456: Intercompany Loan = $100,000) and the Chinese entity books this as “Account 3456: Intercompany Loan = -NEGATIVE $100,000). Hence +100K - 100K = $0 upon consolidation. Looks a little funny when the books stand alone, as you might have a negative Asset Account. Do not be afraid, you’re doing it right. This is known as account elimination.
- Be sure to use Oanda.com for Foreign Exchange difference
Of course, your situation is unique. Be sure to work with your tax and legal professionals to make sure you’ve kept everything kosher, legal, and well documented. Hope this helps!
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