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What is a good way of structuring an inter-company loan?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

Table of contents

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!

Interested in learning about the March 2020 COVID stimulus? Read our CARES Act for Startups page.

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