VLP Legal Press #2
Related Party Loan
What is a Related Party Loan? A loan your company receives from a Related Party
Who is a Related Party? A Related Party includes:
A close family member, shareholder, or director
An individual with 20% or more voting control of the company
A person or entity controlled by your company
A person or entity controlled by the same third party as your company
Why Use a Related Party Loan?
Provides fast and flexible funding, especially useful for startups
Avoids the need to increase the company’s capital
Why It Matters?
May create conflicts of interest since the borrower and lender are connected
Must comply with the arm’s length principle (i.e., fair market terms) for tax purposes
Requires proper documentation to avoid penalties
Instruction No. 14256 – Issued by the General Department of Taxation (GDT)
What is the Instruction About? It outlines how a Related Party Loan can be exempted from the arm’s length principle, provided the following conditions are met:
Written loan agreement specifying interest rate, term, and repayment schedule
Board approval, unless the company is a single-member entity
Supporting documents, such as a business plan or financial projections
How to Set an Interest Rate for a Related Party Loan? The interest rate must not exceed the annual rate published by the GDT
What is a Cash Advance?
A Cash Advance is a short-term fund provided by a Related Party, with a repayment term of less than one year
It is not considered a “loan” and is not subject to the arm’s length principle
No More Filing Obligation?
There is no longer a requirement to file loan transactions with the GDT, whether the loan is from a Related Party or not
This is for general reference only and does not constitute legal advice. For further guidance, contact us at connect@vlplaw.co