Amendments to the Income Tax Act that enter into force as of 1 January 2018 and expected increased scrutiny by the tax authorities may lead to taxation of certain upstream intragroup lending as concealed profit-sharing. Under the new provisions, loans to shareholder or other subsidiaries of a parent company with a term exceeding 48 months may be deemed taxable profit-sharing unless the taxpayer proves ability and intention to repay. In determining intention to repay, the tax authorities in particular consider repayment schedules, extensions granted for repayments, increases to the loan amount, the correlation between company profit and loans issued, use of the loan and whether the company pays dividends.
To bolster oversight by the tax authority, the new amendments also require that the issue and repayment of upstream intragroup loans are declared to the tax authorities on a quarterly basis. The first of these declarations is due on 20 April 2018 and must include loans issued or loans whose terms have been significantly amended since 1 July 2017.
While details of the new rules are still being worked out by the tax authorities, especially concerning cash pooling arrangements, it is clear that all such arrangements need to be reviewed to ensure compliance with the declaration requirements and to avoid incurring taxes unintentionally.