(TAX UPDATE) Transfer Pricing On Intra-Group Loans, the Interest Free Handshake Is Over

01Introduction

There is a loan sitting in almost every group we see. The holding company puts money into the Sdn Bhd. No written agreement. No interest. Repayable, in theory, whenever. For years nobody asked a single question about it.

On 30 July 2026, HASiL made that loan everybody's problem. The Inland Revenue Board issued the Malaysia Transfer Pricing Guidelines on Controlled Financial Transactions: Intra-Group Loans (MFTIL). It supplements Chapter 9 of the Malaysian Transfer Pricing Guidelines 2024 and sets out the Director General's position on how Section 140A of the Income Tax Act 1967 and the Income Tax (Transfer Pricing) Rules 2023 apply to related party financing.

The message is direct. A written loan agreement and a stated interest rate are no longer enough.

02The six moves the MFTIL expects

First, delineate the actual transaction. Before you price anything, you analyse the functions performed, the risks assumed, and the comparability of the arrangement. Substance over the label on the document.

Second, ask whether the purported loan is genuinely a loan. You test it against real debt characteristics. Is there a repayment obligation, a maturity date, an expectation of return, a ranking on liquidation, and a genuine intent of the parties to create debt. If the funding is not a genuine loan, it can be treated as an equity contribution. The consequence is real. Interest deductions get disallowed, and additional tax and surcharges follow.

Third, look from both sides. The lender's perspective and the borrower's perspective both matter, including credit risk, repayment capacity, realistic financing alternatives, economic conditions, security, guarantees, covenants, and group support.

Fourth, assess the borrower's creditworthiness. Credit rating, repayment capacity, financial position, group membership, implicit support, guarantees, and loan specific features can all move the arm's length interest rate. One nuance worth knowing. The MFTIL treats implicit support, the benefit a subsidiary gets simply from belonging to a group, as generally not requiring an adjustment on its own. It is a factor in the credit assessment, not a separate chargeable benefit.

Fifth, choose a pricing approach. The Comparable Uncontrolled Price method is preferred where public loan market data exists for borrowers with comparable credit ratings and loan characteristics.

Where comparables are not available, the Cost of Funds method applies, built from the lender's borrowing costs, arrangement or servicing expenses, a risk premium, and an appropriate profit margin, validated against observable market rates.

There is also a Simplified Method that lets eligible taxpayers use a designated BNM published Deposit Rate or Average Lending Rate without a full comparability analysis.

Sixth, keep the records. Contemporaneous transfer pricing documentation and supporting evidence, including loan agreements and credit assessments, must be retained in Malaysia for 7 years, and produced within 14 days of an IRB request.

03The Simplified Method

The Simplified Method is the relief most SMEs will look at first. To use it, you should not be in the business of borrowing and lending, the interest income must be taxed under Section 4(c) of the Income Tax Act 1967, and the loan must be denominated in Ringgit.

For the Deposit Rate route, the loan is funded from your own internal funds, the aggregate intra-group loan amount in the year of assessment does not exceed RM50 million, and the counterparties are associated persons resident in Malaysia. For the Average Lending Rate route applied to cross border intra-group loans, the aggregate amount in the year of assessment likewise does not exceed RM50 million.

One trap to note. The Simplified Method is not available where the funds are on-lent through an intermediate borrower. And even where you qualify, the rate you land on is not permanent.

A rate set under a non-simplified method may be reviewed by the DGIR once every three years if the facts and circumstances have not changed, so treat your characterisation and pricing file as something to revisit, not something to file away.

04The question that actually matters

For years, the working question was simple. Is the interest rate at arm's length. The MFTIL suggests a more important question comes first. Would an independent party have granted this loan at all.

Picture your company holding a signed loan agreement, an interest rate charged annually, and proper accounting entries. That combination used to be the answer. Under the MFTIL, it might not be.

HASiL is signalling a sharper focus on whether the borrower realistically has the ability to repay, whether an independent lender would have approved the financing in the first place, whether the loan behaves like debt or looks more like capital support, and whether documentation exists to justify why the arrangement was made at all.

The risk is not confined to the rate. If the arrangement looks like equity in substance rather than debt, the interest deduction itself is on the line, on top of the recharacterisation exposure covered above.

Before your next audit, ask yourself this. If this borrower walked into a bank today, would the loan be approved.

Is there evidence showing the borrower could actually repay? Are the loan terms, repayment obligations? and supporting analysis documented, not just assumed. Have shareholder or related party balances been sitting on the books for years without a commercial reason behind them. Could your financing arrangements survive a HASiL review as they stand today.

For most groups, the real exposure was never the interest rate. It was the absence of evidence for why the loan exists at all. Sometimes the most expensive transfer pricing risk is the one you never knew you were carrying.

05What this means for you

If your group runs on director loans, holding company advances, or inter-company balances that were never really documented, this is your cue to act. The old habit of unsecured, interest free, repayable on demand no longer survives contact with the MFTIL.

Start with characterisation. Confirm your loan is a loan and not equity in disguise. Then price it, either through the Simplified Method if you qualify, or through CUP or COF if you do not. Then document it, and keep the file ready to hand over inside 14 days.

06KTP View

The MFTIL does not invent a new tax. It closes the gap between what your loan agreement says and what your arrangement actually is. For most Malaysian SME groups, the exposure is not the interest rate, it is the risk of recharacterisation, losing the interest deduction, and paying a surcharge on top. Get the characterisation right first, use the Simplified Method where you genuinely qualify, and treat the 14 day production rule as a filing standard, not a scramble.

This article is general educational content on the MFTIL and is not tax advice on any specific taxpayer's facts.

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