more-arw search

Q&A Forum

Tax impact on Inter-company payments

My company (ABC) has a wholly-owned subsidiary (XYZ), and whenever an employee from ABC works on XYZ ( and viceversa) there are inter-company transactions generated as well as an admin charge. Both companies are in the US.

At the moment, the interco balance ABC owes XYZ is around $1m. We would like to pay off this balance but we would like avoid any negative tax implications for ABC.
Also, at the end of each month, XYZ sweeps all their cash back to ABC, so any repayment we make will eventually be transferred back to us.

Our original idea was to have ABC pay the balance and then have XYZ pay a dividend to ABC. But we are not sure whether that's the best alternative.

Any thoughts?
Thank you!

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Why would ABC have a negative tax implication if it were to pay back inter-company (unless someone is on cash basis)? Am I missing something?

Thanks

Anonymous
(Tax Analyst) |

Hi Wayne!

Yes, ABC is on a cash basis.

This is mi first time having a look at taxation of inter-company transactions and to be honest I am very lost in this matter. I am not sure of the tax implications of just repaying the loan, or the tax implications of them paying us a dividend (because at the end of the month, all their funds are transferred back to us).

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I'm not a tax guy - I repeat "me don't do tax" :) but wouldn't the interest exp and income essentially cancel each other out if you filed a consolidated return?

Anonymous
(Tax Analyst) |

It is not the interest we are worried about tho. At the minute they don't charge us any interest. If we repay them the loan, they will sweep us the funds back creating a new inter-company loan(they don't keep any cash on their accounts). So we were considering declaring a dividend from the subsidiary top the parent, but we don't know if there are any tax implications :-s

Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Wayne is being modest about he don't do tax because he's correct for federal tax purposes if you are presumably filing a consolidated federal tax return. Whether interest on these advances/loans was charged or not, it would be a wash in a consolidated return. However, there could be state tax implications because they also have transfer pricing rules governing intercompany loans that should have arms' length interest rates because states have different tax rates. Subsidiary dividends too could have state tax implications.

Hey Wayne, it was good seeing you again at the conference!

Jake

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Thank you Jake (on both counts, but I am definitely not a tax man) :)

693 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.