How to Move Money Between Related Companies | The Guide

Given the abundance and within-reach knowledge around how to run a successful multi-entity company, cash crossing borders to fund global expansion is still a compliance nightmare among those who dare go beyond the confines of their local jurisdictions.

“Click-to-send-money” is too easy in the eyes of tax authorities. So while you sit back and munch on cake over a Zoom call with the new team you’ve just formed and financed over in the States, you better have a spare slice for the tax collector.

Moving funds between your entities comes with non-compliance risk. In this article, we’ll help make clear what compliance means from an accounting perspective and provide examples of non-compliant transfers, all while letting you keep hold of that precious piece of baked goodness.

Is it legal to move money between businesses?

If you’re like us, you didn’t plan to bootstrap your own business. And if you’re very much like us, you went after the big VC money and powerful investor network conveniently not in the same country as you.

Assuming you set up a structure having a parent company abroad, like a Delaware flip, you eventually need to shift that fresh cash over to your country in order to pay expenses, like your team lunches.

This is an intercompany transfer. And there are many legal types of intercompany transfers.

Maybe you’d like to access a new market abroad and need to set up a new legal entity there. Or take advantage of that high interest U.S. bank account for the large pile of cash you’re sitting on. Or maybe even delve into the FX market and hold that money in a currency you undoubtedly believe will appreciate in value.

Whatever it may be, you’ll find yourself moving money between your entities often enough to offer you a nice surprise on year-end filing day.

IRS & CRA compliance on intercompany transfers

Talking about compliance on this matter means having the appropriate intercompany agreements for your multi-national group. It refers to the process of ensuring that a multinational company's intercompany transactions between its various subsidiaries or divisions in different countries comply with the relevant tax laws and regulations.

A global organisation for world trade, known as the OECD, has Transfer Pricing Guidelines that go into more detail on this. These guidelines provide direction on how to value cross-border transactions for tax purposes between related companies, using a principle called "arm's length".

In a nutshell, abiding by the arm’s length protocol means you’re trading between your own entities as if they are unrelated companies. When you buy or sell between your own entities, each must take into consideration the tax laws in their respective jurisdictions.

Governments have this in place to prevent companies from moving profits out of the country and dodging taxes. There are well defined processes for Transfer Pricing that ensure compliance with IRS, CRA and most local tax authority guidelines.

What are the risks of non-compliance?

In certain jurisdictions, corporate groups may be fined or receive a penalty for not providing intercompany agreements on request. An auditor will use any discrepancies in your accounts to justify further investigation into your business, resulting in a rather lengthy and costly investigation.

As a remedy to your lack of documentation, local tax authorities may taken it upon themselves to recategorise your transactions in a way you never intended. This could increase your tax bill.

And speaking of tax bills… how about double taxation? If you move revenue made by one entity to another entity without the right documents, the first will have to pay tax on that revenue while the other has to pay tax on the money that it receives (also considered revenue).

Loan, capital contribution or services agreement

First things first, this example is for a business where one entity owns 100% of the other. There may be multiple subsidiaries, but for simplicity's sake, let’s assume one parent company and one subsidiary. Also, I’m assuming that the parent company holds investment funds and is otherwise not used for anything else (like sales or hiring). All hires, sales contracts, and expenses are in your subsidiary, at least for now.

In this situation, you have two options to document the cash transfer (the investment you raised) from your parent company to your operational subsidiary. Remember that each company has its own circumstances to consider, so treat this post as a starting point for your research.

Both of these can be applied at the end of your financial year, so don’t panic if you have sent money sporadically without documenting it.

Intragroup loan

The parent company transfers money and records it in both accounts as a loan. To comply with tax laws, you must apply an interest rate to the loan so it's “arms-length”. Not doing this could cause issues with tax authorities further down the line. Draft a loan agreement, and you are good to go.

Pros

Can be repaid, so if you plan to work in your home country now but want to open an office where your parent company is in a year or so, you can send money back without too much complexity.

Cons

The interest rate will generate income in your parent company, and if you have no plans to repay it, it might create additional admin for you and your accountants.

Capital contribution

The parent company invests money in the subsidiary. The subsidiary records the cash as capital (equity). Consider this an internal fundraise: the subsidiary can then issue shares in itself to the parent company (even though it’s already 100% owned by the parent). A board resolution and notifying your local company register is how you formalise this.

Pros

Straightforward, with no ongoing commitments or interest complications.

Cons

Irreversible, so if you need to return funds back to the parent company, you would have to consider a separate mechanism to move funds back, like dividends or a loan.

Services agreements and transfer pricing

The two options above can be used when the parent company is simply an investment-taking shell. If you need to transfer funds between two entities with operational activities (R&D and Sales), then you may need a services agreement, and you need to work out the correct transfer pricing method to apply.

Just recharging costs can leave you with a tax headache, so you essentially need a mark-up. This also includes cases where one of your companies is used for invoicing (as your customer or supplier might want to deal only with a US company). This is a wholly separate and complex area that I’ll cover in a different post.

Examples of non-compliant transfers

Let’s presume your US-based parent company sends money to its foreign subsidiary to fund its operations. It records the transaction as a loan in its books. However, if no credit assessment has been made or your company cannot demonstrate the loans are contracted at arm’s length, as per the OECD guidelines, this would be non-compliant

Say you’re an Indian company that opens up a US-based entity to sell to American customers. If you’re generating revenue in America using intellectual property (IP) owned by the Indian company and sending that revenue back to India without a services agreement between the two, transfer of IP and revenue could be deemed non-compliant, both by US and Indian tax authorities.

If an entity cannot demonstrate a legal right to sell the services of another entity through a services agreement, it cannot legally sell that IP.