Startup Guide to Intragroup Transfers

Staying compliant when moving funds

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.

If you are heading towards your year-end and have made these types of transfers without any documents, don’t worry. Speak to us, and we can set this up for you. Then, get back to building something people want!