Currently, domestic loans between related parties in Singapore can be interest-free, provided the lender isn't in the business of borrowing or lending. However, the 2024 Amendments will mark the end of this practice. From January 1, 2025, all domestic loans—regardless of whether the lender or borrower is involved in borrowing and lending activities—will need to be priced with an arm’s length interest rate.

This change brings Singapore’s domestic financing practices in line with international norms, as it ensures that all loans reflect the terms and conditions that would be agreed upon between independent parties in similar circumstances.

To ease the compliance burden, the Inland Revenue Authority of Singapore (IRAS) offers taxpayers the option of using a pre-published indicative interest margin. This option is available for any domestic loan, regardless of the loan’s principal amount—an exception to other cases where the indicative margin only applies for loans under SGD 15 million.

If the loan falls under these guidelines, businesses can avoid extensive documentation. However, for loans that do not meet the criteria, a full arm's length analysis or benchmarking will be required.

Interestingly, the updates leave cross-border related-party loans untouched. The existing rules still apply, with businesses able to use the indicative margin for loans up to SGD 15 million. For loans exceeding this amount or those that don’t use the indicative margin, businesses must determine the arm's length interest rate based on TP benchmarking.

The 2024 updates also bring changes to TP documentation requirements. Here’s what businesses need to know:

• For Domestic Loans Entered into Before January 1, 2025: No significant changes. Loans that are interest-free and not related to borrowing/lending activities remain exempt from documentation. However, if the loan includes an arm’s length interest rate, documentation is required to support this.
• For Domestic Loans Entered into After January 1, 2025: Any loans where both parties are not in the business of borrowing or lending must have an arm’s length interest rate or apply the IRAS indicative margin. Documentation is required only if an arm’s length analysis is conducted. If the indicative margin is used, TP documentation is exempt.
• Cross-Border Loans: These continue to follow the same rules as before. However, if the indicative margin is applied, documentation is not needed.

The 2024 updates also emphasize the importance of regularly reviewing long-term loan agreements. Previously, many businesses did not revisit the terms of their loans once they had been agreed upon. However, the new rules mandate annual reviews to ensure that the original arm’s length conditions still hold true. Factors such as changes in the borrower’s financial situation, collateral, or the broader economic environment could impact the loan’s terms.

Businesses can streamline this review process by preparing simplified TP documentation that confirms the original conditions still apply and that the agreed-upon interest rates remain relevant.