Transfer pricing has seen a number of notable developments in recent months.

 

Following the Malaysia Transfer Pricing Guidelines 2024, the Inland Revenue Board (“IRB”) then issued guidelines dated 30.7.2026 titled Controlled Financial Transactions: Intra-Group Loan (“Guidelines”), providing its views on intra-group financing arrangements in relation to transfer pricing treatment. The Income Tax (Transfer Pricing) (Amendment) Rules 2026 (“Amendment Rules”) were subsequently gazetted on 27.8.2026.

 

In this article, we analyse the key points arising from the Guidelines and the Amendment Rules.

 

1. A. Characteristics of intra-group loans (i.e. Debt vs Equity)

 

Generally, the interest rate on an intra-group loan is subject to the arm’s length requirement under Section 140A of the Income Tax Act 1967 (“ITA“). The Guidelines state that the characteristics of the intra-group loans, whether they are properly regarded as debt or equity, should be determined based on the following criteria[1]:

 

No.	Criteria	Debt	Equity
1.	Legal obligation to repay	Fixed and enforceable obligation to repay principal and interest	No obligation to repay; repayment depends on profits or the discretion of management
2.	Fixed maturity date	Repayment scheduled on a specific date or upon demand	No fixed maturity; perpetual or redeemable at issuer’s discretion
3.	Expectation of return	Interest is predetermined, independent of borrower’s profitability	Not a fixed return; it depends on profits/dividends
4.	Ranking upon liquidation or dissolution	Ranks as a creditor before equity holders	Ranks as equity after debt obligations
5.	Participation in management / control	No participation in the borrower’s management	Usually includes voting rights or influence in management
6.	Right to enforce repayment	Enforceable in courts as a debt contract	Legal recourse is limited depending on the residual claim.
7.	Treatment in accounting and  financial reports	Classified as liability	Classified as equity
8.	Tax treatment under the relevant tax law	Treated as interest-bearing loan	Treated as capital contribution or equity
9.	Intent of the parties	Intent to create a debtor-creditor relationship	Intent to create ownership interest

 

The criteria stated in the table above are not conclusive on a single criterion or the label of the arrangement. As such, the financial arrangement must be assessed by all the criteria, with the economic and underlying commercial or financial relationship between parties[2].

 

In circumstances where the said arrangement does not possess the characteristics of a genuine loan, the said arrangement may be recharacterised as an equity contribution. The said recharacterisation may lead to the following consequences[3]:

 

1. 1. Disallowance of interest deduction under Section 33(1) and/or Section 33(2);
2. 2. Additional tax payable; and
3. 3. Imposition of tax surcharge under Section 140A(3C).

 

 

1. B. Perspectives of lenders and borrowers

 

Once the arrangement is accepted as a loan, the Guidelines require the commercial and financial relations between the associated borrower and lender to be evaluated from both perspectives.

 

1. 1. Lenders

 

The lender would conduct a comprehensive credit assessment covering the borrower’s business, the purpose of the loan, its structure and the source of repayment, typically including an analysis of cash flow forecasts and the strength of the balance sheet[4]. Credit risk and the potential for changes in economic conditions such as rising interest rates or exchange rate volatility are central considerations[5].

 

Where the lender is the parent entity, it already exercises control over and owns the borrower, which reduces the significance of taking security in its risk assessment[6]. The Guidelines therefore caution that the absence of contractual rights over the borrowing entity’s assets may not accurately reflect the economic reality of the risk[7]. If the borrower’s assets are not already encumbered, taxpayers should evaluate whether those assets could effectively serve as collateral for the “unsecured loan”, and how that affects pricing[8]. In other words, an intra-group loan documented as unsecured will not automatically attract unsecured pricing.

 

2. 2. Borrowers

 

The borrower would seek to minimise overall financing costs while ensuring the funds match its short-term and long-term business requirements, selecting the most cost-effective option available given its commercial objectives and the assets it could offer as security[9]. The Guidelines also acknowledge that where macroeconomic conditions shift, the analysis of whether either party would renegotiate the loan terms may be informed by the options realistically available to both[10].

 

The creditworthiness of the borrower is identified as one of the primary factors an independent lender considers in setting an interest rate[11]. The Guidelines note that recognised agencies such as RAM Ratings, Moody’s and Standard & Poor’s may be referred to, and that for small and medium-sized enterprises, CTOS and the Central Credit Reference Information System provide assessments based on credit history and financial performance[12].

 

1. C. Determination of the arm’s length interest rate

 

Section 140B is applicable to circumstances where a company provides a loan or advances to the director of the company. As a general rule, comparability analysis is essential to ensure that the interest rate is imposed at arm’s length, where the economically relevant characteristics include, but not limited to:

 

1. 1. Contractual terms
2. 2. Functional analysis
3. 3. Characteristics of financial instruments
4. 4. Economic circumstances
5. 5. Business strategies

 

Amongst others, a simplified method for pricing to determine an arm’s length interest rate on intra-group loans was introduced in the Guidelines[13]. However, this simplified method is not available where the capital of the intra-group loan is borrowed from one entity and transferred from the original borrower to the ultimate borrower[14].

 

Under this simplified method, the taxpayer can elect the designated interest rates without performing a detailed comparability analysis[15]. There are two options available under the designated interest rates published by Bank Negara Malaysia (“BNM”):

 

1. 1. The deposit rate; and
2. 2. Average Lending Rate (“ALR”)

 

The taxpayer must fulfil the following criteria in order to apply the deposit rate and the ALR[16]:

 

No.	Criteria	Deposit Rate	ALR
1.	Taxpayer’s business	The taxpayer is not in the business of borrowing and lending
2.	Tax treatment of interest income	The interest income from the intra-group loan is taxed under Section 4(c) of the ITA
3.	Currency of the loan	The loan is denominated in Ringgit Malaysia
4.	Aggregate amount of intra-group loan	Does not exceed RM 50 million for the year of assessment
5.	Source of loan	Taxpayer’s internal funds	–
6.	Associated person	Taxpayer only engages in intra-group loan with an associated person who is a tax resident in Malaysia	–

 

In circumstances where the Revenue has reason to believe that the interest rates of the intra-group loan are not arm’s length interest rates, it may lead to the following consequences[17]:

 

1. 1. Substitute or impute interest rate;
2. 2. Transfer pricing adjustment may result in imposition of surcharge under Section 140A(3C)

 

1. D. Transfer Pricing Documentation

 

Under Rule 4 of the Income Tax (Transfer Pricing) Rules 2023, taxpayers are required to provide contemporaneous documentation to support the intra-group transaction. The Guidelines emphasise that all relevant documentation including the agreements, credit assessments and supporting documents demonstrating the arm’s length principle must be maintained[18]. Taxpayers who opt to use the simplified method must keep and retain the supporting documents to substantiate its position[19]:

 

1. 1. Loan agreement;
2. 2. Confirmation that the source of the intra-group loans is from the company’s internal funds;
3. 3. Confirmation of currency, amount and loan terms;
4. 4. Confirmation that the company is not in the business of borrowing and lending;
5. 5. Proof that the loan is denominated in Ringgit Malaysia;
6. 6. Proof that the loan amount does not exceed RM 50 million; and
7. 7. Proof that the interest rates applied, i.e. Deposit rate or ALR are based on the official publication of the BNM website or the Revenue’s website

 

1. E. Amendments through the Amendment Rules

 

The Amendment Rules are deemed to have effect from the year of assessment 2023. The key amendments introduced are as follows:  

 

No.	Rule	Previous	Amendment	Remark
1.	Rule 4(4)	“For the purposes of this rule, “Multinational Enterprise Group” means a collection of enterprises related through ownership or control which is required to prepare consolidated financial statements for financial reporting purposes under the applicable accounting principles or would be so required if equity interest in any of its enterprises were traded on public securities exchange which includes—   (a) two or more enterprises for which the tax residence is in different jurisdictions; or   (b) an enterprise that is resident in Malaysia and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction, or is resident in another jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in Malaysia.”	“For the purpose of this rule, “Multinational Enterprise Group” means a group of associated enterprises that have business establishments in two or more jurisdictions.”	Taxpayers should review the revised wording against their group structures, as the scope of entities falling within the definition may shift.
2.	Rule 13(1A)	–	“(1A) An adjustment made under subrule (1) in respect of an assessment made on any person in a controlled transaction may be reflected by an offsetting adjustment on the assessment of the other person in the controlled transaction, upon request by that other person and subject to the approval of the Director General.”.	The new subrule provides that an adjustment made under rule 13(1) in respect of an assessment on one person in a controlled transaction may be reflected by an offsetting adjustment on the assessment of the other person in that controlled transaction, upon request by that other person and subject to the approval of the Revenue.

 

1. F. Commentary

 

The Guidelines set out the Revenue’s view on how intra-group loans will be examined, and that view is now on record. Businesses should therefore be proactive rather than wait for an audit. The existing intra-group loan arrangements, particularly legacy shareholder advances and informal financing between related parties, should be revisited to confirm that they can be supported as debt and priced on a basis the Revenue would accept.

 

Meanwhile, the new offsetting adjustment provision allows an adjustment on one party in a controlled transaction to be reflected in the assessment of the other. With the Amendment Rules deemed to have effect from the year of assessment 2023, taxpayers who have already been through a transfer pricing adjustment involving a Malaysian counterparty should consider whether this adjustment is open to them.

 

 

[1] Paragraph 1.15

[2] Paragraphs 1.16  & 1.17

[3] Paragraph 1.19

[4] Paragraph 2.5

[5] Paragraph 2.7

[6] Paragraph 2.6

[7] Paragraph 2.6

[8] Paragraph 2.6

[9] Paragraph 2.8

[10] Paragraph 2.10

[11] Paragraph 2.11

[12] Paragraph 2.14

[13] Paragraph 3.21

[14] Paragraph 3.22

[15] Paragraph 3.21

[16] Paragraph 3.24

[17] Paragraph 3.27

[18] Paragraph 4.2

[19] Paragraph 4.4

 

---

About the authors

Yap Wen Hui
Senior Associate
Tax, Customs and Incentives Practice Group
Halim Hong & Quek
wh.yap@hhq.com.my

---