Why LHDN Wants a Credit Rating for Intercompany Loans

Malaysian transfer pricing rules require the interest charged on a loan between related companies to match what an independent lender would have charged an independent borrower. A credit rating is the tool used to work out what that independent rate should be.

When a bank considers lending money, it checks the borrower's ability to repay before deciding on a rate. The Malaysia Transfer Pricing Guidelines 2024 apply the same logic to intercompany loans, stating that creditworthiness is one of the primary factors an independent lender considers, and that credit ratings help identify comparable transactions for benchmarking. A credit rating is an independent assessment of a borrower's ability to meet its debt obligations in full and on time, based on financial health and repayment history, and it directly affects the arm's length interest rate applied in a comparable transaction between unrelated parties.

Being part of a larger group does not automatically mean a borrowing company shares the group's overall credit standing for pricing purposes. Financial strength, profitability, existing debt levels, and cash flow stability all affect the rating assigned to the specific borrower, and that rating is then benchmarked against market data to arrive at an arm's length rate. The loan's own terms, including currency, maturity, and whether it is secured, also feed into that comparison.

Without a credit rating behind it, an interest rate has no basis for comparison if LHDN reviews the transaction. LHDN expects the credit rating evaluation, and the reasoning behind it, to be documented as part of the transfer pricing analysis when the loan is arranged, not worked out afterwards to justify a rate already applied.

If you wish to focus on running and growing your business, our CFO advisory team can take care of your accounting, payroll, tax planning, e-stamping, corporate secretarial and compliance matters for you. Feel free to WhatsApp us at 010-246 2151.