When one company lends money to a related company, the interest rate charged is not something the two parties can simply decide between themselves. It must reflect what an independent lender would have charged an independent borrower under similar circumstances. Getting to that rate is not guesswork, established methods exist, and the right one depends on what information is actually available.

The most straightforward and preferred approach compares the loan against similar loans in the open market, taking into account the borrower's credit rating, the loan's terms, and other relevant factors. This works well because lending markets are large and active, with published data on bond yields, loan pricing, and interbank rates. Loans with long tenures, no security, or exposure to a high risk project would carry a higher rate, while loans backed by strong collateral or guarantees would typically carry a lower one. Comparisons are not limited to unrelated companies either, loans within other groups, if similar enough, can also serve as valid reference points.

Where no suitable market comparison exists, a cost of funds approach may be used instead. This looks at what it actually costs the lender to raise the capital being lent, plus a reasonable margin for risk and profit. This method suits situations where funds are sourced externally and passed through one or more related entities before reaching the final borrower, in which case the intermediary should only earn a return for that pass-through role, not a full lending margin.

For smaller arrangements, Malaysia also offers a simplified method. Businesses not in the lending business, whose intra-group loans are in Ringgit and do not exceed a set threshold, may simply apply an officially published deposit rate or lending rate, without running a full market comparison at all.

Choosing the wrong method, or applying the right one loosely, is one of the more common ways a reasonable related company loan ends up being challenged.

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