Inter corporate loans, interest

[Nishtha Jain]

In case a pvt ltd wnats to extend loan to another pvt ltd company, where both companies have same directors, can such loan be interest free? if not what other ways can be used to deploy funds in the other group company?

[YAGAY andSUN]

A private limited company can technically extend an interest-free loan to another private limited company with common directors, provided it complies with Sections 185 and 186 of the Companies Act, 2013. While Section 185 permits such transactions under specific exemptions (e.g., both companies are private and no other body corporate holds shares), Section 186 mandates that inter-corporate loans should carry at least the prevailing government security interest rate. Hence, an interest-free loan may not align with Section 186 and could face compliance risks. Additionally, from a tax perspective, such transactions may be scrutinized for lack of commercial justification. As safer alternatives, companies may consider equity infusion, share application money, or low-interest inter-corporate deposits, which are more compliant and tax-efficient ways to deploy funds between group companies.

AI Summary

Private company risks compliance issues giving interest-free loans to related companies despite Section 185 exemption under Section 186 A private limited company queried about extending an interest-free loan to another private company with common directors. The response indicated that while Section 185 of the Companies Act, 2013 permits such transactions under specific exemptions for private companies, Section 186 requires inter-corporate loans to carry at least the prevailing government security interest rate. An interest-free loan may not comply with Section 186 and faces compliance risks, plus potential tax scrutiny for lacking commercial justification. Safer alternatives include equity infusion, share application money, or low-interest inter-corporate deposits for deploying funds between group companies.