Moving money between companies: A guide

Samir Moussa
Software Engineer, rebank

Given the vast abundance and within-reach knowledge around how to run a successful multi-entity company, cash crossing borders to fund global expansion is still a compliance nightmare among those who dare go beyond the confines of their local jurisdictions.

“Click-to-send-money” is too easy in the eyes of tax authorities. So while you sit back and munch on cake over a Zoom call with the new team you’ve just formed and financed over in the States, you better have a spare slice for the tax collector.

Moving funds between your entities comes with non-compliance risk. In this article, we’ll help make clear what compliance means from an accounting perspective and provide examples of non-compliant transfers, all while letting you keep hold of that precious piece of baked goodness.

Why move money between entities?

If you’re like us, you didn’t plan to bootstrap your own business. And if you’re very much like us, you went after the big VC money and powerful investor network conveniently not in the same country as you.

Assuming you set up a structure having a parent company abroad, like a Delaware flip, you eventually need to shift that fresh cash over to your country in order to pay expenses, like your team lunches.

This is an intercompany transfer. And there are many types of intercompany transfers.

Maybe you’d like to access a new market abroad and need to set up a new legal entity there. Or take advantage of that high interest U.S. bank account for the large pile of cash you’re sitting on. Or maybe even delve into the FX market and hold that money in a currency you undoubtedly believe will appreciate in value.

Whatever it may be, you’ll find yourself moving money between your entities often enough to offer you a nice surprise on year-end filing day.

What do we mean by compliance?

Talking about compliance on this matter means having the appropriate intercompany agreements for your multi-national group. It refers to the process of ensuring that a multinational company's intercompany transactions between its various subsidiaries or divisions in different countries comply with the relevant tax laws and regulations.

A global organisation for world trade, known as the OECD, has Transfer Pricing Guidelines that go into more detail on this. These guidelines provide direction on how to value cross-border transactions for tax purposes between related companies, using a principle called "arm's length".

In a nutshell, abiding by the arm’s length protocol means you’re trading between your own entities as if they are unrelated companies. When you buy or sell between your own entities, each must take into consideration the tax laws in their respective jurisdictions.

Governments have this in place to prevent companies from moving profits out of the country and dodging taxes.

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What are the risks of non-compliance?

In certain jurisdictions, corporate groups may be fined or receive a penalty for not providing intercompany agreements on request. An auditor will use any discrepancies in your accounts to justify further investigation into your business, resulting in a rather lengthy and costly investigation.

As a remedy to your lack of documentation, local tax authorities may taken it upon themselves to recategorise your transactions in a way you never intended. This could increase your tax bill.

And speaking of tax bills… how about double taxation? If you move revenue made by one entity to another entity without the right documents, the first will have to pay tax on that revenue while the other has to pay tax on the money that it receives (also considered revenue).

Examples of non-compliant transfers

Let’s presume your US-based parent company sends money to its foreign subsidiary to fund its operations. It records the transaction as a loan in its books. However, if no credit assessment has been made or your company cannot demonstrate the loans are contracted at arm’s length, as per the OECD guidelines, this would be non-compliant

Say you’re an Indian company that opens up a US-based entity to sell to American customers. If you’re generating revenue in America using intellectual property (IP) owned by the Indian company and sending that revenue back to India without a services agreement between the two, transfer of IP and revenue could be deemed non-compliant, both by US and Indian tax authorities.

If an entity cannot demonstrate a legal right to sell the services of another entity through a services agreement, it cannot legally sell that IP.

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How you can become compliant

The first thing to do is speak with your accountant. Check they understand your intercompany transactions and have correctly accounted for them in your company accounts. Bare in mind that most accountants are not international tax experts and will usually have experience only with local tax laws.

You may want to talk to a lawyer and ask them to draft you intercompany agreements. Note, lawyers are super expensive, often charging over $30K for one function. Often, they are not experienced with the requirements and specific needs of international businesses.

Alternatively, speak with a tax consultant. They are experts in their field but tend to work with large corporate multinationals with big teams — with a rate to match. An initial consultation can cost thousands just to start.

We prefer you speak with us, rebank. We work exclusively with global startups. We streamline the process from start to finish, generate the docs you need to stay compliant and work with your accountant to make the correct filings. All while keeping you focused on what you do best.

Samir Moussa
Software Engineer, rebank

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