payment of Advance by Subsidiary Company to Holding Company

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KPB (Querist)
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26 July 2009 Is there any restriction on the subsidiary company for giving interest free Advance against supply of goods to its holding company..? if yes then is there any time period under which this advance should be recovered..?

CA Devanshi Gandhi (Ajani)

CA Devanshi Gandhi (Ajani) (Expert)
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26 July 2009 clear ur question what do u mean by interest advance??

KPB

KPB (Querist)
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26 July 2009 My Question is - Can a Subsidiary Company can give advance to its holding company against supply of goods..? If yes than is it possible that the advance can be recovered over a period of five years against the supply of goods by the holding company..? Does it require any pre-board approval or not..

Aashok Kumar Sharma online

Aashok Kumar Sharma

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09 August 2024 Yes, a subsidiary company can give an advance to its holding company against the supply of goods, but there are specific considerations and compliance requirements involved. Here’s a detailed overview of how this arrangement works and what approvals may be needed:

### **1. Giving Advance to Holding Company:**

**Permissibility:**
- **Advance Payments**: A subsidiary can advance funds to its holding company, particularly if there is an agreement in place for the supply of goods or services. This is a common practice in intercompany transactions.

**Compliance Considerations:**
- **Transfer Pricing**: Ensure that the transaction complies with transfer pricing regulations. Advances and transactions between related entities must be conducted at arm’s length, and pricing should reflect market conditions.
- **Documentation**: Proper documentation should be maintained, including a clear agreement outlining the terms of the advance, the purpose, and the repayment schedule.

### **2. Repayment Over Five Years:**

**Repayment Terms:**
- **Long-Term Advances**: Repayment over a period of five years is possible if it is specified in the agreement between the subsidiary and the holding company. The terms of the repayment, including the schedule and any interest, should be clearly documented.
- **Interest**: If the advance is interest-free or if interest rates are not at arm’s length, it might have tax implications. Ensure that any interest charged is in line with market rates and complies with transfer pricing regulations.

**Accounting Treatment:**
- **Advance Recording**: The advance should be recorded as a receivable in the subsidiary’s books. The repayment schedule should be monitored to ensure proper accounting.
- **Repayment Tracking**: Regularly track and record repayments as they occur to maintain accurate financial records.

### **3. Approval and Corporate Governance:**

**Board Approval:**
- **Board Approval**: According to the Companies Act, 2013, certain transactions with related parties require board approval. Specifically, any significant advance or long-term arrangement with a related party (such as a holding company) should be approved by the board of directors.
- **Resolution**: Ensure that a board resolution is passed authorizing the advance and documenting the terms of the transaction.

**Regulatory Compliance:**
- **Companies Act, 2013**: Under Section 188 of the Companies Act, 2013, transactions with related parties require approval by the board and, in some cases, the shareholders. Ensure compliance with these provisions.
- **Disclosure**: Disclose related party transactions in the financial statements as per the disclosure requirements of the accounting standards and regulatory guidelines.

### **4. Practical Steps:**

1. **Draft Agreement**: Prepare a formal agreement outlining the advance, the purpose, the repayment terms, and any interest to be charged.
2. **Board Approval**: Obtain approval from the board of directors of the subsidiary company for the advance and repayment terms.
3. **Transfer Pricing Compliance**: Ensure that the terms of the advance and repayment comply with transfer pricing regulations.
4. **Accounting Records**: Maintain accurate accounting records of the advance, repayments, and any interest charged.
5. **Disclosure**: Ensure proper disclosure of related party transactions in the financial statements.

### **Summary:**

- **Advance**: A subsidiary can give an advance to its holding company against the supply of goods.
- **Repayment**: Advances can be recovered over a period of five years, with terms clearly specified in the agreement.
- **Approval**: Board approval is generally required for significant transactions with related parties, including advances.
- **Compliance**: Ensure compliance with transfer pricing regulations, accounting standards, and disclosure requirements.

By following these steps, you can ensure that the advance arrangement between the subsidiary and holding company is properly documented and compliant with regulatory requirements.

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