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Intercompany agreements: services or money between related companies need to be in writing
- Aug 11
- 11 min read
When a holding company provides services or lends money to its subsidiary or lets it use a brand or a piece of software, that transaction does not govern itself. Without a contract, it has no legal basis and separate regulators have good reasons to be interested in the gap.
🏛️ Corporate governance | 🧾 Tax & transfer pricing | ⚖️ Director liability | 📋 LHDN compliance |
🏢 What is a controlled company in Malaysia?
Under the Companies Act 2016, a company is a subsidiary when another company holds more than half of its issued share capital, controls the majority of its board, or can appoint or remove a majority of its directors. That other company is called the parent company.
In everyday terms: if one company owns enough of another to call the shots, the two companies are related, and every transaction between them is a related-party transaction.
This matters because the law treats those transactions differently from ordinary commercial dealing. A holding company buying services from an independent supplier at whatever price they negotiate is unremarkable. The same holding company buying services from its own subsidiary or providing services to it is a related-party transaction.
These transactions may be subject to disclosure requirements, shareholder approval thresholds, arm's length pricing rules, and director liability exposure.
THE KEY POINT Related-party transactions between controlled companies are not illegal. Malaysian law recognises that they create efficiency, reduce duplication, and allow groups to share resources. The concern is that they are fair, documented, disclosed, and independently justifiable. Intercompany agreements are how you demonstrate all four. |
⚠️The problems that arise without written agreements
When money or services move between related companies without a written agreement, three separate problems tend to materialise, at the worst possible moment.
⚠️ PROBLEM 1 · TAX AUDIT LHDN questions the transaction The Inland Revenue Board (LHDN) reviews your group accounts and notices management fees flowing from the subsidiary to the holding company. There is no management services agreement. The fees are not benchmarked to market rates. There is no contemporaneous transfer pricing documentation. Under section 140A of the Income Tax Act 1967 and the Malaysian Transfer Pricing Guidelines 2024, LHDN adjusts the pricing, assesses additional tax, and imposes a surcharge of between 35% and 100% on the additional tax assessed. A fine of up to RM100,000 per year of assessment follows for missing documentation. |
⚠️ PROBLEM 2 · DIRECTOR LIABILITY A director is personally sued A minority shareholder or creditor challenges an intercompany transaction such as a loan from the subsidiary to the holding company with no repayment terms, or a service arrangement where one entity is clearly getting a worse deal than the other. Under s. 213 of the Companies Act 2016 the directors of both entities owe fiduciary duties to their respective companies. A director who approved an undocumented transaction that damaged the company cannot easily defend themselves without the paper trail showing what was agreed, why, and on what commercial basis. |
⚠️ PROBLEM 3 · INVESTOR DUE DILIGENCE The deal stalls or falls apart A potential investor conducts due diligence. The data room shows intercompany receivables with no supporting loan agreements, management fee income with no management services contract, and IP being used by subsidiaries without any licence. The investor reprices the deal to reflect the undocumented risk, requires the agreements to be put in place under deal-time pressure (expensive and rushed), or walks away. |
📋 What Malaysian law actually requires
The requirements come from three separate sources: company law, tax law, and (for listed companies) the Bursa Malaysia Listing Requirements. Even companies that are not listed are subject to the first two. Section 222 does not apply to private companies.
Provision | What it covers | Obligation | Penalty for breach | |
S 197 CompaniesAct 2016 | Definition of 'person connected' with a director. Also sets out who is treated as connected to a director — including spouse, children, body corporates in which the director has a controlling interest. | Determines the scope of who counts as a related party for the purposes of sections 221, 222, 225, 228, and 229. | No direct penalty, but misidentifying a connected person may mean related-party obligations are breached | |
S 213 CompaniesAct 2016 | Director's duties — acting in best interests of company. | Director must not prefer interests of a related party over the company. Intercompany transactions must be commercially justified and properly authorised. |
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S 221 CompaniesAct 2016 | Director's duty to declare interest in any contract or proposed contract with the company. | Director must declare the nature of their interest at a board meeting as soon as practicable after the relevant facts become known — and the company secretary must record the declaration in the minutes. |
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S 222 CompaniesAct 2016 | Prohibition on voting by an interested director. | A director who is interested in a contract or proposed contract must not vote on it at a board meeting — and must not be counted in the quorum for that vote — unless an exception under s222(2) applies |
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S 225 CompaniesAct 2016 | Prohibition of loans to persons connected with directors. | A company must not make a loan to any person connected with a director of the company or its holding company, nor enter into any guarantee or provide any security in connection with such a loan, unless a specific exception applies (e.g. loan to a subsidiary or holding company, etc.) |
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S 228 Companies Act 2016 | Non-cash asset transactions with directors or substantial shareholders. | Shareholder approval required if transaction value exceeds RM50,000 (and 10% of net assets) or RM250,000 |
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S 229 Companis Act 2016 | Exceptions to section 228. | Section 228 does not apply to transactions in the ordinary course of business, (…) or between wholly-owned subsidiaries and their parent. But the transaction must be documented to demonstrate the exception applies. | No penalty— but failing to document the transaction properly means the s 228 exemption cannot be established. | |
S 140A Income Tax Act 1967 + MTPG 2024 | Transfer pricing transactions between related parties. | Must be priced at arm's length and contemporaneous documentation is required. | Surcharge 35–100% on additional tax; fines RM20,000–RM100,000 per YA |
SUMMARY OF THE MOST RELEVANT OBLIGATIONS Section 221 requires a director to declare any direct or indirect interest in a contract or proposed contract with the company and section 222 then prevents that director from voting on the matter except to be counted in the quorum.
Under section 221(3) a director is not deemed to be interested in a contract merely because it is for the benefit of a company that is related to their company under section 7. Dual board membership alone does not automatically trigger the declaration requirement for routine intragroup transactions. What does trigger it is a real, material personal interest in the specific contract where a director personally benefits from the terms, or where a connected person as defined in section 197 stands to gain.
The practical guidance from the Court of Appeal in Delta-Pelita Sebakong Sdn Bhd v. Wong Hou Lianq & Ors And Other Appeals [2020] MLRAU 41 is that where there is any doubt, the director should disclose. The decision depends on how the business is organised, the subject-matter, role played by the director and overall contractual terms. |
📄 The agreements every controlled group needs
The specific documents depend on what transactions actually occur between entities in the group. These are some that appear most frequently in Malaysian corporate groups of all sizes, from family-owned businesses to listed conglomerates. The relevant applicable tax principles are set out in the Malaysian Transfer Pricing Guidelines 2024.
⚙️ Management services agreement Holding company → subsidiary Covers management, finance, HR, IT, legal, and administrative services provided by the holding company to its subsidiaries. Sets out what is provided, how costs are allocated, and what fee is charged. Key clause: Cost-plus pricing or a % markup on direct costs for low-value services (LHDN safe harbour for routine intra-group services). | 💰 Intercompany loan agreement Any direction within the group Covers money lent between related entities such as for: working capital, project funding, or asset acquisition. Sets out the principal, interest rate, repayment schedule, and what happens on default.
Key clause: Interest at market rate; risk of LHDN reclassifying as equity if rate is below arm's length. | 💡 IP licence agreement IP holding company → operating subsidiary Covers the right to use a brand, trademark, software, proprietary system, or customer database owned by one entity in the group. Sets out the scope, royalty rate, territory, and sublicensing rights.
Key clause: Royalty rate benchmarked to comparable arm's length transactions; documented valuation basis. | 🤝 Cost sharing agreement Between subsidiaries sharing activities Used when two or more entities in a group jointly fund or develop something. It works for R&D, marketing, or shared systems. It needs to allocate the costs and benefits between them on a documented basis.
Key clause: Each entity contributes in proportion to its reasonably anticipated benefit from the shared activity. |
🔄 Secondment agreement When employees move between entities Covers the terms on which an employee of one company works for another company in the group. It details which entity bears the employment costs, what happens to employment rights, and what notice applies if the secondment ends.
Key clause: Employer of record remains original entity unless the agreement expressly transfers employment. Distinction critical for Industrial Relations Act purposes. | 🏢 Property / tenancy agreement Property company → operating companies Where one entity owns the group's premises and others occupy them, there must be a written tenancy at market rent. An undocumented arrangement exposes both the landlord entity (unrecorded income) and the tenant entity (unrecorded expense) to tax adjustments. Key clause: Rent supported by independent valuation or comparable transactions. May have to be registered in accordance with National, Sarawak or Sabah land codes. | 📊 Dividend and distribution policy Holding company level Not technically an intercompany agreement, but the board should have a documented dividend policy governing when and how profits flow through the group. Undocumented distributions can be challenged as not in the subsidiary's best interests.
Key matters: Board resolution at each subsidiary level and must mee the solvency test under s 131 CA 2016 before any dividend is declared. | 🔍 Transfer pricing documentation All related-party transactions Not a contract between entities but a document that must be prepared for each related-party transaction, explaining why the pricing is arm's length. Required before the income tax return is filed for the relevant year of assessment. Private entities likely benefit from an exemption.
Key matters: Prepared contemporaneously and not retrospectively. They must be kept on file for at least 7 years from the date of the return. |
🎯 What 'arm's length' actually means
The arm's length principle is required by both the Companies Act 2016 for related-party dealings and by the transfer pricing rules under section 140A of the Income Tax Act 1967. It requires that the price charged between related companies should be the same as the price that two unrelated parties, dealing freely with each other, would have agreed.
In practice, this means that the fee or price in the intercompany agreement needs to be supported by evidence of what the market would charge for the same thing:
For management services, that might be benchmarked to what an independent management consultancy would charge.
For a loan, it would be benchmarked to prevailing bank rates.
For IP, it would be benchmarked to comparable royalty arrangements in the sector.
You do not need to prove the price is identical to market. You need to show it is consistent with a range of market prices that independent parties would accept.
An intercompany agreement that simply states a fee without any documented basis for that fee does not meet this standard and an LHDN auditor asking for the basis of the pricing is not a question you want to answer without a prepared answer.
🏛️ The governance angle (It is not just about tax)
Intercompany agreements are not just a tax compliance exercise. They are the foundation of genuine corporate governance within a group. Lack of intercompany agreements is one of the clearest signs that a group's governance is cosmetic rather than real.
When a director sits on the boards of both the holding company and a subsidiary, and a transaction occurs between those entities, that director has a potential conflict of interest.
Under section 221 of the Companies Act 2016, they must declare that interest at a board meeting as soon as practicable after the relevant facts come to their knowledge. Under section 222, they must not vote on the matter. Without a contract, there is nothing to declare, no approval process to follow, and no record of the basis on which the transaction was approved. When something goes wrong, and in any group of companies, something eventually does, the absence of that paper trail can be the difference between a director who can demonstrate they acted in the best interests and one who cannot.
DIRECTOR LIABILITY AND MISSING DOCUMENTATION There is no reported Malaysian case that deals squarely with a director being held personally liable specifically because intercompany agreements between controlled companies were absent. Most cases usually fall under breaches of fiduciary duties.
But cases establish the broader principle: a director who cannot produce documentation authorising payments or transactions, whether to himself or to related entities, is in a weak position. In CIMB Bank Bhd v Jaring Communications Sdn Bhd [2016] MLJU 920, the court found that payments made by a director to himself were unauthorised and unlawful because there was no documentary evidence of board or shareholder approval. The documentation requirement is not a technical nicety. The Court said:
[38] In what could probably be considered the most glaring facet of this already brazen situation is that nor could it be shown that there was even any contractual document governing the relationship between the Company and Utusan Printcorp in respect of the purported investment or short term loan that any responsible board of directors should rightfully be concerned about before committing the company they serve into any business and credit arrangements.
Proper documents is the only way a director can demonstrate they acted in the best interests of the company under s. 213 of the Companies Act 2016 rather than in their own interest or the interest. An undocumented intercompany transaction is not itself a breach of duty, but it removes the director's primary defence when one is alleged. |
✅ Practical checklist for controlled companies
If your business involves two or more related entities, this is the starting point for reviewing your documentation:
📄 | Is there for every transaction between related entities a written agreement in place before the transaction occurs? |
💰 | Are intercompany loans documented with a loan agreement, repayment schedule, and default provisions and is the interest rate benchmarked to prevailing market rates supported by LHDN and other evidence? |
⚙️ | Is there a management services agreement for services between group entities and does it cover all services the holding company provides, apply the correct pricing methodology, and reference the LHDN safe harbour where applicable for low-value routine services? |
💡 | Is all IP used by operating entities either owned by them or licensed under a written agreement and does it include a royalty rate that is commercially justifiable and benchmarked? |
📊 | Are transfer pricing documents prepared before the tax return is filed and not after the audit notice arrives? |
🏛️ | Is there a board resolution for every material related-party transaction, with any interested directors declaring their interest and abstaining? |
🔄 | Are secondment arrangements for staff working across group entities documented, with a clear record of which entity bears the employment costs? |
📋 | Have all agreements been reviewed and updated when the group structure changes, new entities are added, or the transactions materially change? |
This article was generated using AI but reviewed by a human. However, it for general information only and does not constitute legal or tax advice. Specific professional advice should be sought for your circumstances. References to Malaysian legislation and guidelines are current as at the date of this article. For advice on intercompany agreements, related-party transaction governance, or transfer pricing documentation, please contact a professional adviser.
