Applying the Arm’s Length Principle to Related Party Financial Transactions in 2026

Insights • Applying the Arm’s Length Principle to Related Party Financial Transactions in 2026

Applying the Arm’s Length Principle to Related Party Financial Transactions in 2026

Singapore taxpayers entering into financial arrangements with related parties must ensure compliance with the arm’s length principle. This includes transactions such as cash pooling, hedging, financial guarantees, captive insurance, and related party loans.

Application to Financial Transactions

All related party financial transactions must be accurately delineated with a functional analysis, using the 3-step approach:

Identify the actual transaction.
Conduct a functional analysis.
Apply an arm’s length transfer pricing method to determine pricing or remuneration.

Related Party Loans

Domestic Loans Entered into Prior to 1 Jan 2025

If the lender and borrower are both Singapore taxpayers and the lender is not in the business of borrowing and lending: IRAS will restrict the interest deduction as a proxy for the arm's length principle.
If the lender is in the business of borrowing and lending (e.g., banks, finance centres): The interest rate must be determined based on the arm's length principle.

Domestic Loans Entered into On or After 1 Jan 2025

If neither party is in the business of borrowing and lending: Taxpayers may apply the IRAS indicative margin or determine the interest rate using the arm’s length principle.
New in 2026: To ease compliance, IRAS will not make Section 34D transfer pricing adjustments for such loans.
If either party is in the business of borrowing and lending: The interest rate must be determined using the arm’s length principle.

Cross-Border Loans

Regardless of whether either party is in the business of borrowing and lending, the interest rate must be determined using the arm’s length principle.
If the loan does not exceed S$15 million, the IRAS indicative margin may be applied.

Summary Tables

Table 1: Related Party Domestic Loans (Before 1 Jan 2025)

Lender Status	Application
Not in borrowing/lending business	Restrict interest deduction
In borrowing/lending business	Apply arm’s length principle

Table 2: Related Party Domestic Loans (On or After 1 Jan 2025)

Party Status	Application
Neither in borrowing/lending	May apply indicative margin or arm’s length principle. No Section 34D adjustment
Either/both in borrowing/lending	Apply arm’s length principle

Table 3: Related Party Cross-Border Loans

Loan Value	Application
Up to S$15M	May apply indicative margin or arm’s length principle
Above S$15M	Apply arm’s length principle

Documentation Requirements

Where the IRAS indicative margin is not applied, or not applicable, taxpayers must ensure:

An arm's length interest rate is used.
Transfer pricing documentation is prepared if required under Section 34F of the Income Tax Act 1947.

By following this framework, taxpayers can ensure their financial transactions with related parties are compliant, well-supported, and risk-managed under IRAS’ expectations for 2026.

Let's Talk

Need Asia and Global Transfer Pricing experts? Contact us to discuss your transfer pricing and multinational tax compliance requirements.