Intercompany loans without charging interest expense

I think GAAP doesn't care (except for treatment of exchange gains or losses - see FASB 52 for difference in treatment of revaluation between LT and ST intercompany balances.) All inter-company so eliminated for consolidation.

Your issue is going to be tax driven. US tax could say you should be imputing income. Foreign tax could say unless you have documentation, you can't deduct interest expense. You could end up with income taxed, but deduction disallowed. Also could have the loan re-characterized as a capital contribution by tax authorities, with implications when you try to pull funds back out - repayment of capital could be subject to backup withholding, etc.

Best to discuss with your international tax advisors, they are the ones most likely to be concerned that these loans are properly documented.

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We have wholly owned subsidiaries both in the states and oversees and we do not charge interest on the loans. Our auditors have never questioned it.

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US tax law requires interest be charged to your foreign subs. This position does not depend upon whether it is an actual loan or a long term balance in an intercompany account. When you are audited, the US tax you would have paid if you charged interest will be levied by the IRS. There is no doubt. The difference at that point will be that it may no longer be deductible in the foreign sub. Most companies do seek to minimize the interest rate and this has survived audits.

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Hi Daniel,
You will have to refer to your country's Transfer Pricing Regulations. Usually an interest free loan transaction between parent and foreign subsidiary (Associate Enterprise) will be subjected to an adjustment for notional interest for the purpose of tax computation of the lending entity.
The tax officer may take a position that such interest free loan transactions is designed to evade local income tax and resulting into shifting of profits of your corporate group from the USA to a country outside US.
It is, therefore, advisable to charge fair interest rest on such loan transaction.

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First, need to remember that from any foreign location it is easier to put money in than taking money out.
Second, think about using intercompany receivables and payables terms to move money out of a location without triggering other issues. Do not change terms very often and document the business reason for the change.
Third, also consider alternatives such as a letter of awareness, minimum capital guarantees, even intercompany volume guarantees, etc.
Fourth, the principle for intercompany loans has to be to do it at "arms-length terms". In other words, charge each other the some amount that a third part would charge. Otherwise someone is getting an intercompany subsidy.(read next point)
Fifth, may need to overlay the tax consequences. One answer might be to minimize or maximize interest charged to the other party in which case your MIS should capture this and adjust it. If your business is not borrowing and lending money the interest charged intercompany might have some flexibility in terms of nominal rates.
Sixth, be aware of local regulations as in some case the adverse tax consequences of not doing so can be very large. For instance a loan might be assessed by some tax authority as a "deemed" dividend.
Seventh, need to identify, measure and monitor the cross-border risk you start running with the transaction (cross-border risk defined as the risk of nationalization, expropiation, convertibility and transferability). There are books written in each of those.
Eighth, need to establish a process that reviews the situation on a regular basis as many will try to game the system for business unit profits.

Lastly, take a holistic view and make sure it makes sense from a business and corporate perspective.

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