Caution with shareholder loans between the LTD and shareholders.

• Corporate, Company Law
• SME

Shareholder loans are common in many companies. It can be an active loan (a credit balance of the company) or a passive loan (a debt of the company). Both lending and borrowing can be problematic. It does not matter how the loans are named in the company’s balance sheet. Loans to shareholders are treated in the same way as loans to persons related to shareholders, such as spouses or children.

Loans receivable

In the case of loans by the company to its shareholders, the prohibition of the return of deposits and so-called simulated loans must be observed. The prohibition of the return of contributions prohibits the shareholder from repaying the paid-up share capital. If a company grants a shareholder a loan at non-market conditions (low interest rate, very long maturity, no collateral), this may constitute a violation of this requirement. If the prohibition is violated, the loan agreement is null and void and the shareholder must pay back the paid-out (share) capital.

The market-compliant design of the loan is particularly important from a tax law perspective. In the absence of market conditions, the tax authority may qualify the loan as notional and classify it as a hidden profit distribution. A fictitious loan is certainly present if repayment is not planned from the outset. In this case, the shareholder must pay tax on the loan as dividend income. In addition, there is the withholding tax, which in the worst case scenario cannot be reclaimed.

Passive loans

In the case of loans from the shareholder to the company, the main factors to be considered are the amount of the interest rate and the amount of the debt component.

Loans on the liabilities side do not have to bear interest. If they bear interest, the interest rate published annually by the tax administration may not be exceeded. However, one is not automatically on the safe side with the interest rates of the tax administration. In fact, in Circular No 6 of 6 June 1997, the tax administration issued maximum values for borrowed capital. If these values are exceeded, any shareholder loans are regarded as “hidden equity”. Since equity capital may not bear interest, any resulting interest payments are regarded as hidden profit distributions. This can be expensive, especially because of the strict withholding tax practice mentioned above.