Financial assistance

What it means

Financial assistance is the Slovak accounting term for money a company lends or borrows outside the banking system, most often within a group, from a shareholder or another related party. Legally it is usually a loan or credit under the Commercial Code, and in the accounts it is shown on separate accounts from bank loans.

It is split into short-term and long-term by maturity, and into received and provided. Assistance received is a liability that increases borrowed funds; assistance provided is a receivable or financial asset. For money from a shareholder the term shareholder loan is also common.

Interest is not compulsory, but between related parties its level is judged under transfer pricing rules: it should match what independent parties would agree. Interest-free assistance between group companies may lead to an adjustment of the tax base.

How it works in practice

We recommend backing every such arrangement with a written agreement stating the amount, maturity, interest and repayment. Without one it is hard to prove in an audit that it is a loan and not a hidden profit distribution, contribution or gift, which have entirely different tax consequences.

For assistance received from a related party, the thin capitalisation rules must be watched: interest above the EBITDA-based limit is not deductible. For assistance provided, we check whether the interest is at market level and whether an impairment allowance is needed if the borrower is in financial difficulty.

Assistance between a shareholder and the company is booked within settlements with shareholders or on loan accounts, depending on its nature. In the financial statements we show it in the balance sheet by maturity and disclose the terms in the notes if the amount is material or the counterparty is related.

What to watch out for

A common mistake is “assistance” to a shareholder that is never repaid. If a shareholder takes money out of the company without an agreement or intention to repay, the tax authorities may treat it as a disguised profit distribution and tax it as a dividend or other income.

In a company in crisis, shareholder loans are watched closely. If the company repays a shareholder while it cannot pay other creditors, the payment may be challenged, and in bankruptcy such shareholder claims rank behind the other creditors.