Loan agreement

What it means

A loan is a contract under which the lender hands over money or other fungible things to the borrower, who undertakes to return things of the same kind, possibly with interest. It is governed by the Civil Code and can even be agreed orally, although in practice written form is essential.

A loan differs from credit under the Commercial Code mainly in that credit relates only to money, requires written form and is usually provided by banks and financial institutions. With a loan the money changes hands directly; with credit the lender undertakes to provide money on request.

In business, loans most often arise between a shareholder and their company, between group companies and between a company and an employee. These are relationships between related parties, so the rules on arm’s-length terms apply.

How it works in practice

When a shareholder lends to their own company, we prepare a written agreement stating the amount, maturity and interest rate. Interest is an expense for the company but deductible only within the thin capitalisation and transfer pricing rules. For the shareholder, interest is taxable income.

A loan from the company to a shareholder or director is more sensitive. If it lacks a market rate, a real maturity and a reason, the tax office may treat it as a hidden profit distribution. We recommend using it only exceptionally and always with a written agreement and repayment schedule.

An interest-free loan to an employee may be non-cash income equal to the interest saved. For benefits we therefore consider whether another form of support, such as a contribution from the social fund, would be better.

What to watch out for

A loan handed over in cash is hard to prove and, for larger amounts, may breach the cash payment limit. The money should always go by bank transfer with a clear reference, so it can later be shown to be a loan and not income.

An unpaid shareholder loan sitting on the balance sheet for years can cause complications in a liquidation or sale. If the shareholder does not expect repayment, we consider converting it into a capital contribution outside share capital or offsetting it against a contribution.