Loan for use

What it means

A loan for use is a contract under which the lender lets the borrower use an item free of charge for a time, such as a car, premises, a machine or a laptop. It is governed by the Civil Code and differs from a lease agreement precisely in that no payment is made for the use.

The borrower may use the item only for the agreed or usual purpose and must return it at the end in a condition reflecting normal wear. The borrower is liable for damage caused to it and may not pass it on to anyone else without the lender's consent.

Loans for use are common between related parties, for example when a shareholder lets the company use their car for free or when the company lets a shareholder or employee use its assets. It is precisely in such cases that a loan for use can have tax consequences the parties often overlook.

How it works in practice

If a company uses a shareholder's car free of charge, it may under certain conditions deduct running costs such as fuel, provided it can show they relate to the business. It cannot claim depreciation, however, because the car is not its asset.

Conversely, if the company lets a shareholder or employee use its assets for private purposes free of charge, this is generally taxable benefit in kind for the recipient. For a shareholder, the tax authority may also treat it as a hidden profit distribution.

Between related parties, transfer pricing rules apply, requiring prices to match those between independent parties. Free use may therefore lead to the tax base being adjusted by a market rent.

What to watch out for

For a VAT payer, letting assets be used free of charge for private purposes may constitute a gratuitous supply of services on which VAT must be paid if input VAT was deducted when the asset was acquired. The VAT consequences should be assessed before entering into a loan for use.

A loan for use is best made in writing, setting out the purpose, duration, liability for damage, who pays routine maintenance and insurance, and the terms of return. A written contract also makes it easier to justify expenses in a tax audit.