Shareholder loans are common, but they can have tax implications
In practice, it is quite common for a shareholder to lend money to their company or for related companies to provide financing to one another.
At first glance, the arrangement appears straightforward.
The funds are transferred, a loan agreement is prepared and an interest rate is determined.
However, transactions between related parties are also subject to specific tax considerations.
Slovenia’s Ministry of Finance regularly publishes information relevant to determining the recognised interest rate for transactions between related parties.
Why does the interest rate matter?
If related companies were able to determine interest rates completely freely, interest payments could potentially be used to shift part of the profit from one entity to another.
For this reason, tax legislation pays particular attention to transactions between related parties.
The terms of a loan should therefore be properly documented and defensible from a tax perspective.
What should a properly documented loan include?
A loan arrangement should generally clearly specify at least:
the amount of the loan, date of transfer, repayment period, interest rate, method of calculating interest and repayment terms.
Both the principal amount and accrued interest must also be properly recorded in the accounting records.
Particular attention should be given to loans between related companies, loans between a company and its shareholder, and cross-border financing arrangements within groups of related companies.
What about an interest-free loan?
The fact that a loan is interest-free does not automatically mean that there are no tax considerations.
Where related parties are involved, the specific relationship, tax treatment and circumstances under which the financing was provided should always be reviewed.
It is therefore much better to consider the tax implications before the loan agreement is signed and the funds are transferred, rather than discovering potential issues when preparing the annual tax return.
👉 K2A advises: If a shareholder finances their company or related companies lend money to one another, the arrangement should be properly documented both contractually and in the accounting records. Proper documentation can significantly reduce unnecessary complications during a potential tax audit.