Loans between companies and directors require special attention
In business practice, company directors or shareholders sometimes lend money to their companies to finance daily operations.
The opposite situation is also possible, where a company provides a loan to its director or shareholder.
Although such transactions are generally permitted when the relevant legal requirements are satisfied, inadequate documentation or incorrectly determined interest rates may create tax risks.
It is important that loans are properly documented, recorded in the company’s accounts and repaid according to the agreed terms.
Why is a written loan agreement important?
When arranging a loan between a company and its director, it is advisable to prepare a written agreement.
The agreement should clearly specify the loan amount, payment date, repayment deadline, interest rate, repayment schedule and any applicable security.
The agreement must reflect the actual nature of the transaction.
If a company transfers money to its director without an appropriate legal basis, questions may arise regarding the true nature of the payment.
What about interest rates?
Loans between related parties are subject to specific tax rules concerning interest income and deductible interest expenses.
Slovenian tax legislation includes provisions governing recognised interest rates for transactions between related parties.
Therefore, interest rates should not be determined arbitrarily without considering the applicable tax rules.
What happens if the director does not repay the loan?
Particular tax risks may arise when a company grants a loan to its director or shareholder that is not genuinely repaid.
In such circumstances, the tax authorities may examine whether the transaction represents a genuine loan or another form of payment.
Depending on the circumstances, the transaction may also raise questions concerning a hidden distribution of profits.
K2A advises
👉 Always document loans between a company and its director properly. Review the interest rate, repayment terms and correct accounting treatment.
At K2A Accounting, we assist companies with the accounting and tax treatment of loans and other related-party transactions.