Shareholder loan
Shareholder loan - it is an economic event causing an increase in the liabilities of the company in the case of long-term or short-term liabilities.
In principle, it is the property of the company to which it was granted, but nevertheless, indirectly, the shareholder concerned has a business interest in financing the company with his or her loan. Very often, such a loan is subject to appropriate interest rates in order to obtain appropriate benefits (profit) for the shareholder. This form of financing is particularly common among young companies because their cash flow does not allow them to obtain financing from a bank or other entity.
In addition, they are used to generate a tax shield (by increasing tax deductible costs). In addition, it can be extended to rescue a company's financial situation (e. g. by extending the repayment or redemption period).
In tax law, shareholder loans are not only a subject of national regulations, but also of international ones. This is due to the fact that the granting of loans by shareholders allows to avoid taxation of profits (dividends) made by shareholders. By increasing the tax deductible costs (interest paid by the company on a loan received), the income earned by the company is reduced and any income is transferred to the assets of the shareholder. Thanks to this, they are able to avoid the effect of double taxation of profit (i. e. first the profit of the company is taxed and then the dividend from the distribution of this profit to shareholders) [1].
In view of the above, international rules have been introduced to counteract such practices. This is evidenced by transfer pricing, i. e. prices that would be agreed between related parties on the same basis as between unrelated parties. This means that, while not eliminating the positive aspects of shareholder lending to their companies, the states took care not to abuse tax law provisions.
Therefore, all shareholder loans should be granted on the basis of the arm's length principle. By doing so, the shareholder can easily benefit from the loan and the tax authorities can confirm that his conduct is not an artificial conduct aimed at circumventing tax law.
There are specific risks associated with the granting of the relevant shareholder loan[2]. This is, among other things, the risk of losing capital. Looking at the reasons presented in the definition for granting a loan by shareholders, one of the reasons is to rescue a company in poor financial condition. In view of the above, such a shareholder often artificially increases the share capital (without its formal increase) by granting a loan to the company and becomes a creditor of the company at the same time.
Such behavior, although it allows him to:
- balance the debt of the company,
- leaves him in a situation of insolvency (after all, he is a creditor of the company).
This has a fundamental difference, in the case of contributions to share capital, in that the loan can be sought back and the share capital is created to cover possible debts (it is therefore a non-repayable consideration covering the value of the shares in the company)[3].
- A shareholder loan occurs when a company’s shareholder loans money to the company. The loan may be in the form of cash, or it may be in the form of other assets such as stock or property. The loan is typically secured by the company’s assets, and the shareholder is typically paid interest on the loan.
- A shareholder loan can be used to capitalize a company, to purchase new assets, or to finance day-to-day operations. For example, if a company is short on cash, a shareholder loan can be used to purchase inventory or pay employees, without the need for a bank loan.
- In a private company, a shareholder loan may be used to buy out the interests of other shareholders, either in part or in full. The loan is typically secured by the assets of the company, and the loan amount is often based on a percentage of the value of the company.
- In a public company, a shareholder loan may be used to finance a large acquisition or to repurchase shares of the company’s stock. The loan is typically secured by the assets of the company, and the loan amount is often based on a percentage of the company’s current market capitalization.
A shareholder loan is a loan provided by a shareholder to the company in which they hold shares. It is a type of debt financing that can provide the company with a source of capital without having to go through a traditional lender. Some of the advantages of a shareholder loan include:
- Flexibility - Shareholder loans are often more flexible than traditional loans as the terms of repayment can be tailored to the needs of the company. This can be beneficial for companies that may have difficulty obtaining a loan from a traditional lender.
- Lower Interest Rates - Shareholder loans often have lower interest rates than traditional loans, making them more attractive to the company.
- Tax Benefits - Shareholder loans may also provide tax benefits to the company, as they can be used to offset income and reduce the company’s tax liability.
- Easier to Obtain - Shareholder loans are often easier to obtain than traditional loans. This is because the shareholder is more likely to be familiar with the company’s activities and financial situation and may be more willing to lend money than a traditional lender.
A Shareholder loan can have several limitations, including:
- The amount of money that can be loaned is limited by the amount of capital available to the company.
- Interest rates on shareholder loans are generally higher than those of other lenders.
- A shareholder loan is considered a higher-risk loan than other types of financing because there is no collateral to secure the loan.
- The lender may have more control over the company’s operations and financial decisions due to the increased debt.
- If the company is unable to repay the loan, the lender can take legal action to recoup their investment.
- Shareholder loans can also create a conflict of interest between the shareholder and the company.
- They may also be subject to certain tax implications depending on the country's regulations.
Other approaches related to Shareholder loan include:
- Equity Participation - This is a form of financial arrangement in which the shareholder contributes some of their own capital to the company in exchange for a stake in the business. This can be in the form of shares or a loan.
- Royalty Agreement - A royalty agreement is a contract between a shareholder and a company where the shareholder is paid a percentage of the company’s profits in exchange for their investment.
- Debt Financing - This is a form of financing where the shareholder provides the company with a loan to be repaid with interest at a predetermined date.
- Equity Financing - This is a form of financing where the shareholder receives equity in the company in exchange for their investment.
Shareholder loans are a form of financing where the shareholder provides the company with capital in exchange for a stake in the business. Other approaches related to shareholder loans include equity participation, royalty agreements, debt financing and equity financing.
Footnotes
| Shareholder loan — recommended articles |
| Entity theory — Equity instrument — Dissenters right — Charter capital — Distribution In Kind — Credit Facility — Ijarah — Noncovered security — External sources of finance |
References
- Conti-Brown P. (2014), Elective shareholder liability Stanford Law Review
- Kausar A., Lee E., Lim C.Y., Walker M. (2014).,Bank accounting conservatism and bank loan pricing Journal of Accounting and Public Policy
- OECD (2017)., OECD Transfer Princing Guidelines for Multinational Enerprises and Tax Administrations OECD Publishing
Author: Anna Szpakowska
