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) .
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. 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).
- Conti-Brown P. 2012, p. 435-437
- OECD 2017, p. 285-287
- Kausar A., Lee E., Lim C.Y., Walker M. 2014, p. 260-278
- 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