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Shareholder loans

What is a shareholder loan?

If a shareholder of a company grants a loan to ‘his’ company, this must, in principle, be recognised for tax purposes under the principle of separation, provided that the loan agreement satisfies the arm’s length test. If, for example, interest paid is too high, the excess amount constitutes a hidden distribution of profits. If the interest is too low, it is assumed to be a contribution in kind. To the extent that the interest is too low, the transaction may even be subject to corporation tax. This tax consideration must, for the time being, be distinguished from the question of whether, in a specific case, the claim arising from a shareholder loan is treated as subordinated in the event of the company’s insolvency or is otherwise subject to a repayment moratorium during the company’s financial crisis. However, the granting of a loan whilst the company is in crisis may be classified as disguised equity. As a result, the interest on the debt paid by the company is classified as a profit distribution and is therefore not tax-deductible.

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