Taxation of shareholder loans

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On September 13, 2012, the Danish Parliament adopted bill 199 A, which introduces, among other things, taxation of shareholder loans.

The purpose of the provision is to prevent shareholder loans being used as a tax-free alternative to raising taxable dividends or wages.

Thus, it is now apparent from section 16 e of the Tax Assessment Act that if a company directly or indirectly makes funds available for, provides loans or provides security for a natural person, the loan is treated in accordance with the general rules of the tax legislation on withdrawals without repayment obligation, provided that the shareholder has influence in the company.

The law means that the shareholder loan is already taxed at the time of payment. A payout will as a rule be taxed as a dividend distribution, but if the shareholder is employed by the company and the payment can be regarded as a reasonable remuneration for the work performance, taxation can instead take place as salary.

The qualification as a dividend or salary, besides taxing the borrower, has significance for the company’s deductible right. Since the granting of a loan must be treated as a tax deduction in the company without repayment obligation, the rules on the withholding of a-tax or dividend tax and on reporting to SKAT on disbursement apply.

Although civil law may continue to be an illegal shareholder loan to be repaid, cf. the Danish Companies Act, repayment of the loan will not lead to a resumption of taxation of the loan by the shareholder. That is, the shareholder ends up being taxed on a dividend / salary that the shareholder does not receive. Taxation under section 16 e of the Tax Assessment Act thus entails an element of punishment.

Image result for shareholder loansThe provision also applies to natural persons’ loans in foreign companies, irrespective of whether shareholder loans can be legal according to the rules of the company’s home country. It is therefore irrelevant whether this is a legal or illegal shareholder loan.

The new rule ultimately means that company owners will in the future avoid short-term personal features on the company’s overdraft facility, as the company owner will in future be taxed on every single move – no matter how short-term – if it cannot be regarded as part of a customary business arrangement. A usual business disposition could be, for example. be that the shareholder purchases a product / service from the company on credit, and the credit is given on market terms.

Since the law only applies to natural persons, it must be assumed that the rules do not affect loans between group-related companies. Expedition errors should also be straightened out, but the relationship has obviously not been clarified yet.