Legalisation of owner-occupier loans

As of 1 December 2016, the Danish Parliament has adopted the bill legalising illegal capital owners' loans. In the future, this amendment to the law will make certain loans and collateral to shareholders and management members legal under company law.

The amendment will enter into force for loans and collateral granted on or after 1 January 2017. Under certain conditions, the Act makes it possible to legalise illegal owner-occupier loans in accordance with the previously applicable rules, which were granted before the entry into force of the new law. The Company shall decide, at the latest, at the next Annual General Meeting after 31 December 2016, to maintain the loan, provided that the following conditions are met for a legitimate loan.

In addition, the Company must be able to prove to the Danish Business Authority that the loan or collateral meets the conditions at the latest by the deadline for submission of the first annual report to be submitted after 31 December 2016.

Conditions for a legal equity owner loan and collateral

Before a capital company can provide a legal loan and collateral, the following company law conditions must be met:

• The loan, including accompanying taxes, must be included in the company's free reserves at the latest approved annual accounts. In addition, the loan must be granted under normal market conditions.
• An amount corresponding to the loan shall be committed to a special equity reserve known as the 'Loan and Collateral Reserve'.
• Loans or collateral may only be granted after the presentation of the company's first annual report.
• The decision on loans or collateral must be taken either at the general meeting or by the central management body of the company, after authorization from the general meeting. The conditions must be fulfilled at the time of the decision.
• The loan may not amount to a greater amount than that proposed and subscribed by the central management body.

The conditions are reminiscent of the current conditions for the distribution of extraordinary dividends, which require the company to have sufficient capital capacity at all times.

If a legitimate owners' loan fulfils the above conditions, the total annual lending shall be recorded as a special reserve, referred to as the 'reserve for loans and collateral', under the own funds. This should help make it clear from the company's annual report that the company has used free reserves to grant a capital owner loan. By legalising illegal owner-occupier loans, it will no longer entail additional information in the auditor's endorsement in the annual report.

The adopted bill does not change the fact that disbursement of the equity owner loan becomes taxable with the majority shareholder. Taxation such as dividends or wages to owners of capital will therefore still be subject to taxation under the current rules, even if the owner-occupier loan is legalised by company law.  

Equity owners' loans to other equity holders and the company's management (without controlling influence)

The change in the law also means that loans can be granted to the company's management, personal equity owners and personal portfolio owners in the future — without any determining influence. That is, this group is not taxed on equity loans.

Taxation of legal equity loans (with determining influence)

Lawful equity owner loans do not have to be repaid to the company, but they must be taxed as either wages or ordinary dividends. The owner of the capital may also choose to distribute the loan as an extraordinary dividend, but this requires that an extraordinary general meeting be held and that the dividend be decided and approved at the extraordinary general meeting.

Scheme and examples

In the table below, we have set out how a legal and illegal equity loan should be treated in tax and company law. The form shows that the equity owner loan is illegal if the conditions of a legal capital owner loan are not met. According to the Companies Act, the loan must be repaid and the owner of the capital must be taxed. If the owner of the capital fails to repay the loan and related taxes before the company's tax return deadline, there will be another illegal equity loan corresponding to the tax liability. Thus, the owner of the capital is subject to double taxation. There are a number of repair options to avoid refunds and double taxation, but this assumes that the company meets the conditions to make use of these options.

We have listed below some examples to clarify how equity owners' loans are taxed in the different examples:

Example 1 — Repayment of loan

The owner of the capital has borrowed DKK 100 from the company's account and repays the entire amount to the company. In company law, the loan has been repaid, but in tax law it has consequences for the owner of the capital, since he must be taxed on the gross amount of the 100 thousand SEK as salary. It is assumed that the salary is reported and the tax paid before the company's tax return deadline for the income year. If the owner of the capital does not, an additional capital owner loan occurs at the withholding tax. If we assume that the capital owner's drawdown percentage after the advance registration at the time of reporting is 52%, there will be two shareholder loans, one of DKK 100 and a new one of DKK 52.

Example 2 — The loan is not repaid

We assume that this is a legitimate equity owner loan which is not repaid. The owner of the capital can choose taxation such as wages or dividends. In the event that the loan is taxed as wages, no loan remains under company law. The owner of the capital only has to be taxed as a salary on the 100 thousand kr. Net capital owner receives 48 thousand SEK in this example.

If the loan is taxed as dividends, capital owners must pay 27% to the company as dividend tax. Capital owners are subsequently taxed with a possible additional tax of 15%. The loan must be recognized as a reserve for loans and collateral on the Company's equity.

It is assumed that wages or dividends are reported to SKAT before the company's tax return deadline for the income year.

Example 3 — Multiple withdrawals within one year to be repaid

When we have a loan cycle where a controlling shareholder borrows DKK 100 which is repaid, and then borrows DKK 100 which is repaid again, for example 3 times within the year of the company's income, there is no loan at the end of the year under company law, but in tax law the owner must be taxed on a total of DKK 300. If a capital owner has used this model to finance private investments, it can have major tax consequences for the owner of the capital, since the owner of the capital has to be taxed on amounts that have all been repaid to the company.

When the company fulfils the conditions for a legal capital owner loan, it is crucial for taxation whether or not the owner of the capital has a controlling influence. If it turns out that the owner of the capital has a controlling influence, the loan is taxed according to the previous rules, but if the owner of the capital does not have a controlling influence, the loan amount is tax-free.

In companies with several shareholders, the owner of the capital must be aware that in a company where the ownership share is 75%/25%, problems may arise if the equity loan is chosen to be taxed as a dividend, because the owners with the smallest share must also receive distributed dividends. One problem may be whether there is sufficient capital readiness in the company.

Good advice

If the owner of the capital is aware in time that a distribution is needed, we recommend that the owner of the capital consider a decision on extraordinary dividends rather than accounting for legal shareholder loans. Whereas if the company has an illegal capital owner loan, i.e. the conditions for a legal equity loan are not met, we recommend that the company immediately hold an extraordinary general meeting without notice, in which it is decided — if possible, to distribute the claim as an extraordinary dividend or that the loan be paid as a salary. In doing so, the owner of the capital avoids repaying the amount to the company.

If one conducts business in one's own company, the lowest taxation will be achieved by choosing wages up to the top tax threshold and then maximum dividends at 27%. Taxing dividends at 42% is slightly lower than salary with top tax, which is why further extractions from own company would usually be most appropriate as dividends. However, for people living in municipalities with very low municipal taxes, it may be more advantageous to make deductions in the form of wages. We draw your attention to the fact that the payment of wages presupposes that there is an employment relationship and that the total remuneration of the owner of the capital does not exceed what can be considered usual for the work performed.

Contact SkatteInform

We provide qualified answers to your tax questions. If you are interested in assistance regarding equity loans, we are happy to provide you with a fee upon further agreement.

Call us by phone 33 32 10 10

Send an email at info@skatteinform.dk,

or visit us at www.SkatteInform.com

SkatteInform Statsautoriseret Revisionpartnersselskap

Frederiksborggade 54 1. tv

1360 Copenhagen K

Source:

Control signal on shareholder loans — SKM2014.825.SKAT

Audit & Accounting - RR.2017.02.0054

Disclaimer

‍The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.

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