Loans between partners and the company: Accounting and treatment
Posted: Wed Dec 18, 2024 6:08 am
Find out what you need to know before agreeing to loans between a company and one or more of its partners.
It is advisable to seek good advice before lending or receiving money from a partner or a subsidiary.
These operations can have many fiscal and accounting repercussions, in addition to financial ones.
Loans between a company and its partners are common. In addition, sometimes the company is the lender and the partner the borrower, and other times it may be the other way around.
In any case, these transactions may be classified as related-party transactions within the meaning of Article 18 of the Corporate Tax Act . Therefore, given these and czechia email list other implications, it is necessary to pay attention to the specific documentation, even if the amount is not high.
Download your FREE copy of the “Basic Kit for Keeping Your Accounting Up to Date”
Documentation of partner-company loans
Any loan that is formalised, whether from the partners to the company or vice versa, should be reflected in a written contract. Failure to do so may have consequences. As the company is a merchant for the purposes of the Commercial Code, the loan will be deemed commercial. Among other aspects, if it is not agreed in writing, according to article 314 of the Commercial Code, this will imply that no interest will be accrued.
Good loan documentation helps prevent conflicts between partners and the company and ensures that the accounting and tax consequences are as intended.
In the written form, you could make a private contract recorded in a document. However, a public deed can provide legal security and prevent conflicts. In addition, it may be essential for registration in a registry, as in the case of a mortgage guarantee.
Start of marked textTWEET IT! Is the company going to receive a loan from one of the partners? Write down everything you need to take into account!End of marked text
Property transfers and documented legal acts
Regarding the tax on property transfers , we can find several situations:
If the lender is a businessman in the exercise of his activity (the company itself, for example), article 7.5 of the consolidated text of the tax law declares the operation as not subject to tax .
In the event that the lender is a partner, he should not be acting in a purely private capacity. Otherwise, when the partner is a mere non-professional private investor , the partner's loan to the company would be subject to property transfers .
Therefore, in most cases, the loan transaction will not be subject to property transfers. However, in those cases where it is not subject to property transfers, it may be subject to documented legal acts . For it to be taxed under this modality, several conditions must be met at the same time:
We are dealing with the first copy of a deed or notarial act. Therefore, if we are talking about a private contract, it would not be subject either.
The object must be money or a valuable item . This requirement is met for loans.
Contain acts that can be registered in certain registers. The most common case is to guarantee the loan with a mortgage.
That the transaction is not taxed in property transfers . This, as we mentioned, is usually common in loans between partner and company.
That it is not taxed by inheritances and donations .
Valuation and taxation of loans according to market
In direct taxation, both for the company and the partner (whether in personal income tax or in companies), the rules of article 18 of the Corporate Tax Law must be followed. According to this rule, a market valuation must be made if the partner's participation exceeds 25% or if there are other cases of special relationship between partner and company.
Taxation of interest
In addition to the possible valuation at market value, which occurs if there is a link, there are two other aspects of great importance in the taxation of interest :
The borrower, as payer, is obliged to practice the withholding . To do so, he/she will use forms 123 and 193.
In addition, the borrower must take into account the limits on the deductibility of interest in Article 16 of the Corporate Income Tax Law .
How is the loan recorded?
There is no universal rule . It could be accounted for like any other loan, but there is a very varied case law and many considerations must be taken into account, such as:
The link . In the annual accounts, it could appear in items referring to group companies, multi-group companies or associates. In this sense, when the participation is not excessively large, the granting of a loan may be an indicator that there is a significant influence and that, therefore, the company should be classified as an associate.
Remuneration . It is not unusual for it to be above or below market rates, or even to be interest-free . In general, this can lead to, among other consequences, an increase in the company's equity, which benefits from better conditions than those of the market.
The existence of a special structure or circumstances in the loan . It may, for example, be subject to some condition, be linked to a joint venture involving both companies, be linked to some derivative financial instrument, etc.
Solvency . In principle, in order to try to ensure it, it may be necessary to include guarantees in the transaction that must be recorded. In addition, subsequently, impairments in the value of the loan may appear as a result of probable or actual, temporary or definitive non-payments .
The reality of the operation . Even if we classify it as a loan, in some situations, its economic background may be different. In any case, in accounting, the substance must prevail over the form.
As you can see, loans between a company and a partner can become complex operations. Therefore, it is highly recommended that you have good financial, tax, business and accounting advice and tools such as Sage 50 that put in order all the data you need to make the best decisions.
It is advisable to seek good advice before lending or receiving money from a partner or a subsidiary.
These operations can have many fiscal and accounting repercussions, in addition to financial ones.
Loans between a company and its partners are common. In addition, sometimes the company is the lender and the partner the borrower, and other times it may be the other way around.
In any case, these transactions may be classified as related-party transactions within the meaning of Article 18 of the Corporate Tax Act . Therefore, given these and czechia email list other implications, it is necessary to pay attention to the specific documentation, even if the amount is not high.
Download your FREE copy of the “Basic Kit for Keeping Your Accounting Up to Date”
Documentation of partner-company loans
Any loan that is formalised, whether from the partners to the company or vice versa, should be reflected in a written contract. Failure to do so may have consequences. As the company is a merchant for the purposes of the Commercial Code, the loan will be deemed commercial. Among other aspects, if it is not agreed in writing, according to article 314 of the Commercial Code, this will imply that no interest will be accrued.
Good loan documentation helps prevent conflicts between partners and the company and ensures that the accounting and tax consequences are as intended.
In the written form, you could make a private contract recorded in a document. However, a public deed can provide legal security and prevent conflicts. In addition, it may be essential for registration in a registry, as in the case of a mortgage guarantee.
Start of marked textTWEET IT! Is the company going to receive a loan from one of the partners? Write down everything you need to take into account!End of marked text
Property transfers and documented legal acts
Regarding the tax on property transfers , we can find several situations:
If the lender is a businessman in the exercise of his activity (the company itself, for example), article 7.5 of the consolidated text of the tax law declares the operation as not subject to tax .
In the event that the lender is a partner, he should not be acting in a purely private capacity. Otherwise, when the partner is a mere non-professional private investor , the partner's loan to the company would be subject to property transfers .
Therefore, in most cases, the loan transaction will not be subject to property transfers. However, in those cases where it is not subject to property transfers, it may be subject to documented legal acts . For it to be taxed under this modality, several conditions must be met at the same time:
We are dealing with the first copy of a deed or notarial act. Therefore, if we are talking about a private contract, it would not be subject either.
The object must be money or a valuable item . This requirement is met for loans.
Contain acts that can be registered in certain registers. The most common case is to guarantee the loan with a mortgage.
That the transaction is not taxed in property transfers . This, as we mentioned, is usually common in loans between partner and company.
That it is not taxed by inheritances and donations .
Valuation and taxation of loans according to market
In direct taxation, both for the company and the partner (whether in personal income tax or in companies), the rules of article 18 of the Corporate Tax Law must be followed. According to this rule, a market valuation must be made if the partner's participation exceeds 25% or if there are other cases of special relationship between partner and company.
Taxation of interest
In addition to the possible valuation at market value, which occurs if there is a link, there are two other aspects of great importance in the taxation of interest :
The borrower, as payer, is obliged to practice the withholding . To do so, he/she will use forms 123 and 193.
In addition, the borrower must take into account the limits on the deductibility of interest in Article 16 of the Corporate Income Tax Law .
How is the loan recorded?
There is no universal rule . It could be accounted for like any other loan, but there is a very varied case law and many considerations must be taken into account, such as:
The link . In the annual accounts, it could appear in items referring to group companies, multi-group companies or associates. In this sense, when the participation is not excessively large, the granting of a loan may be an indicator that there is a significant influence and that, therefore, the company should be classified as an associate.
Remuneration . It is not unusual for it to be above or below market rates, or even to be interest-free . In general, this can lead to, among other consequences, an increase in the company's equity, which benefits from better conditions than those of the market.
The existence of a special structure or circumstances in the loan . It may, for example, be subject to some condition, be linked to a joint venture involving both companies, be linked to some derivative financial instrument, etc.
Solvency . In principle, in order to try to ensure it, it may be necessary to include guarantees in the transaction that must be recorded. In addition, subsequently, impairments in the value of the loan may appear as a result of probable or actual, temporary or definitive non-payments .
The reality of the operation . Even if we classify it as a loan, in some situations, its economic background may be different. In any case, in accounting, the substance must prevail over the form.
As you can see, loans between a company and a partner can become complex operations. Therefore, it is highly recommended that you have good financial, tax, business and accounting advice and tools such as Sage 50 that put in order all the data you need to make the best decisions.