What is a shareholder loan?
Shareholder loans can be anything from payments done using the company credit card to pay for a private cost on behalf of a shareholder to salary advances paid to a shareholder when a payslip has not yet been made, dividends that are distributed without complying with the Companies Act or actual loans issued to the shareholder.
The reason shareholder loans are interesting from a tax perspective is that sometimes these shareholder loans are taxed when issued to a majority shareholder.
Whether the loan is illegal or legal is irrelevant in this case.
Loans are considered illegal when they do not comply with the Companies Act.
Can a shareholder loan be legal?
According to the Companies Act, a shareholder loan can be legal.
It requires that certain formalities are in order.
However, suppose a loan is issued to a majority shareholder owning more than 50% of the company (a physical person, not a company).
In that case, the loan could be taxed regardless of being legal or not.
So, in reality, it makes not much sense from a tax perspective to consider a legal shareholder loan to a majority shareholder, even when formalities are done concerning the Companies Act.
Minority shareholders owning less than 50% of a company are generally not taxed on shareholder loans.
An intercompany account with a shareholder in the accounting
If an intercompany account should tip the balance so that suddenly, a shareholder owes money to the company, then a new shareholder loan exists.
It is essential for majority shareholders when using this method to handle payments between the majority shareholder and the company that the intercompany account is updated ongoing in the accounting. Otherwise, each new payment might be considered a new separate shareholder loan which will be taxed for majority shareholders.
Also, using a new account in the accounting for booking a new payment to a majority shareholder will create a new loan from a tax perspective, regardless of having other accounts in the accounting that would show that the company as a whole owes money to the majority shareholder.
All shareholders that have received a shareholder loan will need to pay a 10,05% p.a. interest on any intercompany account balance owed to the company and repay any balance owed to the company at once when the balance is considered an illegal shareholder loan.
Shareholder loans and money laundering
Shareholder loans that are considered illegal are classified as money laundering in Denmark.
All accountants and auditors in Denmark will have to report illegal shareholder loans to the government as money laundering.
This can naturally also trigger an inspection afterwards.
What should the accountant do when discovering an illegal shareholder loan to a shareholder in the accounting for 2023 or in the annual report for 2022?
If an illegal shareholder loan to a shareholder is discovered in 2023 when preparing the accounting for 2023 and or in the annual report for 2022, there are two things to consider:
Firstly, the loan needs to be settled by either repaying it or offsetting other amounts (f.ex. offsetting a net salary or a net dividend with the loan) with 10,05% p.a. interests following the rules in the Companies Act.
Secondly, if the shareholder is a majority shareholder, the loan must be taxed following the tax rules.
Furthermore, the shareholder loan and the subsequent repair here-off should also be shown correctly in the annual report for 2022.
How are shareholder loans regulated in Denmark?
When preparing the accounting or an annual report, accountants sometimes find loans to a shareholder.
Shareholder loans can be complicated to handle since Denmark has two different sets of legislation:
The Companies Act (§210-212)
Link to the Company Act legislation relating to shareholder loans:
The tax rules (LL § 16 E)
Links to the tax legislation relating to shareholder loans:
Shareholder loans and the Companies Act (§210-212)
In Denmark, a shareholder loan is legal only if certain formalities are in order.
If a shareholder loan is considered illegal, the Companies Act stipulates that the loan must be repaid with 10,05% p.a. interest at once.
This is relevant for both minority and majority shareholders.
Shareholder loans and tax rules (LL § 16 E)
Regardless of whether a shareholder loan is considered legal concerning the Companies Act, a majority shareholder will be double taxed on all shareholder loans unless these are repaired correctly.
When a shareholder is a company, the tax rules relating to shareholder loans (LL § 16 E) do not apply.
Also, the tax rules do not apply to minority shareholders (that own 50% or less of the company).
Taxation becomes relevant when a shareholder is a physical person and owns more than 50% of the company (called a majority shareholder).
In the eyes of the tax authorities, no shareholder loan exists at any point in time, even if there is a shareholder loan according to the Companies Act.
The tax office focuses on the payments made to a majority shareholder, which needs to be taxed as either a salary or a dividend.
Since a shareholder loan still needs to be repaid according to the Companies Act, it will result in double taxation.
Can a shareholder not just repay a shareholder loan?
A minority shareholder can repay a shareholder loan with 10,05% p.a. interest or repair the loan using the methods described below.
A majority shareholder should never repay a shareholder loan but always seek to repair the shareholder loan to avoid double taxation.
How to repair a shareholder loan?
A shareholder loan can be repaired by converting the shareholder loan to either a dividend or salary, but only if the whole process is handled correctly.
Repairing a shareholder loan by converting it to a dividend or salary can help avoid double taxation for a majority shareholder.
It is needed to decide on a case-to-case basis what to do.
The most important thing to notice here is:
Never repay a shareholder loan if you are a majority shareholder! Once the shareholder loan has been repaid without repairing it, regardless of the shareholder loan having been offset with the payment and now showing a zero balance, a majority shareholder will still be taxed on the original transfer of the shareholder loan. The majority shareholder will then have to get an additional salary or dividend to pay the tax and interest on the shareholder loan, thus giving double taxation on the original transfer of the shareholder loan. Therefore repaying a shareholder loan is a horrible idea if you are a majority shareholder.
Repairing a shareholder loan using the payroll method
In general, repairing a shareholder loan to a shareholder using the payroll method can be done like this:
Firstly a written agreement between the shareholder and the company must be drafted, showing that the additional salary (f.ex. a bonus) has been agreed upon.
This naturally requires that the shareholder is employed in the company already.
The payroll method cannot be used if the shareholder is not employed.
The payment of the loan that the shareholder received is considered a gross salary in this method.
Using the current tax percentage for the shareholder as stated on the personal income tax self-assessment for the month the loan was received, the gross salary is converted into a net amount.
The calculated personal income tax from the converted shareholder loan into salary is then declared together with the gross salary on e-Indkomst (SKAT Erhverv).
Furthermore, the shareholder will need to pay the income tax to the company from his/her private account + 10,05% (0,05% national bank rate + 8% recommended rate + 2% penalty rate) p.a. interest rate on the tax amount since receiving the payment.
The company will then pay the income tax to the tax office once shown on “Skattekontoen”.
The shareholder must transfer the personal income tax and the interest from the private bank account to the company BEFORE the tax is due on Skattekontoen. Otherwise, this amount will be considered a new illegal loan, resulting in new charged interest.
The interest the shareholder pays is considered a taxable income in the company.
The shareholder cannot deduct the interest on his/her personal tax return.
If the shareholder loan is discovered after the fiscal year has ended, it has to be shown in the annual report.
The field used in the annual report is called “Tilgodehavender fra selskabsdeltagere og ledelse” in Danish (in English: “Loans to shareholders and management”).
The personal income tax calculated from the shareholder loan has to be shown as “Eventualforpligtelser” (“liabilities”).
An explanatory note stating that an illegal loan has occurred in the fiscal year should be added also.
This method can be used by both minority and majority shareholders to repay a shareholder loan.
Repairing a shareholder loan using the dividend method
First, the company needs to investigate if the financial report allows dividends distribution to the shareholders.
It will require that the company has reserves available from previous years’ profits.
Also, it is worth noticing that distributing dividends during the first fiscal is not possible.
If it is possible to distribute a dividend, the payment to the shareholder is considered a gross dividend.
The dividend can be distributed at an ordinary or an extraordinary general assembly.
For a majority shareholder, the distribution of the dividend must relate to the original transfer of the shareholder loan to avoid being also taxed on both the dividend separately as well as the shareholder loan. Some reference to the original transfer would be an excellent idea. Always make sure to have adequate documentation in place.
The company must declare the gross dividend and a 27% dividend tax.
You can read more about dividends here:
The shareholder will then need to pay the 27% dividend tax to the company from his/her private account + a 10,05% (0,05% national bank rate + 8% recommended rate + 2% penalty rate) p.a. interest rate calculated from the dividend tax from the date of receiving the payment and until the date of repayment of dividend tax,
Once the dividend tax is visible as debt on Skattekontoen, the company will pay this to the tax office.
This method can be used by both minority and majority shareholders to repay a shareholder loan.
What to include in the annual report
In the example where a shareholder loan from 2022 is discovered in 2023, then depending on how it is repaired, then the accountant should include the following in the annual report for 2022:
The shareholder loan remains on 31.12.2022 since it was not repaired at the end of the year.
Therefore the shareholder loan should be shown on the asset account called “Tilgodehavender hos selskab og ledelse”.
Furthermore, interest (10,05% p.a.) from receiving the shareholder loan until 31.12.2022 should also be accrued.
The company will have the tax deduction for the salary in 2022, even though the salary will be shown as a cost in the annual report for 2023 (if the salary method is used to repair the shareholder loan).
The tax, therefore, also needs to be accrued correctly in the annual report for 2022 since there will be a difference between 2022 and 2023 when looking at the annual report (loan is shown in 2022, salary cost is shown in 2023) and the tax calculation (tax deduction in 2022 as the payment year).
Explanatory notes need to be included as well in the annual report for 2022:
A note stating that a shareholder loan has been present during the year has to be included in the annual report.
If the shareholder is a director as well, then a separate note is required showing:
Loans to the shareholder
Terms and interest
Repayments during the year
Loans obtained and repaid during the year
Losses on loans
(Last update of this blog: 15.2.2023)