(Last update of this blog: 20.2.2021)
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.
Can a shareholder loan be legal?
According to the Companies Act, then a shareholder loan can be legal.
It requires that certain formalities are in order.
However, if the loan is issued to a shareholder (a physical person, not a company), then it will be taxed regardless of being legal or not.
So, in reality, it makes not much sense to consider a legal shareholder loan, even when formalities are done concerning the Companies Act.
Intercompany account with the shareholder in the accounting
Suppose the shareholder has an intercompany account in the company accounting. In that case, that shows what payments the shareholder has done on behalf of the company previously. If new shareholder loans can be offset and contained herein so that the company always owes money to the shareholder and not the other way around, then the shareholder will not be taxed on payments done to him.
If an intercompany account should tip the balance so that all of a sudden, the shareholder will owe money to the company, then a new shareholder loan exists and will also be taxed.
It is important when using this method to handle payments between the shareholder and the company that the intercompany account is updated ongoing in the accounting.
Otherwise, payments might be considered as separate loans and taxed individually.
Using a brand new account in the accounting for booking a new payment to the shareholder will create a new loan from a tax perspective, regardless of having other accounts in the accounting that would show that the company owes money to the shareholder.
Shareholder loans and money laundering
Shareholder loans that are considered illegal are classified as money laundering from 1.1.2021.
Meaning that all accountants 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 a shareholder loan in the accounting or annual report for 2020?
If a shareholder loan is discovered in 2021 when preparing the accounting and/or annual report for 2020, then there are two things to consider:
Firstly, the loan needs to be removed by either repaying it or offsetting other amounts (f.ex. offsetting a net salary or a net dividend with the loan) with added interests following the Companies Act.
Secondly, the loan needs to be taxed following the tax rules.
Furthermore, the shareholder loan and the subsequent repair here-off should also be shown correctly in the 2020 annual report.
How is shareholder loans regulated in Denmark?
When preparing the accounting or annual report, then sometimes accountants find loans to the shareholder.
Shareholder loans can be very 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 loan is considered illegal, then the Companies Act stipulates that the loan must be repaid with interests at once.
If a legal loan is issued to a shareholder (a physical person, not a company), then it will be taxed regardless of it being legal.
In reality, it makes not much sense to consider issuing a legal shareholder loan, even when formalities are done correctly concerning the Companies Act.
Shareholder loans and the tax rules (LL § 16 E)
Regardless of whether a shareholder loan is considered legal or not concerning the Companies Act, the shareholder will most often be taxed on all shareholder loans unless these are repaired correctly.
When a shareholder is a company, then the tax rules relating to shareholder loans (LL § 16 E) do not apply.
These types of shareholder loans, in general, will not result in taxation.
Only when a shareholder is a physical person, then taxation becomes relevant.
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 only on the loan payment to the shareholder, which needs to be taxed as either a salary or a dividend.
So the tax office does not acknowledge the presence of a loan from a tax perspective.
It is the payment to the shareholder that is taxed.
How to repair a shareholder loan?
A shareholder loan can often be repaired by converting the loan into either a dividend or salary – but ONLY, the whole process is handled correctly.
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.
Once the shareholder loan has been repaid, without repairing it, then regardless of the loan having been offset with the payment and now showing a zero balance, the shareholder will still be taxed on the loan’s original transfer.
So the shareholder will have to get an additional salary or dividend to pay the tax on the loan, thus giving a very high tax on the original transfer of the shareholder loan.
Therefore repaying a shareholder loan is a horrible idea.
So make sure you consult your accountant first.
Repairing a shareholder loan using the payroll method
In general, a reclassification from an illegal shareholder loan to a salary can be done like this:
Firstly a written agreement between the shareholder and the company needs to be drafted, showing that the additional salary (f.ex. a bonus) has been agreed upon.
The payment that the shareholder received is considered a gross salary.
Using the current tax percentage for the shareholder as stated on the personal income tax self-assessment for the month where 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/hers 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.
The interest that the shareholder pays is considered a taxable income in the company.
The shareholder cannot deduct the interest on his/her private 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 “Tilgodehaveander fra selskabsdeltagere og ledelse” in Danish (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.
Repairing a shareholder loan using the dividend method
First of all, the company needs to investigate if the financial report gives the option of distributing a dividend.
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, then the shareholder’s payment is considered a gross dividend.
The dividend can be distributed at an ordinary or an extraordinary general assembly.
However, it is important that the distribution of the dividend clearly relates to the original transfer to avoid being also taxed on this dividend separately.
Some reference to this would therefore be an excellent idea.
Always make sure to have adequate documentation in place.
The company will need to 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, then the company will pay this to the tax office.
What if the shareholder does not have funds to repay the tax to the company?
If the shareholder does not have sufficient funds to repay the tax to the company, then either additional salary or additional dividend can be added during the repaid so that the salary or dividend can contain the total due tax.
If it is not possible to do this either, then the management and shareholder can be reported to the police.
And risk fines and/or imprisonment later.
What to include in the annual report
In the example where a shareholder loan from 2020 is discovered in 2021, then depending on how it is repaired, then the accountant should include the following in the annual report for 2020:
The shareholder loan is still a loan on 31.12.2020 since it was not repaired end of the year.
Therefore the shareholder loan should be shown on the account called “Tilgodehavender hos selskab og ledelse”.
Furthermore, interests (10,05% p.a.) from the date of receiving the shareholder loan and until 31.12.2020 should also be accrued.
The company will still have the tax deduction for the salary during 2020, even though the salary will be shown only as a cost in the annual report 2021 (if the salary method is used to repair the shareholder loan).
The tax, therefore, also needs to be accrued correctly in the annual report, since there will be a difference between 2020 and 2021 when looking at the annual report (loan shown in 2020, salary cost is shown in 2021) and the tax calculation (tax deduction in 2020 as the payment year).
Explanatory notes need to be included as well in the annual report:
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