Commercial law
When a company grants a loan to a partner, it must be properly formalised and documented. It is common for companies to make loans to their partners, either to cover cash needs or as a financial transaction. However, in order for this transaction to be valid and not be considered a disguised remuneration or a distribution of profits, it is essential:
- Formalising the contract: The loan must be formalised in a written contract detailing the amount, repayment term, interest rate and repayment conditions. This documentation is essential to avoid tax problems.
- Accounting record: Both the company and the partner must properly reflect the loan in the accounts, following the rules set out in the General Accounting Plan (PGC). This ensures transparency and regulatory compliance.
Tax legislation
The tax aspects of such transactions are key, as the tax authorities are particularly vigilant in monitoring transactions between companies and their partners to avoid abuses.
- Market interest: The Inland Revenue requires that loans between partnership and partner are made at market values. This means that the loan must bear interest at a rate that is in line with market conditions. If interest is not charged or is lower than market rate, the tax authorities can impute a presumed gain to the partner and adjust the taxable income of the partnership. In order to establish a market interest rate, the legal interest rate, or the interest recently charged by a bank on a loan with the partnership, can be taken as a reference, as this would be considered an interest rate between independent parties.
- Corporate income tax: If the loan generates interest in favour of a company, the company must declare it as financial income. Also, interest paid to the shareholder may be deductible by the interest-paying company for corporate income tax purposes, provided that it is at arm’s length.
- Personal income tax of the shareholder: If the shareholder is an individual, he/she must declare the interest received as income from movable capital in his/her Personal Income Tax (IRPF). If no interest is paid, the tax authorities may charge a presumptive income, taxing the partner for the lack of repayment or the profit obtained from the loan.
Repayment period and conditions
The loan repayment term needs to be clearly stipulated in the contract. The absence of a time limit can lead to uncertainty and tax problems:
- Defined term: Clearly defining the term prevents the transaction from being considered indefinite or permanent, which could lead to tax complications.
- Form of repayment: Repayment of the loan may be in full or in part, but in either case, each payment must be reflected in the accounts of the partnership and the partner.
Tax requalification risks
One of the main risks in such transactions is that the tax authorities may recharacterise the loan as a disguised dividend or gift if the formal and tax requirements are not met:
- Covert dividends: If the repayment of the loan is not made or if it is made without interest, the tax authorities may consider that the partner has received a disguised benefit. This would have tax implications for both the partnership and the partner.
- Donations: In some cases, failure to repay the loan or the absence of interest may lead to the transaction being considered a donation, which would entail the payment of Inheritance and Gift Tax.
Debt capitalisation
If the company is unable to repay the loan, a viable option is to convert the debt into equity through a capital increase. This can strengthen the company’s financial position and avoid liquidity problems. However, this process must follow a strict legal procedure, including the amendment of the articles of association and the convening of a general meeting.
Practical recommendations
To minimise legal and fiscal risks, it is advisable:
- Having specialised advice: Since transactions between partnership and partner are subject to rigorous control by the tax authorities, it is essential to have specialised tax and legal advice in order to structure the loan correctly.
- Review and update the loan: It is important to periodically review the loan conditions and adjust them if necessary, especially if market conditions change or the company’s financial situation requires it.
- Transparency in the partnership relationship: Clear and documented communication between the company and the partner is essential to avoid conflicts and to ensure that the transaction is carried out in a legal and transparent manner.
Directors’ liability
The directors of the company are obliged to ensure compliance with all legal and tax regulations. In the event of negligence or non-compliance, they may be personally liable for the consequences.
Conclusion
The repayment of a loan between a partnership and a partner is a common transaction, but one that carries significant legal and tax responsibilities. To avoid problems with the tax authorities and possible penalties, it is essential to comply with all applicable regulations, to formalise the loan properly and to maintain clear and accurate documentation.
