LOAN TO A COMPANY OWNER: BETTER WITH OR WITHOUT INTEREST?

From a tax calculation perspective, what is the least burdensome way to structure a loan for a company owner?

It may seem strange, but structuring a loan with a 0% interest rate is less advantageous than with interest rates greater than zero. How can that be?

The fact is that, according to legislation, income tax must now be paid on interest-free loans from a company.

Calculating loan interest is one thing; actually paying it is quite another. Here, it is advisable to draft the Loan Agreement so that the interest is payable when the entire loan is repaid.

It must be remembered that in transactions with related parties, there are significant restrictions on such term extensions – a loan issued in 2018 or later must not exceed 12 months, and it would be best to repay it at the end of the year to issue a new one at the beginning of the next year – practically creating a credit line. If this principle is not observed, then so-called “dividend-equivalent payments” will arise, and Corporate Income Tax will have to be paid on the loan amount. Entrepreneurs often forget about this.

P.S. Next time, we will find out how it is advisable to cooperate with the SRS during its audit.