How to avoid illegal shareholder loans

When a company lends money to or provides security for a shareholder, joint owners, a member of the management or a person with close ties to them, it is called a shareholder loan. Because the rules apply to shareholders and joint owners, a loan from a subsidiary to the company's parent company may in some cases be an illegal shareholder loan.

Shareholder loans are also called capital owner loans because the rules apply to loans in private limited companies and other corporate structures where you do not have shares. However, the rules don't apply if the loan or security is granted by a legal entity other than a capital company.

How to take out a legal shareholder loan

For a shareholder loan to be legal, the loan must:

• Be lent by the company's unrestricted reserves
• Take place on standard market terms
• Be approved at a general meeting
• Be granted after the first annual report

The company's unrestricted reserves are, for example, transferred profits or funds that are not otherwise bound through the articles of association or legislation.

The shareholder loan being granted on market terms means that the loan is given on the same terms as a loan or security from, for example, a bank. This applies to the conditions for interest, security, and grace period, among other things.

As shareholder loans in most cases do not comply with these requirements, the Danish Business Authority automatically initiates an inspection case if they become aware that a loan has been granted or security has been provided for a company or person close to the company. Therefore, it doesn’t depend on whether the shareholder loan is legal.

What if the loan is not legal?

Suppose a shareholder loan does not comply with the conditions. In that case, it must be repaid to the company alongside an annual interest rate based on the default interest rate following the Interest Act. Additionally, the company may risk a fine due to failure to withhold and report the loan. The loan recipient may also, in some instances, risk a fine if the loan should have been taxed as A-income.

An illegal loan must be repaid immediately. The Danish Business Authority usually gives a deadline of six weeks for the company to recover the loan and document that the loan has been repaid.

IUNO's opinion

It can be challenging to assess when a loan is granted on market terms because there is no objective standard to measure by. Therefore, many people get into trouble if they have taken out a shareholder loan without researching the market first.

If you want to find out what the market terms of a loan are for you, IUNO recommends that you obtain a loan offer from a bank and review the terms that the bank offers you. In addition, it may be beneficial to seek legal advice to avoid illegal shareholder loans. With that in mind, it will be easier for you to make the loan terms from your company. It is still essential to be aware of the other three requirements, as it is not enough only to meet the standard market terms.