Interest-free loans granted to a shareholder by their company are not possible!

If a shareholder of a company currently needs free money, why wouldn’t they logically borrow them from their company? A cursory search of freely available Internet sources might convince someone that an approval by the General Meeting is enough, and that the interest-free loan is at home and then it will be repaid “somehow”. Mistake. Sources on the Internet are outdated.

Already from 1^st January 2021 according to the provisions of Section 40 (5) of the BCA (the “Business Corporations Act”), no business corporation may provide a shareholder or a person close to them with a gratuitous performance. Exceptions are only usual occasional gifts, donations made in a reasonable amount for a publicly beneficial purpose, performance that has satisfied a moral obligation or considerations of decency, and benefits provided by a business corporation under the law. The gratuitous performance means any performance, including monetary, i.e., both the gratuitous transfer of assets and the transfer of an item or a right to use. However, the reality in many companies does not correspond to this, and some even do not understand why they should return the loan to their company and even with interest. After all, the company is theirs...

Under what conditions can a joint-stock company or a limited liability company now provide an interest-free loan to its shareholder?

For the reason described above, a business corporation may lend its shareholder money only for consideration/interest, and at the usual interest rate, as the rules of transfer pricing apply between them as related persons (Section 23 (7) of the Income Tax Act). The interest rate must be determined as usually agreed in normal business relations between unrelated parties.

What is the penalty for a breach?

Simply put, there is a risk of compensation for damages from members of the statutory body who approved the conduct or were aware of it but did not prevent it. Namely, this is a breach of diligence of a professional manager. Due to the statutory prohibition, the shareholder always enriches themself without legal reason and the corporation is therefore entitled to a refund of the funds from the shareholder due to unjust enrichment of the shareholder (at least of the interest!). Also, if the company gets into trouble - e.g., insolvency, the insolvency administrator is perfectly clear and asks the shareholder to return the loan. The breach of rules of transfer pricing is duly remunerated also by the tax administrator. It is also necessary to point out that if the loan has not been repaid, the consequence for the borrower may be non-monetary income, which must also be taxed.

Nevertheless, the situation can be dealt with properly, even in the long-term perspective. That is, by the correct transaction setup of the company!