Agreements between the company and
the main shareholder should always be in writing.
Time and again, major shareholders find themselves in a bind because they cannot document agreements and transactions they enter into with their company. This can be costly. Written agreements are a useful precaution.
A major shareholder and a company are two independent entities that can enter into agreements with each other. Typically, there is an employment agreement that describes the salary and terms of the major shareholder’s employment in the company, but the agreements can also concern the transfer of assets such as real estate or cars.
Written language is wise, but not a requirement
Previously, the Danish Companies Act required that all agreements between a major shareholder and his company be in writing. However, this has changed. Today, oral agreements are in principle just as valid as written agreements. The Danish Companies Act merely requires that the agreements be documented (Section 127(2)).
It is obvious that written agreements are significantly easier to document than oral agreements, and that this increases the possibility of proving the content of an agreement. In other words, the evidence is weakened if the agreement is not in writing.
Arm’s length conditions are important for major shareholders
In tax law in particular, we often encounter challenges when there are no written agreements. All funds and assets transferred from a company to a major shareholder must be taxed, and all agreements must therefore be concluded on so-called ‘arm’s length terms’.
This means that the agreements must be made on the same terms and at the same prices as if they were made between independent parties. Purchases and sales of assets must be valued at market prices. If the agreement is not made on market terms, the tax authorities can disregard the agreement.
The burden of proof thus falls back on the main shareholder and the company, and this may result in taxation that is higher than it should be.
Save documentation for valuation
Agreements regarding, for example, the transfer of properties require writing in order to correctly register ownership, but we recommend that written agreements be entered into for all transfers of assets between a major shareholder and a company.
Also remember to save the documentation for the valuation of the asset for each transfer.
Loan agreement
If major shareholders lend money to their company, it is recommended that a written loan document be prepared, if it is an actual loan, and an overall framework agreement that describes the loan conditions in the form of an ongoing interim settlement.
Please note that a major shareholder cannot borrow money from his company for tax reasons. Such loans are taxed by the major shareholder either as salary or dividend.
Mere information
If you are looking for advice on loans to your company or agreements between your company and you in general, you are always welcome to contact inforevision’s tax department. You can read more about us here .
