If you are the main shareholder in a company that is or is at risk of getting into financial trouble, it pays to know the rules for deductions and taxation on loan losses. This is because your tax position as the main shareholder is relatively poor.
Here you can learn more about how you as the main shareholder will be taxed if you plan to lend money to your own company, and what you can do to avoid taxation of interest - e.g. via price premiums or convertible bonds.
Big difference between losses on shares and losses on loans
In principle, individuals can deduct losses on money lending, but this does not apply to losses on loans to related parties and to a company where you are the main shareholder.
However, individuals have deductions for losses on unlisted shares, and the tax value of a loss can be offset against tax on other income, such as salary income tax.
For a principal shareholder, the difference between the tax treatment of losses on shares and losses on loans is crucial if the company is or will be in financial difficulties. The most optimal thing you can do as a principal shareholder in such a situation is:
- Supporting your own company by injecting new capital or
- to convert your claim (receivable) in the company into capital before the company's previous equity is lost, so that the new shares have an acquisition value equal to the value of the claim.
Tax challenges when lending
It is not only in a loss situation that the main shareholders' tax position is poor. It also applies during the term of the loan. A principal shareholder cannot give an interest-free loan to his own company without it having tax consequences.
The courts have repeatedly ruled that the tax authorities are entitled to demand that such a loan be remunerated with a market interest rate, even if the company is not immediately able to pay the interest.
Although the main shareholder has been taxed on the interest on an ongoing basis, the Tax Agency does not recognize a carryback or deduction for losses on the part of the receivable corresponding to the taxed interest.
Premium and convertible bonds
The problem of taxation of interest can be countered by establishing the loan with a premium instead of interest, making the loan interest-free against a condition that the loan must instead be redeemed at a premium. Such a premium is taxable in the same way as interest, but taxation is deferred until the time the loan is repaid and there is no taxation in bankruptcy. It must not be an annual premium, as the Tax Agency normally equates this with interest.
It is also possible to grant the company a loan in the form of a so-called "convertible bond". On the one hand, it can be redeemed as a regular loan if the company gets back on its feet. On the other hand, it entitles the company to a deduction if it ends up making a loss, because convertible bonds are treated like shares. The company law rules for the convertible debt must be complied with before the Tax Agency recognizes it.
Debt conversion
When a principal shareholder converts his claim (receivable) in his own company into shares, the shares are considered to have been acquired at the value of the claim. This is based on the company's equity calculated at current market value at the time of the debt conversion.
If the debt conversion takes place after the company has lost its previous equity, the new shares are considered for tax purposes to have been acquired at the value of the receivable at the time of the debt conversion. This means that a later loss on the shares is reduced, possibly down to zero DKK.
The recommendation is therefore that a principal shareholder converts his receivable into shares before the company has lost its capital, as principal shareholders will then have a deduction for losses on shares if the company goes bankrupt against expectations.
Written loan document
It is recommended that a written loan document is prepared in the case of an actual loan and an overall framework agreement describing the loan conditions in the case of a current account.
