A receivable on the part of a shareholder or manager with respect to the company can constitute a very attractive investment. The interest paid on this current account is in principle deductible by the company, while for the manager/shareholder it is subject to just 25% withholding tax. So what are the conditions for doing this?
In tax terms, such a receivable can provide an appealing income, with the interest subject to a tax rate of just 25% while dividends and remuneration can easily reach in excess of 50%. This makes it extremely tempting to lend as much money as possible to your company and, of course, to charge as much interest as you can. The law permits such a financing structure, but one cannot get carried away, which is why two significant limitations have been introduced.
Limitation 1: current account maximum
At the end of the financial year the sum in the current account may not, under the law, exceed the sum of (i) the fiscally paid-up capital at the conclusion of the financial year and (ii) the sum of all reserves already taxed at the start of that financial year. This means that a capital increase during the financial year would raise the maximum balance of your current account while the profit for that year may not be included. The same applies in a converse situation, where a capital decrease during the financial year shall have an immediate effect upon the maximum balance of your current account while a loss during the financial year (or the payment of a dividend that is offset against the taxed reserves) will only take effect as of the following year.
An example clarifies the issue:
For the company with the equity shown above, the current account balance at the end of the financial year cannot exceed the sum of:The fiscally paid-up capital at the end of the financial year, being €612,630The sum of the taxed reserves at the end of the previous financial year, being €24,381 + €60,000 + €3,116 Thus the balance of the current account credit for the managers/shareholders cannot exceed €700,127. This is the so-called one-on-one thin capitalisation rule, which is intended to prevent companies from being financed solely by debt and not holding any assets themselves. When your current account has a balance greater than the threshold calculated above, the interest charged to this current account will be reclassified as a dividend on a pro rata basis. Let’s say that in the above example the balance of the current account amounts to €800,000 and €40,000 in interest is awarded, then a portion of that interest will be reclassified as a dividend:
Thus, €4,993.65 of the awarded interest of the €40,000 will be fiscally considered as dividend (and the company will consequently be taxed therefore). The remainder of course is still considered to be interest.
Limitation 2: maximum interest rate
The second limitation concerns the interest rate that may be charged. In this respect the law stipulates that the interest rate for this current account cannot exceed the market rate of interest. The interest awarded over and above the market rate of interest is likewise reclassified as a dividend.
In the above case, where we received interest of €40,000 from a current account balance of €800,000, we employed an interest rate of 5%. Now let us say that the market rate of interest is 4%, then only the first 4% will be considered as interest and the remaining 1% will be reclassified as a dividend.
What is the market rate of interest?
While limitation 1 is relatively clear, very easy to calculate and does not leave room for interpretation, limitation 2 naturally causes the most issues. The taxpayer wants to receive as much interest as possible, of course, while the tax authorities will be able to collect more tax by reclassifying that interest as dividends, which means that the latter party would prefer to use the lowest possible interest rate.
We don’t have to tell you that this issue has given rise to much debate.
Comparison with the statutorily determined interest rates for current accounts with a debit balance When a company grants certain benefits to its managers (or other members of staff) for free or at a reduced rate, they become a taxable benefit in kind. In order to determine the value of such a benefit, certain benefits have been statutorily valued, including the granting of a loan to a manager at a lower or even non-existent interest rate.
In this case the law asserts that if the manager borrows money from the company (i.e. to create a current account debit balance), then in 2013 interest of at least 8.8% must be charged as a benefit in kind. This means that the law considers the value of an 8.8% interest rate on a current account as being on market terms.
View of the tax authorities
The obvious question is whether that statutory interest rate can also be employed for a current account credit balance.
The tax authorities are of the opinion that this statutory interest rate only applies to a debit balance and cannot simply be adopted when it comes to a current account credit balance. The authorities say this is not an interest rate on market terms.
In order to avoid running into problems with the taxman, it is our experience that the authorities generally consent to an interest rate set in accordance with the interest rates published on the National Bank’s website. This refers to the interest rates for current account loans to non-financial companies with a balance of less than 1 million euros. This is a specific interest rate that is listed separately on the National Bank’s website, and experience has shown us that the tax authorities agree that it is an interest rate in line with market conditions.
However, the issue was still presented to the courts, and on 6 December 2012 the court in Bergen ruled on it, stating that the fixed interest rate for the debit balance of your current account, as statutorily determined, presumes to reflect the true value of the benefit for the beneficiary. So the interest rate reflects the market interest rate. The court correctly asserts that what holds for the balance on the one hand should likewise hold for the balance on the other, so that the interest rates on market terms for a current account debit balance or credit balance can be the same.
More recently, the appeal court in Antwerp also ruled on the issue, stating on 22 April 2014 that a statutorily set interest rate for a debit balance can also serve as a guideline for a current account credit balance interest rate on market terms.
So surely this means that we can always apply the higher interest rates (8.8% for 2013)? No! The court of appeal clearly asserted in the above ruling that these interest rates can act as guidelines for current account loans but that the company must be able to demonstrate that it is effectively a current account loan.
When a current account loan remains unchanged for a lengthy period, or when a current account can be easily settled by the company and only continues to exist because it is fiscally beneficial to the manager/shareholder, it will consequently not be classified as a current account. It is more likely to be considered as an investment loan by the tax authorities (and also by the above ruling of the court of appeal), to which lower interest rates apply!
Which interest rate should be used?
This is how your company can continue to survive, pay its expenses and, as soon as it has sufficient cash, repay its current account. If this is the case, the tax authorities will have to accept an interest rate of 8.8% for 2013, with due regard for the ruling of the Antwerp appeal court. So what is characteristic of a current account loan is that it fluctuates. After all, you wouldn’t simply ignore a bank overdraft if you had the financial means to repay it.
A current account that remains unchanged over an extended period will be seen by the taxman as an investment loan, for which lower interest rates will be applicable.
As a company, the biggest risk you run is if you have a current account while there is a surplus of liquid funds available.
Let’s say that you provide a current account loan of €100,000 to your company. But your company is flush with liquid funds and has €50,000 in a checking account and €200,000 in a time deposit account. This means that the company is demonstrating that it does not immediately require that €200,000, and in reality it would make much more sense to settle the current account (at a higher interest rate) instead of investing the sum in a time deposit account at much lower interest rates.
In this case the tax authorities have already been able to successfully determine the market interest rates that are also paid on the time deposit account, and so the large portion of the current account interest will naturally be reclassified as a dividend.
But of course not every case is the same, and there could be valid reasons for keeping and maintaining a current account loan.
First and foremost, ensure that your current account does not grow to excessive proportions, bearing in mind the first limitation.
Further, set an interest rate that is in line with market conditions. If we are effectively talking about a current account that grows and shrinks on a ‘cash-need’ basis, there is no problem at all with employing the higher statutory interest rates. In fact the interest rate can be even higher if you can show that it is on market terms. Ask your bank what the interest rate would be if your company applies for a cash loan – your banker is in a perfect position to assess whether or not the interest rate is in line with market conditions, as he is intimately familiar with your position.
If the money you have made available to your company is more like an investment loan, then it is better to adjust the interest rate downwards.
In conclusion, there is a risk that the tax authorities will simply see your current account as a futures investment if the balance changes little over the years and your company clearly has enough cash to settle the current account (wholly or partially) and does not generate any profit with this money.