Why a loan from a shareholder in Denmark is a very bad idea
Shareholder loans are often quite complicated to handle, as there are two different pieces of legislation in Denmark - the tax laws (LL §16 E) and the Companies Act (§210-212). A shareholder loan is legal in Denmark only if certain formalities are met. If the loan is deemed illegal, the Companies Act stipulates that the loan must be repaid immediately with interest. If a loan is made to a partner - not to a company, but to an individual - it will be taxed regardless of whether it is legal.
In Denmark, shareholder loans may include, but are not limited to:
dividends paid in violation of the rules,
payments made using a company credit card to cover private expenses on behalf of a shareholder,
actual loans made to a shareholder,
salary advances made to a shareholder when a pay slip has not yet been issued.
The required formalities must be completed for a shareholder loan according to the Companies Act to be legal. In Denmark, as of January 1, 2021, illegal shareholder loans which are classified as money laundering, and therefore, must be reported to the government.
In Denmark, a shareholder will not be taxed on payments to him in case his new loans can be compensated and included in a document showing that it is the company that owes money to the shareholder, not the shareholder to the company. On the other hand, in case it is the shareholder who owes money to the company, then it is treated as a loan and taxed. To ensure that the payments are not treated as separate loans that will be taxed individually, be sure to regularly update the company's accounting. Despite having accounts in the company showing that the company owes the shareholder money, the use of a new account in the accounting to record the new payment to the shareholder will be treated as a new loan. If a shareholder's loan is discovered in 2022, at the time of the 2021 annual report, the loan must be removed, offset (according to the Companies Act) with interest on other amounts, or repaid. According to Danish tax regulations, such a loan should be both shown in the 2021 annual report and taxed.
In accordance with the Danish Companies Act, the shareholder will be taxed on all loans from the company, regardless of whether they are legal or not. The tax provisions relating to shareholder loans do not apply when the company is the shareholder, and thus such loans will not be taxed. In contrast, the loan will definitely be taxed as a dividend or salary when the shareholder is an individual. A shareholder's loan should not be repaid without first converting it into a salary or dividend, as the loan will be taxed on the transferred amount, even if the current balance is 0.
In such a case, the shareholder, in order to pay the high tax on the loan, will have to obtain additional dividends or additional remuneration. What can the company do? The company should check whether it has profit reserves from previous years and whether it can pay dividends, if so, the gross dividend can be paid at an extraordinary or annual general meeting of the company (in the first fiscal period, the payment of dividends is not possible). In order for the dividend paid not to be taxed separately, it must relate exactly to the original transfer. The company must declare the gross dividend and the 27 percent dividend tax, while the shareholder will be required to pay to the company, from his personal account, the 27 percent dividend tax plus 10.05%, or 0.05% national bank rate plus 8% recommended rate plus 2% penalty percentage rate. The company must pay the dividend tax to SKAT, which shows up as a debt on Skattekontoen.
A shareholder's illegal loan can be converted into gross remuneration, in order to do so, a written agreement (stating additional remuneration such as a bonus) must be drawn up between the company and the shareholder and the company. The gross remuneration will be converted into a net amount according to shareholders’ current percentage of tax, which was determined in the self-assessment of personal income tax for the month in which the shareholder received a loan from the company. After which, personal income tax has been calculated on the converted shareholder loan, it should be declared on e-Indkomst along with the gross salary. The shareholder will be required to pay income tax plus 10.05% from his personal account to the company, which is the 0.05% national bank rate plus the 8% recommended rate plus a 2% interest penalty. Once the tax appears on Skattekontoen, the partnership will have to pay it to SKAT. Before the tax appears on Skattekontoen, the shareholder should pay personal income tax from his personal account plus interest(which he cannot deduct in his tax return), so that the sum is not considered another illegal loan. Shareholder loans detected after the end of the tax year must be included in the annual report (field "Tilgodehavender Fra Selskabsdeltagere Og Ledelse'' - shareholder and management loans). The personal income tax calculated on the shareholder's loan should be shown as a liability (Eventualforpligtelser), a note with information about the illegal loan that occurred during the tax year must be included in the annual report.
If the 2021 shareholder's loan is discovered in 2022, the type of information that the accountant will need to contain in the 2021 annual report depends on how the loan was repaired. If it has not been repaired by the end of the year, the shareholder's loan is still seen as a loan as of Dec. 31, 2021, so it should be revealed in an account named "Receivables from the company and management." In addition, interest, 10.05%, from the day of receipt of the shareholder's loan until 31.12.2021 should be charged as well. The company still claims the right to deduct from the salary in 2021, although in the annual report for 2022 the salary will appear only as an expense, so in the annual report the tax should be calculated correctly, because looking at both the tax calculation - the tax deduction in 2021 as the year of payment, and the annual report - the loan shown in 2021 and the salary expense shown in 2022 - there will be a visible difference. The annual report should include such information as a note stating the fact of the shareholder's loan, an additional note if the shareholder is also a director, a separate note showing: shareholder's loans, losses on loans, interest, repayment terms during the year, loans received and repaid within the year.
In case the shareholder does not have sufficient funds to repay the tax to the company, additional dividends or additional remuneration can be added, which will include all the tax due, and if this is also not possible, the shareholder and the board of directors should be reported to the police.