Why shareholder loans in Denmark are a really bad idea

Why shareholder loans in Denmark are a really bad idea

In this blog, we discuss why shareholder loans in Denmark are a really bad idea.

Shareholder loans can be anything from payments done using the company credit card to pay for a private cost on behalf of a shareholder to salary advances paid to a shareholder when a payslip has not yet been made, dividends that are distributed without complying with the Companies Act or actual loans issued to the shareholder.

The reason shareholder loans are interesting from a tax perspective is that sometimes these shareholder loans are taxed when issued to a majority shareholder.

Since the loans need to be repaid (or as you will learn later, repaired), a majority shareholder can be in situation where the loan is taxed, even though it has been repaid.

Meaning, the majority shareholder will have to pay tax on a loan that he/she will not get to keep.

Whether the loan is illegal or legal is irrelevant in the context of taxation for the majority shareholder.

Loans are considered illegal when they do not comply with the Companies Act.

Can a shareholder loan be legal?

According to the Companies Act, a shareholder loan can be legal.

It requires that certain formalities are in order.

However, suppose a loan is issued to a majority shareholder owning more than 50% of the company (a physical person, not a company), in that case, the loan should be taxed regardless of being legal or not.

So, in reality, it makes not much sense from a tax perspective to consider a legal shareholder loan to a majority shareholder, even when formalities are done concerning the Companies Act.

Minority shareholders owning less than 50% of a company are generally not taxed on shareholder loans.

An intercompany account with a shareholder in the accounting

If an intercompany account should tip the balance so that suddenly, a majority shareholder owes money to the company, then a (taxable) shareholder loan will exist.

It is essential for majority shareholders when using this method to handle payments between the majority shareholder and the company that the intercompany account is updated ongoing in the accounting.

Otherwise, each new payment might be considered a new separate shareholder loan which will be taxed for majority shareholders.

Also, using a new account in the accounting for booking a new payment to a majority shareholder will create a new loan from a tax perspective, regardless of having other accounts in the accounting that would show that the company as a whole owes money to the majority shareholder.

All majority shareholders that have received a shareholder loan will need to pay a penalty interest on the loan.

How much penalty interest should be applied on an illegal shareholder loan to a majority shareholder?

If a shareholder loan is illegal the majority shareholder will need to pay a penalty interest.

The penalty interest is calculated from the official Danish National Bank interest rate (adjusted 1.1 and 1.7 each year) for loans added 10% interest p.a.

The official Danish National Bank loan interest rate was:

1.1.2023: 1,90%
1.7.2023: 3,25%
1.1.2024: 3,75%

So the penalty interest will be:

1.1.2023-30.6.2023: 11,90% p.a.
1.7.2023-31.12.2023: 13,25% p.a.
1.1.2024-30.6.2024: 13,75% p.a.

Interest should be applied only on the original loan (and not applied interest).

Shareholder loans and money laundering

Shareholder loans that are considered illegal are classified as money laundering in Denmark.

Accountants and auditors in Denmark will have to report illegal shareholder loans to the Danish government as money laundering.

This can naturally also trigger an inspection afterwards.

What should the accountant do when discovering an illegal shareholder loan to a shareholder in the accounting for 2024 or in the annual report for 2023?

If an illegal shareholder loan to a shareholder is discovered in 2024 when preparing the accounting for 2024 and or in the annual report for 2023, there are two things to consider:

Firstly, the loan needs to be settled by either repaying it or offsetting other amounts (f.ex. offsetting a net salary or a net dividend with the loan) with penalty interest following the rules in the Companies Act.

Secondly, if the shareholder is a majority shareholder, the loan must be taxed following the tax rules.

Furthermore, the shareholder loan and the subsequent repair here-off should also be shown correctly in the annual report for 2023.

How are shareholder loans regulated in Denmark?

When preparing the accounting or an annual report, accountants sometimes find loans to a shareholder.

Shareholder loans can be complicated to handle since Denmark has two different sets of legislation:

The Companies Act (§210-212)

Link to the Company Act legislation relating to shareholder loans:

Companies Act §210
Companies Act §211
Companies Act §212

The tax rules (LL § 16 E)

Links to the tax legislation relating to shareholder loans:

LL § 16 E

Shareholder loans and the Companies Act (§210-212)

In Denmark, a shareholder loan is legal only if certain formalities are in order.

If a shareholder loan is considered illegal, the Companies Act stipulates that the loan must be repaid with interest at once.

This is relevant for both minority and majority shareholders.

Shareholder loans and tax rules (LL § 16 E)

Regardless of whether a shareholder loan is considered legal concerning the Companies Act, a majority shareholder will be double taxed on shareholder loans unless these are repaired correctly.

When a majority shareholder is a company, the tax rules relating to shareholder loans (LL § 16 E) do not apply.

Also, the tax rules do not apply to minority shareholders (that own 50% or less of the company).

Taxation becomes relevant when a shareholder is a physical person and owns more than 50% of the company (called a majority shareholder).

In the eyes of the Danish Tax Agency, no shareholder loan exists at any point in time, even if there is a shareholder loan according to the Companies Act.

The Danish Tax Agency focuses on the payments made to a majority shareholder, which needs to be taxed as either a salary or a dividend.

Since a shareholder loan still needs to be repaid according to the Companies Act, it can result in double taxation.

Can a shareholder not just repay a shareholder loan?

A minority shareholder can repay a shareholder loan with interest or repair the loan using the methods described below.

NB: A majority shareholder should NEVER REPAY a shareholder loan, but always seek to REPAIR the shareholder loan to avoid double taxation.

How to repair a shareholder loan?

A shareholder loan can be repaired by converting the shareholder loan to either a dividend or salary, but only if the whole process is handled correctly.

Repairing a shareholder loan by converting it to a dividend or salary can help avoid double taxation for a majority shareholder.

It is needed to decide on a case-to-case basis what to do.

The most important thing to notice here is:

Never repay a shareholder loan with a bank transfer if you are a majority shareholder!

Once the shareholder loan has been repaid with a bank transfer without repairing it, regardless of the shareholder loan having been offset with the payment and now showing a zero balance, a majority shareholder will still be taxed on the original transfer of the shareholder loan.

The majority shareholder will then have to get an additional salary or dividend to pay the tax and interest on the shareholder loan, thus giving double taxation on the original transfer of the shareholder loan.

Therefore repaying a shareholder loan is a horrible idea if you are a majority shareholder.

Repairing a shareholder loan using the payroll method

In general, repairing a shareholder loan to a majority shareholder using the payroll method can be done like this:

Firstly a written agreement between the majority shareholder and the company must be drafted, showing that the additional salary (f.ex. a bonus) has been agreed upon.

This naturally requires that the shareholder is employed in the company already.

The payroll method cannot be used if the shareholder is not employed.

The payment of the loan that the shareholder received is considered a gross salary in this method.

Using the current tax percentage for the shareholder as stated on the personal income tax self-assessment for the month the loan was received, the gross salary is converted into a net amount.

The calculated personal income tax from the converted shareholder loan into salary is then declared together with the gross salary on eIndkomst (SKAT Erhverv) for the month where the payment was received.

Furthermore, if the loan is considered illegal, the majority shareholder will need to pay the income tax to the company from his/her private account + penalty interest on the tax amount since receiving the payment.

The company will then pay the income tax to the Danish Tax Agency once the tax appears on “Skattekontoen”.

The shareholder must transfer the personal income tax and the interest from the private bank account to the company BEFORE the tax is due on Skattekontoen.

Otherwise, this amount will also be considered a new illegal loan, resulting in new charged interest.

The interest the shareholder pays is considered a taxable income in the company.

The shareholder cannot deduct the interest on his/her personal tax return.

If the shareholder loan is discovered after the fiscal year has ended, it has to be shown in the annual report.

The field used in the annual report is called “Tilgodehavender fra selskabsdeltagere og ledelse” in Danish (in English: “Loans to shareholders and management”).

The personal income tax calculated from the shareholder loan has to be shown as “Eventualforpligtelser” (“liabilities”).

An explanatory note stating that an illegal loan has occurred in the fiscal year should be added also.

This method can be used by both minority and majority shareholders to repay a shareholder loan.

Repairing a shareholder loan using the dividend method

First, the company needs to investigate if the financial report allows dividends distribution to the shareholders.

The dividend can be distributed at an ordinary or an extraordinary general meeting.

It will require that the company has free reserves available from previous years’ profits.

If the company is an ApS, and has finalised an annual report for a fiscal year ending maximum 6 months prior to deciding on the distributing of the dividend, the management can decide to use the annual report as documentation for the distribution of dividend.

If the decision is made after 6 months from the end if a fiscal year, the company will need to prepare a PnL and balance.

It is important to note, that the PnL and balance is not just a print from the accounting system.

The PnL and balance need to be prepared using the same rules as for the annual report.

So the company will need to add f.ex. (depending on situation):

Assets and liabilies reported according to the Danish Financial Statements Act;
Statement from management;
Explanatory notes;
And an audit should be performed if the company has chosen audit.

If the company is an A/S, this is always required before distributing the dividend.

Furthermore, according to the Danish Financial Statements Act, if a dividend is not paid out in cash (as is the case when offsetting a majority shareholder loan with the dividend), a special valuation report needs to be done as well, this is typically done by an auditor.

A failure to comply with these rules, could result in criminal and personal liability, as well as large fines.

Also, it is worth noticing that distributing dividends during the first fiscal is not possible.

The Business Authority guidelines on issuing a dividend to offset an existing shareholder loan

For a majority shareholder, the distribution of the dividend must relate to the original transfer of the shareholder loan to avoid being taxed on both the new dividend separately as well as the shareholder loan.

Some reference to the original transfer would be an excellent idea.

Always make sure to have adequate documentation in place.

The company must declare the gross dividend and a 27% dividend tax.

You can read more about dividends here:

Link to Dania Accounting’s blog about dividends and dividend tax

The shareholder will then need to pay the 27% dividend tax to the company from his/her private account + penalty interest calculated from the dividend tax from the date of receiving the payment and until the date of repayment of dividend tax.

Once the dividend tax is visible as debt on Skattekontoen, the company will pay the tax to the Danish Tax Agency.

What to include in the annual report if using the payroll method to repair

In the example where a shareholder loan from 2023 is discovered in 2024, then the accountant should include the following in the annual report for 2023:

The shareholder loan remains in the balance on 31.12.2023, since it was not repaired at the end of the year.

The shareholder loan should be shown as a receivable in the assets.

Furthermore, the penalty interest from the date of receiving the shareholder loan until 31.12.2023 should also be accrued and shown as a receivable in the assets.

The penalty interest is shown as an income for the company.

The company will have the tax deduction for the salary in 2023 where the amount was originally transferred to the majority shareholder, even though the salary will only be shown as a cost in the annual report for 2024 where it was decided to repaid the shareholder loan.

The tax, therefore, also needs to be accrued correctly in the annual report for 2023 since there will be a difference between 2023 and 2024 when looking at the annual report (loan is shown in 2023, salary cost is shown in 2024) and the tax calculation (tax deduction in 2023 as the payment year).

What to include in the annual report if using the dividend method to repair

In the example where a shareholder loan from 2023 is discovered in 2024, then the accountant should include the following in the annual report for 2023:

The shareholder loan remains in the balance on 31.12.2023, since it was not repaired at the end of the year.

The shareholder loan should be shown as a receivable in the assets.

Furthermore, the penalty interest from the date of receiving the shareholder loan until 31.12.2023 should also be accrued and shown as a receivable in the assets.

The penalty interest is shown as an income for the company.

The dividend tax (27%), should be shown as a liability towards the Danish Tax Agency and a receviable from the majority shareholder in the assets.

Explanatory notes

Explanatory notes need to be included as well in the annual report for 2023:

A note stating that an illegal shareholder loan has been present during the year has to be included in the annual report.

If the shareholder is a director as well, then a separate note is required showing:

Loans to the shareholder;
Terms and interest;
Repayments during the year;
Loans obtained and repaid during the year;
Losses on loans.

(Last update of this blog: 13.5.2024)

FAQ