Taxation of shareholder loans

The company granted a loan of NOK 2,000,000 to a shareholder before the change in regulations on 7 October 2015. The terms of the loan stipulate exemption from repayment until 31 December 2023. The terms of the loan stipulate that accrued interest for the whole year be paid on 31 December annually. The following questions must be answered:

1. If interest is paid in compliance with the terms of the loan on 31 December 2015, will the interest be taxable from the initial time of accrual?

If interest is paid in compliance with the terms of the loan on 31 December of the relevant year, the amount of credit granted has not increased. Interest payed will therefore not be taxable for the shareholder as a shareholder loan. However, the company must pay tax on the interest income. For the shareholder, interest payed on a shareholder loan is tax deductible.

2. What happens if interest is added to the principal amount?

If interest is added to the principal amount, effectively increasing the granted credit, it becomes taxable in the same manner as the shareholder loan. Interest added to the principal amount is considered paid and is therefore tax deductible for the shareholder.

These exceptions only apply if the credit amount is less than NOK 100,000 and re-paid within 60 days.

3. Will accrued, unpaid interest after 7 October 2015 be considered new credit?

If interest is paid in compliance with the terms agreed between company and shareholder, interest accrued during the year will usually not be considered taxable as a shareholder loan. Interest will only become taxable as a shareholder loan when it is added to the principal amount.

4. If the terms of the loan stipulate that interest should be calculated annually but paid in full 31 December 2023, will interest calculated annually be assessed as a taxable shareholder loan for each individual year?

Terms stipulating a re-payment of interest at a much later date than that of accrual, can be considered an increase in credit. This must be determined by a case-by-case evaluation. 

If terms between the company and the shareholder stipulate that interest shall be paid in full together with the principal amount at the close of the year 2025, the agreement deviates from normal market terms to such a degree that interest accrued will be considered an increase in credit according to the rules of shareholder loans.

5. Shareholder loans granted before 7 October 2015 with a stipulated annual payment of NOK 100,000. The payment is to be made as a set off against dividends. The shareholder makes no payments after 7 October 2015. Will the loan be considered taxable?

If payments are not made in compliance with the terms, each specific payment will be considered as having been extended. Extensions on credit is taxable according to section 10-11, subsection 4, of the Taxation Act. In general, only the payments that have not been paid according to the terms of the loan become taxable.

6. Shareholder loans granted before 7 October 2015 with stipulated monthly payments of NOK 10,000. The payments are made 61 days after the due date. Will the payment be taxable?

When a payment is not made by the due date, the extended payment becomes increased credit and taxable according to section 10-11, subsection 4, of the Taxation Act. In general, any extension is taxable. If one or more of the exceptions in section 10-11-1 of the Taxation Act are met, the extension might be tax-free. The requirement of full payment within 60 days is absolute; in this case, the payment is therefore taxable.

1. If the shareholder borrows NOK 100,500, will only the part of the loan exceeding the limit of NOK 100,000 be taxable? In this case, NOK 500.

No, loans exceeding the NOK 100,000 limit will be taxable in their entirety. In this case, the shareholder will be liable to pay tax for NOK 100,500.

2. Section 10-11-1 of FSFIN (the regulation relating to the Taxation Act) sets outs exceptions to the rule stating that loans from a company to a shareholder is considered dividend. Do these exceptions also apply to loans to partners from a businesses assessed as partnerships?

Yes, these exceptions apply to both limited liability companies and businesses assessed as partnerships.

3. Does the exception in section 10-11-1 letter d of FSFIN apply to loans from other companies within the same group, or do they only apply to the company in which the shareholder is employed?

Yes, the exception applies to loans from other companies in the same group.

4. Is it possible for a company to grant several loans of less than NOK 100,000 and still be within the terms of section 10-11-1 letter b in FSFIN, or are all transfers considered as one?

The limit stipulated by section 10-11 -1 letter b of FSFIN applies to the sum of loans from company to shareholder. Transferring several smaller amounts from the company to the shareholder is of no concern as long as the total amount borrowed does not exceed the limit of NOK 100,000. If three loans each NOK 50,000 are granted, the limit has been exceeded and the total loan of NOK 150,000 will be taxable as dividend.

5. If the credit is not repaid in full within 60 days, will the total amount borrowed become taxable or just the amount that remains unpaid?

Only the amount remaining unpaid after the 60 days will be taxable, provided that the total credit at all times stays below NOK 100,000.

1. If the shareholder is employed by the company, will the shareholder be liable to pay tax for both shareholder loans and low-cost loans from an employer?

If a loan granted to the working shareholder is considered taxable as a shareholder loan, it will not at also be taxable as a low-cost loan from an employer.

2. Does the exception in section 10-11-1 letter d of FSFIN apply to loans from other companies within the same group, or do they only apply to the company in which the shareholder is employed?

Yes, the exception applies to loans from other companies in the same group.

3. Can a working shareholder choose to have a shareholder loan taxed as salary?

A shareholder loan is taxable as dividend according to section 10-11, subsection 4, of the Taxation Act. It is not possible to choose to have a shareholder loan taxed as salary.

4. Does section 10-11, subsection 4, of the Taxation Act include salary advances?

Salary advances are not considered credit according to section 10-11, subsection 4, of the Taxation Act. Salary is taxable according to the cash principle. This means that salary becomes taxable at the time of payment, even if this occurs in advance of a regular payment date. A distinction must be made between true advance payments and payments that exhibit the characters of a loan. Payments of larger sums over extended periods may be considered loans and not salary advances. In such cases, the loan can be taxed as dividend.

1. How will the company providing collateral for a shareholder’s third party loan in, for example, a bank affect taxation?

If the company provides collateral for the shareholder’s third-party loan, the amount is taxable for the shareholder. The shareholder’s liability to pay tax also applies to any collateral provided by the company for third-party loans made to the shareholder’s spouse or other related parties. When the collateralisation is removed, the equivalent amount will be considered capital paid to the company. If the collateral is written down at the same pace as the loan is being paid back, each reduction in collateral will be considered capital paid-in to the company.

2. Who is liable to tax when the company provides collateral for third-party loans to the shareholder’s spouse or other related parties?

The shareholder is taxed for credit and collateral provided to a spouse or other related party.

3. A personal shareholder owns company A (holding company), which in turn owns company B (subsidiary company). The personal shareholder borrows from company B (subsidiary) and repays the loan to company B. How to adjust input value and taxable paid-up equity?

When a shareholder in a parent company (company A) receives credit or collateral from a subsidiary (company B), the benefit must be considered dividend from the parent company. This means that down payments made to the subsidiary must be considered taxable paid-up equity to the parent company increasing the input value of the parent company’s (company A) shares. 

4. Are loans between subsidiaries within the same group taxable?

No, only loans made to personal shareholders are taxed according to section 10-11, subsection 4, of the Taxation Act.

5. A personal participant owns a share of company A, which is a business assessed as a partnership (ANS, KS, etc.), which in turn owns company B, a private limited company (AS). The personal participant is granted a loan from company B. Is the loan taxable for the personal participant?

Yes, loans made to personal participants are taxed according to section 10-11, subsection 4, of the Taxation Act.  The liability to pay tax also applies to participants who are granted loans and who indirectly own stock or shares in the company granting the loan.

6. Will loans granted to foreign personal shareholders fall under the rules relating to loans from a company to a shareholder and considered dividend?

Taxable shareholder loans must be treated in the same manner as other taxable dividends. This means that taxable shareholder loans will incur source taxation in the same manner as dividends paid out to foreign shareholders.

7. Are loans granted from a company to the shareholder’s sole proprietorship due to the ordinary business activity, taxable?

A sole proprietorship is not a separate taxable unit, but considered identical to the shareholder. Loans granted to the sole proprietorship will be considered loans granted directly to the shareholder. Therefore, any credit granted to the shareholder’s sole proprietorship is also taxable. The purpose of the credit granted makes no difference to the shareholder’s liability to pay tax. Loans granted to sole proprietorships as part of the ordinary activities of the enterprise are therefore, for the shareholder who owns the sole proprietorship, taxable.

8. During the year, a shareholder borrows NOK 200,000 from the company. Within the same year, he pays back the loan. Will the loan be taxable?

Yes, the loan will be taxable even if it is paid back within the same year. The payment must be considered paid-up equity, which can be withdrawn tax free at a later date.

9. Does the FIFO (first in, first out) principal apply to shareholder loans? Will the first granted loan be considered the first to be paid back?

The FIFO principal does not apply to shareholder loans. The company and shareholder are free to decide which loan is paid back first.

10. A company provided collateral for a loan to shareholder before 7 October 2015. If the company has to pay the shareholder’s debt to the bank (collateral activated), who becomes liable to tax?

Activating collateral entails a recourse claim from the company. If the shareholder pays the claim within a reasonable period, it will not trigger a liability to pay tax as is if it were a shareholder loan (section 10-11, subsection 4, of the Taxation Act). If the recourse claim is not paid within a reasonable period, converting the claim against the shareholder to a company credit must be considered. This form of credit would be taxable.

11. Are loans granted from the company’s bankruptcy estate to the shareholder taxable according to section 10-11, subsection 4, of the Taxation Act?

The bankruptcy estate is a separate taxable unit. The loan is granted by the bankruptcy estate and not the company, and therefore it is not taxable.

12. Are loans granted from the company to the shareholder’s cohabiting partner taxable according to section 10-11, subsection 4, of the Taxation Act?

A cohabiting partner is not considered a related party according to section 10-11, subsection 4, of the Taxation Act. Loans granted from the company to the shareholder’s cohabiting partner are therefore not taxable. If in reality the loan is extended to the shareholder, the portion of the loan extended to the shareholder will be taxable. For example, the cohabiting partner uses the loan to buy a shared residential property and the shareholder owns half the property.

13. Is it forbidden for a shareholder to lend money from his own limited liability company?

A company can extend loans to shareholders within the terms of section 8-7 of the Norwegian Private Limited Liability Companies Act. For tax purposes there are no legal restrictions on loans from companies to shareholders, but such loans will usually trigger dividend taxation for the shareholder, see section 10-11, subsection 4 of the Taxation Act.

14. Can deductions for risk-free return be applied to loans that are taxable as dividends?

In the same manner as for regular dividends, deductions for risk-free returns are granted for loans taxed as dividends. The deduction for risk-free return is only granted to loans that have been paid out legally by the company.

15. The shareholder uses an interim account, where he amongst others lists private costs. The shareholder sometimes covers costs for the company and these payments are set off against the company’s coverage of the shareholder’s private costs. At the end of the year the interim account is settled and the total loan granted by the company to the shareholder as at 31 December for the year in question is calculated. Can the shareholder avoid liability to pay tax for the loan if the same amount is declared as?

The use of an interim account in this way means that the company is extending credit to the shareholder. This extended credit is taxable as dividend according to section 10-11, subsection 4, of the Taxation Act. Each individual withdrawal is taxable unless one or more of the exceptions set out in section 10-11-1 of FSFIN (regulation concerning the Taxation Act) can be applied. Payment of taxable loans during the year are considered paid-up equity. Total tax liability will therefore normally be higher than the sum remaining in the interim account at the end of the year. In addition, the tax liability must be dated to the year the credit was granted, not the following year when dividend is decided.

16. The company has extended a loan to an independent party, who later buys into the company. Will the loan become taxable as a shareholder loan when the independent party becomes a shareholder?

Tax liability is considered when the credit is granted. If the borrower was not a shareholder when the loan was granted, it will not be taxable as a shareholder loan. If the loan agreement is extended following the lender becoming a shareholder in the company, the loan will, because of the extension, become taxable as a shareholder loan.