Financing our company through our own money: the participating loan.


It is quite often the case that you as shareholder have to cover your lack cash in your company with your own funds. Let us see how to protocol these loans in an easy and tax efficient.


You can either subscribe a loan policy – one single document in which the maximum amount available is declared – or a so called participating loan. We will focus this article in this investment figure.


The amount of a participating loan is considered as part of the equity of the company for the soles purposes of avoiding compulsory liquidation. We can use this figure to compensate losses and avoid the dissolution.


It is also very attractive way of financing your Company as a participating loan is not subjected to Capital Duty Tax (1%), and it is not necessary to formalise the loan in a Public Deed, nor to register it at the Commercial Registry. However, in order to have official evidence and proof from the date and conditions agreed it is recommended to stamp the private document as capital duty tax (ITP) exempted in the regional tax authorities.


Other relevant features of this figure are:

1.- The companies must agree an interest rate depending on the company’s profits, business volume or any parameter related with the evolution of the company’s activity. It is possible to agree an additional fix interest rate.


2.- In principle, the interests paid are fully deductible for Corporate tax purposes (and being if the beneficiary in another country with Double Tax Treaty possibly also not subject to withholding tax). However, being the parties considered related ones, the thin capitalisation rule would still apply as the participating loan is not considered as equity for this purpose. Therefore, the interests shall be deemed to be dividends (and therefore not deductible for Corporate tax purposes) as the net remunerated indebtedness of company towards the shareholder exceeds 3 times its fiscal capital (i.e. the net equity minus the results of the present fiscal year).


3.- If the borrowing company wishes to pre-pay the loan, it is compulsory to create a non disposable reserve for the same amount.


4.- In case of bankruptcy of the borrowing company, the rights of the lender of the participating loan will come after the rights of any other creditor.


5.- It is also possible to capitalise –to convert in net equity through an increase of capital Public Deed before Public Notary – the amount of the loan. This is normally the case when the loan cannot be refunded.


For more information regarding this subject please contact us.

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