Rules for loans to partners and shareholders

Loans to shareholders are not uncommon in everyday business life. Particularly in owner-managed companies, groups with internal financial flows or start-ups with close shareholder structures, it happens time and again that funds flow from the company to shareholders, parent companies or sister companies. What is often overlooked: The legal and tax structure of such loans is complex and incorrect arrangements entail considerable risks.

In this article, we show you what you need to pay attention to in order to structure loans to shareholders correctly and in a legally compliant manner and which pitfalls you should avoid.

What does return to stock mean and why is it relevant?

In Switzerland, the principle of capital protection applies: shareholders may not simply have their paid-in capital refunded. This legal prohibition is called the return of paid-in capital and is regulated in the Swiss Code of Obligations 680. It is intended to ensure that the company's assets are available to meet current obligations and are not used for the private financing of shareholders.

A breach of this principle can have both civil law and tax consequences. These range from the personal liability of the board of directors to high additional taxes and penalty interest.

The distinction is often difficult, particularly in the case of shareholder loans. If a loan is too large, too risky or too advantageous, it may qualify as a hidden profit distribution or repayment of equity from the perspective of the tax authorities.

What you should pay particular attention to with shareholder loans:

For a loan to a shareholder to be legally permissible, three key criteria must be met:

1. direction and amount of the loan

This does not only apply to traditional loans to natural persons, but also to so-called upstream loans (e.g. from the subsidiary to the parent company) or crossstream loans (e.g. to sister companies in the same group). All of these forms are considered "related parties" and fall under the regulations on the return of deposits.

The amount is also decisive: If a loan is granted that exceeds the freely available equity of the company, this may constitute a quantitative violation, even if the economic repayability would be given.

2. recoverability of the loan

A loan may only be granted if there is a high probability that it can be repaid. If this intrinsic value is not given, for example in the case of financially distressed shareholders or a lack of creditworthiness, there is a risk of a breach of company law. In addition, the loan can be regarded as a hidden profit distribution, which can lead to a considerable additional tax burden.

The consequences:

Back taxes
Interest on arrears
In serious cases: Liability or criminal proceedings

3. third-party conformity (arm's length comparison)

One aspect that is often underestimated is the so-called third-party conformity. This requires that the loan is concluded under the same conditions as would be usual between independent third parties. This includes

Standard market interest rate
Repayment modalities (term, installments, due date)
Adequate collateral
Written contract with complete documentation

If this third-party conformity is lacking, the loan is often classified as a non-cash benefit for tax purposes, with corresponding tax consequences at both company and shareholder level.

So how do you calculate the free equity?

Whether a loan is permissible also depends on the company's free equity. The law does not prohibit all payments to shareholders, but only those relating to paid-up capital.

Free equity is calculated in the following steps:

Determine open equity according to balance sheet
Deduct paid-up share capital from this
Add hidden arbitrary reserves
Deduct deferred taxes on hidden reserves

Only the amount calculated in this way may be used for loans or distributions. If this limit is exceeded, there is a quantitative breach of the return of deposits.

Our recommendations from practice

To avoid risks and structure loans to shareholders correctly, we recommend the following steps:

Only grant loans if their repayment is economically realistic
Strictly separate loans and dividends - do not offset them against each other
Conclude written contracts with standard market conditions
Keep all relevant documents in order: Interest, collateral, repayment plans
Clarify at an early stage whether the loan may be offset as part of an appropriation of profits
Always discuss tax implications with specialists in advance

Conclusion

Loans to shareholders are generally permitted, but only if they are legally clean, economically justified and structured correctly for tax purposes. Anyone who observes the principle of the return of deposits, complies with third-party conformity and documents carefully can work flexibly with this form of financing without exposing themselves to unnecessary risks.