Lending money to a company can be a strategic move, especially if you’re helping a family member kickstart their business. However, navigating the tax implications requires careful consideration to ensure you’re maximizing benefits and minimizing liabilities.
When you loan money directly to the company, Hacienda (the tax authority) applies certain assumptions regarding interest, which may not align with the actual terms of your loan. Particularly, if you’re closely related to a major shareholder in the company (holding over 25% of shares), you’re categorized as a “linked person.” In this scenario, the loan is presumed to generate interest at the market rate, regardless of the actual interest arrangement. Consequently, you’re obligated to declare this assumed interest as income on your personal tax return (IRPF), even if the original loan was interest-free.
Furthermore, if the loan exceeds 75% of the company’s capital reserves, additional tax implications arise. Interest generated on the portion below the 75% threshold is taxed at your personal income tax rates, typically ranging from 19% to 23%. Conversely, interest on the portion exceeding the 75% limit is subject to the general tax rate, potentially reaching up to 45%.
To circumvent these tax complexities, a more strategic approach involves loaning the money to your family member directly, rather than to the company. While this eliminates the tax implications for you, your family member becomes liable for adhering to the minimum interest rule when loaning the funds to the company. Nevertheless, they can offset this interest against their income and deduct it as a capital expense for the company, offering a more favorable tax scenario.
Consider the case of Jim, who intends to lend €200,000 to his daughter Margaret for her business. If Jim directly injects the funds into the company, he may face significant tax liabilities due to assumed interest. However, if Margaret acts as an intermediary, receiving the loan from Jim and then loaning it to her company as a director’s loan, the tax burden is significantly reduced. Margaret incurs tax only on the interest generated, and with strategic planning, she may even generate a profit from the arrangement.
In conclusion, by understanding the tax implications and strategically structuring the loan, you can optimize benefits for both yourself and your family member’s business venture. Always consult with financial experts for personalized advice tailored to your specific circumstances.