From time to time we are asked by contractors who operate through their own Personal Service Company whether they have an option of taking a loan from their company for personal use. This could be the case where a company has surplus funds but the contractor does not withdraw monies as salary, either because they only require the funds for a short period of time or because they wish to avoid the payment of income taxes.
It is possible for directors to take loans from their companies but there are restrictions and provisions to be aware of. If you are a company director and are thinking of taking a loan from your company for personal use, a number of legal and tax issues should be taken into consideration.
Legal Restrictions
By law, a company is not allowed to give loans valued at over 10% of the company’s net assets to a director or person connected to the director. This is prohibited under Section 31 of the Companies Act, 1990. In simple terms a connected person is a spouse, or a person who is a near relative of the director, in business partnership with the director or is another company controlled by the director.
If the company does provide a loan of more than 10% of the net assets of the company to either a director or a connected person, the directors will generally be in breach of company law. This can result in proceedings from the Office of the Director of Corporate Enforcement (ODCE). In a worst case scenario, directors may be restricted from acting as a director and can also be made personally liable for the debts of the company in the event the company becomes insolvent. The latter may occur where a company is dissolved and it is believed that the breach of the 10% rule contributed to the insolvency of the company. In this case the person who benefited from the transaction may become personally liable for the debts of the company.
If your company does not have audit exempt status or voluntarily undertakes a statutory audit, be aware that your company auditor is legally required to report a breach of the director loan legislation to the ODCE.
Tax Implications
1) BENEFIT IN KIND
If a loan is provided to a director on an interest free basis, or at interest rate lower than Revenue specified interest rates, the loan is considered to be a Benefit In Kind upon which PAYE/PRSI/USC charges apply.
Revenue’s specified interest rates (in 2023) are:
- 4% if the loan you plan to take from the company is used to purchase a property which will become your principal private residence
- 13.5% for loans used for all other purposes
These specified interest rates are set by Revenue and are subject to possible change each year.
If a company provides a loan to a director at an interest rate below these specified rates (including zero %), a Benefit In Kind arises on the shortfall between the Revenue specified rates and the amount being paid by the director. PAYE/PRSI/USC must be paid on the Benefit In Kind.
If a director does pay interest to the company, this is treated as taxable income for the company. Income from interest (and other similar “passive” income sources) is taxed at a 25% corporation tax rate. Therefore a tax liability of 25% of the annual interest charge may arise for the company; assuming that the company has no losses to offset against the interest income.
2) CORPORATION TAX
The company would also need to pay over to Revenue an amount of the loan advanced to the director. Essentially the loan is deemed to have been made to the director under the deduction of income tax at 20%. That is, the amount that was physically loaned represents 80% of a deemed total loan. The remaining 20% must be paid to the Revenue when the company files its corporation tax return.
By way of illustration:
To calculate the amount of tax payable on a loan, you simply multiply the loan amount by 20/80. Say your company lends you €100,000. The amount of tax which must be paid over by the company is €100,000 x 20/80 = €25,000.
This money can be reclaimed from Revenue as the loan is repaid by the director. This reclaim is made on an annual basis via the company corporation tax return.
By way of illustration:
To calculate how much of this tax can be refunded, you simply multiply the amount of the loan which was repaid by 20/80. Say in a particular year, you repaid €20,000 of the loan to the company. The amount of tax which can be repaid to the company from Revenue is €20,000 x 20/80 = €5,000.
Why are there strict rules surrounding directors taking loans from their company?
Given the special position within companies which directors hold, it could be easy for directors to potentially enter into transactions with their companies which would result in them placing their interests before those of the company and its stakeholders. Therefore protections are required. As mentioned above, restrictions on company loans also apply to persons connected with directors to avoid any circumvention of the rules using a close third party.
