Illegal shareholder loans
If you are you one of those who have received a letter from the Danish Business Authority on illegal shareholder loans in 2015, or if you receive such a letter later on, we would like to answer some of the questions that may arise in connection with receiving such a letter.
The reason why you receive such a letter is that the Danish Business Authority has detected by random checking that the latest annual financial statements of a company in which you are a member of the management include an amount receivable from the company’s owners or management. According to the Danish Companies Act, such loans are illegal in the vast majority of cases and therefore have to be recovered. The management of the company is responsible for recovering the loan.
When a company lends money to its owners or management, for instance to its chief executive officer, such arrangements are often collectively referred to as “shareholder loans”. Under the Danish Companies Act, the main rule is that shareholder loans are illegal.
Please note that lending to owners or members of management of the company’s subsidiary is also illegal, which also applies to lending to spouses etc. of owners or members of management.
Financial year has not ended
If the financial year has not yet ended, there is still time for the company to recover the illegal loan before the end of the financial year. The item “receivables from owners and management” will in these cases not appear from the company’s balance sheet.
Accordingly, the Danish Business Authority will be able to see that the company no longer has a shareholder loan.
The Danish Business Authority points out that any measure to write off the loan in the financial statements will not legalise the loan as the requirement is for the recovery of the full loan amount.
Far from all companies will manage to recover their receivables by the end of the financial year. The Danish Business Authority calls on the management to recover the loan immediately if the loan is illegal.
If the loan is recovered after the end of the financial year, the loan will still appear from the balance sheet when the company files its next annual report with the Danish Business Authority. In those cases, the management is encouraged to write in the management’s review that the loan has been recovered after the end of the financial year. You may also provide this information in a note to the financial statements.
However, the Danish Business Authority may subsequently order the company’s management to submit documentation to prove that the loan has been repaid in full, inclusive of statutory interest.
If an illegal loan is recognised in the company’s balance sheet, the full amount has to be repaid immediately. In other words, it is not sufficient to agree on a repayment arrangement with the debtor.
If the loan is illegal under the Danish Companies Act, it has to be repaid. This applies regardless of whether you have been taxed on the loan amount.
It follows from the Danish Companies Act that an illegal loan must be repaid with statutory interest. This means specifically that an amount of interest is payable equivalent to the rate of interest set out in the Danish Interest on Overdue Payments Act plus 2%. If a higher interest rate has been agreed, interest must be calculated in accordance with the agreement.
Under the Danish Interest on Overdue Payments Act, the rate of interest is the lending rate fixed by the Danish central bank (at 1 January and 1 July of each year) plus 8%.
What happens if I fail to recover an illegal loan immediately?
If the Danish Business Authority detects an illegal loan when checking the next annual report of the company, the Danish Business Authority will issue an enforcement order instructing the company to recover the loan immediately, inclusive of statutory interest.
At the same time, the company will be requested to submit documentation to prove that the loan with interest has been repaid to the company. If the company fails to submit such documentation, the Danish Business Authority will levy mandatory fines on the management until the documentation is submitted. The time limit for submission of documentation is typically six weeks.
What are the possible consequences of an illegal loan?
The circumstance that a company has – or has had – an illegal loan is a punishable offence for the members of management who have decided to grant or maintain the loan. It follows from section 367 of the Danish Criminal Code that any non-compliance with the prohibition is punishable by a fine.
The fine typically amounts to about 2.5% of the loan principal if the loan is repaid within six weeks of the Danish Business Authority’s enforcement order and 5% if the loan is repaid later than six weeks after the order.
A concrete analysis will be conducted in each individual case to assess whether sufficient grounds exist to report the management to the police.
If a company has granted a loan that falls within the prohibition of the Danish Companies Act against loans to company owners and/or members of management and the loan amount is of a not insignificant size or the offence is repeated, the Danish Business Authority may decide that a company should not be allowed to exercise the possibility of audit exemption in its two subsequent financial years. The Danish Business Authority may further decide that the company should not be allowed to choose to have an audit performed in accordance with the Authority’s standard of declaration for small enterprises.
Danish Business Authority notifies SKAT
If the loan is not repaid, the members of management who have decided on or maintained the relevant transactions will incur liability for the losses inflicted on the company.
In addition, the management risks being confronted with a claim for damages. This means, specifically, that the individual members of management risk assuming personal liability in damages for any loss the company, the company’s creditors or any other persons have sustained as a result of the loan.
What is a legal loan?
A concrete assessment must be made in each individual case to determine whether a shareholder loan is legal or illegal.
Experience shows that by far the majority of shareholder loans are illegal.
Various exemptions from the prohibition against shareholder loans have been provided, for instance in the following situations:
- Legal equity financing
- Lending to Danish and certain foreign parent companies
- Lending in the context of usual business transactions. In some cases, outstanding balances may be regarded as usual business transactions and are therefore exempted from the prohibition against shareholder loans. Accordingly, credit facilities granted in the ordinary course of business are exempted from the prohibition. The following conditions need to be met:
- the transaction must be in the ordinary course of business;
- the transaction must be for the benefit of the company;
- the loan to the shareholder/member of management must have been granted on the same terms (terms of payment, credit scoring, provision of security, etc.) as those on which similar transactions are usually conducted vis-à-vis third parties;
- the transaction must be usual in the industry concerned; and
- furthermore, it is normally a condition that the company has entered into similar transactions with unrelated parties.
The management is responsible for ensuring that a specific loan meets the conditions of the Danish Companies Act for being legal.
Errors in the annual report
If you think that the latest annual report of the company contains an error or misstatement concerning a loan to shareholders or members of management, you should contact the Danish Business Authority.
Annual report with illegal shareholder loan
If you have already filed a new annual report at the time when you receive the letter from the Danish Business Authority, you are naturally not able to rectify the offence and write in the annual report that steps have been taken to rectify the offence.
The annual report you have filed will be subjected to the Danish Business Authority’s ordinary procedures of financial reporting monitoring. If the Danish Business Authority selects the company’s annual report for a random check and detects that the company has an illegal shareholder loan, then the management of the company risks being served with an enforcement order with instructions to recover the loan immediately. Moreover, the management risks that the Danish Business Authority notifies SKAT of the offence and, finally, the management risks being reported to the police for non-compliance with the prohibition against shareholder loans.
You should not take any measures in relation to the Danish Business Authority because of the letter, but the Authority calls on the management of the company to recover any illegal shareholder loans immediately.