If the company is healthy
Repayment is an ordinary transaction that follows the agreed terms and does not create taxable income for the shareholder.
Companies · Dealings with shareholders
Shareholder loans
Putting money into your own company looks like the simplest thing in the world. But the way you do it changes whether it can be paid back, how it is taxed and, if things go badly, where you stand as a shareholder compared with the other creditors.
01 · The two routes
Shareholder loan or capital contribution
When a shareholder puts money into the company, they can do it as a loan (money the company will have to pay back) or as capital, giving up the right to be repaid. They are two completely different transactions.
| Shareholder loan | Capital contribution (versamento in conto capitale) | |
|---|---|---|
| Nature | A debt owed by the company to the shareholder | Equity |
| Repayment | Due, according to the agreement | Not due, unless distributed |
| Subordination | Applies in the cases set by law | Does not apply |
| Interest | Possible, with a presumption that interest is charged | Not provided for |
| Effect on equity | None | Strengthens it |
| Relevance for balance sheet ratios | Worsens the debt ratio | Improves it |
The distinction must be formalised at the time of payment: minutes of the shareholders' meeting, a written agreement between the parties, a consistent payment reference on the transfer. Reconstructing it afterwards is possible, but it becomes ground for dispute, both with the tax authorities and with any creditors.
02 · The risk
When the shareholder comes after the other creditors
This is the point that makes a shareholder loan less secure than it looks. The law provides that, in certain circumstances, repayment to the shareholder is subordinated to the other creditors.
- It applies when the loan is made at a time of excessive imbalance between the company's debt and its equity.
- It also applies when the loan is made in a situation where a capital contribution would have been reasonable instead of a loan.
- The shareholder is paid after all the other creditors.
- If repayment took place in the year before the declaration of insolvency, it must be paid back.
- The rule concerns SRLs (Italian limited liability companies) in particular, and is extended to other cases.
- It does not depend on what the parties want: it is a rule of law that protects creditors.
Why this rule exists
It is there to block a shortcut.
- A shareholder who lends instead of contributing capital shifts the risk onto the creditors
- If things go well they get the loan back, if they go badly they lose like everyone else
- Subordination brings their position back into line with that of the people who took the risk
- It cannot be overridden by an agreement between shareholders
03 · The treatment
The tax side of shareholder loans
The loan itself does not generate income, but the interest does, and the presumption that interest is charged needs to be managed.
- An interest-bearing loan produces interest that is investment income for the shareholder and a deductible cost for the company, within the set limits.
- An interest-free loan is legitimate, but it must be stated as such in writing: otherwise there is a presumption that interest is charged.
- Interest paid to shareholders who are individuals is subject to withholding tax, with its own rules.
- The deductibility of interest expense for the company is subject to the general limits set by law.
- The loan must be shown in the financial statements among the liabilities, with those owed to shareholders shown separately.
- A waiver of the loan by the shareholder has specific tax treatment, which affects both the company and the cost of the shareholder's holding.
Waiving the loan is a route used to strengthen the company's equity without moving money: the loan turns into equity. It must however be documented correctly, because the tax treatment depends on the tax value of the waived loan.
04 · How it is done
What you need to do it properly
There are only a few formalities, but they must all be followed, because they are the proof of what the transaction is.
The resolution or agreement
Minutes of the shareholders' meeting or a private written agreement that classifies the transaction and states the amount, the interest and the terms of repayment.
A bank transfer with a payment reference
The payment must be traceable and the reference must match the classification chosen. It is the first document anyone looks at in a tax audit.
The accounting entry
The account must be opened correctly: a debt owed to shareholders for a loan, a reserve for a capital contribution.
Disclosure in the financial statements
The notes to the financial statements must report the shareholder loans and their terms.
05 · When it comes out
How and when it is repaid
This is the moment when mistakes made on the way in come to light.
If the company is in difficulty
Subordination can prevent repayment, and a repayment already made may have to be paid back.
If the paperwork is missing
The repayment risks being reclassified as a distribution of profits, with tax consequences for the shareholder.
If the shareholder leaves
The loan remains a claim against the company, separate from the value of the holding: it must be dealt with separately in the transfer of shares.
If the company is wound up
The shareholder who made the loan ranks as a creditor, subject to subordination. See liquidation.
If the loan is waived
The loan turns into equity and increases the tax cost of the holding, under that transaction's own rules.
06 · What to avoid
The costliest mistakes
They are almost always mistakes of form that turn into problems of substance.
- A bank transfer with no payment reference and no document at all: the classification becomes a matter of interpretation.
- The shareholder account used as a current account, with money constantly going in and out and no record of what each movement is.
- Withdrawals by the shareholder recorded as repayment of loans that were never formalised: this is one of the most frequent reclassifications.
- An interest-free loan not stated as such, with interest presumed.
- Repayment while the balance sheet is imbalanced, with the risk of having to pay it back.
- No disclosure in the notes to the financial statements, which makes the arrangement unclear to banks and other parties too.
A disorderly shareholder account is the first place a tax audit of a closely held company looks. Keeping it clean, with every movement documented and classified, takes little time and heads off a long list of disputes in advance.
Frequently asked
The questions that keep coming up
Can I lend money to my SRL without interest?
Yes, an interest-free loan is fully legitimate. It must however be expressly stated as such in a resolution or a written agreement, because otherwise there is a presumption that interest is charged.
With the right paperwork the company deducts no interest and the shareholder declares no investment income: the situation is clean for both.
What difference does a capital contribution make compared with a loan?
A capital contribution goes into equity and cannot be repaid like a debt: it strengthens the company and improves the ratios that banks and other parties look at.
A loan remains a debt, which the company must repay, but which in situations of imbalance can be subordinated to the other creditors. The choice depends on how much you need to be able to get that money back.
The company is repaying my loan: do I have to declare it?
Repayment of the capital lent is not income and does not have to be declared. Only any interest counts as income.
For this to be beyond dispute, though, it must be clear that the money really was a loan. Without paperwork, the repayment risks being reclassified as a distribution of profits, taxed accordingly.
What does subordination mean in practice?
It means that, in a crisis, the shareholder who made the loan is paid only after all the other creditors have been paid.
And if repayment took place in the year before the declaration of insolvency, the shareholder must pay back what they received. That is why, in a company that is already imbalanced, contributing capital is often more honest and safer than lending.
Let's talk
How the money is classified is decided when it goes in, not when it comes out
A bank transfer with no payment reference and no resolution becomes whatever the party with an interest in saying so claims it is. Better to put it in writing first.