Which jurisdictions allow interest free loan to shareholders?

[chrisgerth]

Hello,

headline says it all. I am currently researching optimal jurisdiction for a holding company. So far I only found Singapore being a jurisdiction which allows interest free loans to its shareholder. Do you know any other jurisdiction?

 

[JohnnyDoe]

Nothing prevents a company to give out loans interest free. What you need to consider is the taxation at corporate and personal level.

 

[chrisgerth]

Thanks for your reply, can you elaborate what I have to look for on the receiving part (meaning individual shareholder = personal level)?

 

[JohnnyDoe]

It depends on your residence, you should check with your accountant.

 

[chrisgerth]

Alright, and what about the corporate aspect of it? Any experience on that part you can share?

 

[JohnnyDoe]

Alright, and what about the corporate aspect of it? Any experience on that part you can share?

In Cyprus it was possible without any issue, I don’t know if it’s still the case in 2023.
In the US if the loan is not at market rate you are penalized.
BVI, Panama, Nevis - no problem.

 

[daniels27]

Hello,

headline says it all. I am currently researching optimal jurisdiction for a holding company. So far I only found Singapore being a jurisdiction which allows interest free loans to its shareholder. Do you know any other jurisdiction?

https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_iit_benefits_to_company_directors_from_interestfreeloan_2014-09-12.pdf?sfvrsn=68ba89d3_9

3.1 The benefits arising from interest-free/subsidised loans taken up in the capacity as directors/shareholders are regarded as perquisites of employment and is taxable under Section 10(1)(b) of the Singapore Income Tax Act (“ITA”). 3.2 For the purpose of ITA, the directors of a company are regarded as employees.

I personally would be very careful with it as most likely your personal tax residence country will consider the loan as financial benefit, which is taxable. You may be better off charging interest (and offsetting it with a consulting invoice from you) or alternatively keeping it off the books, i.e. balancing the payment and repayment without entering the loan.

 

[Don]

In Cyprus it was possible without any issue, I don’t know if it’s still the case in 2023.
In the US if the loan is not at market rate you are penalized.
BVI, Panama, Nevis - no problem.

The problem is that its often considered as a deemed distribution and is taxable, including in Cyprus.
Estonian general partnership (company) is a feasible and great structure for owners loans, since there is no WHT on interest payments to non-residents, and no corporate income tax before profit distributions.

 

[chrisgerth]

The problem is that its often considered as a deemed distribution and is taxable, including in Cyprus.
Estonian general partnership (company) is a feasible and great structure for owners loans, since there is no WHT on interest payments to non-residents, and no corporate income tax before profit distributions.

I do know general partnerships from Germany (Offene Handelsgesellschaft) and they do indeed offer great flexibility as far as I can remember. However how would a Holding setup look like? Would it consist of an entity (OÜ) where the sole shareholder is said general partnership? And the general partnership would have myself, the individual, as a silent partner?

 

[Don]

I do know general partnerships from Germany (Offene Handelsgesellschaft) and they do indeed offer great flexibility as far as I can remember. However how would a Holding setup look like? Would it consist of an entity (OÜ) where the sole shareholder is said general partnership? And the general partnership would have myself, the individual, as a silent partner?

You did not really mention what exact structure you had in mind, from where you're getting your income, etc.
We have set up a branch office in Cyprus under the EE holding.
This way you can trade equities tax free since stock trading is exempt from tax in Cyprus and from Estonia holding you can lend the money to yourself, or distribute tax free dividends.
+ No need to stay on island, 0-days presence is required for tax residence in Estonia
+ No ghesy tax (social tax on dividends in Cyprus, which is otherwise applicable)
+ You can finance yourself without the money withdrawn being considered as income

 

[chrisgerth]

You did not really mention what exact structure you had in mind, from where you're getting your income, etc.
We have set up a branch office in Cyprus under the EE holding.
This way you can trade equities tax free since stock trading is exempt from tax in Cyprus and from Estonia holding you can lend the money to yourself, or distribute tax free dividends.
+ No need to stay on island, 0-days presence is required for tax residence in Estonia
+ No ghesy tax (social tax on dividends in Cyprus, which is otherwise applicable)
+ You can finance yourself without the money withdrawn being considered as income

I am tax resident in Hungary, dividends would come from HU company as described here Which jurisdiction for Holding Company?

 

[Dandyline]

In Cyprus it was possible without any issue, I don’t know if it’s still the case in 2023.
In the US if the loan is not at market rate you are penalized.
BVI, Panama, Nevis - no problem.

Still possible, comes with a fee though.

When a Director, shareholder and their spouses or their second degree relatives obtains any loan or money advances above their salaries from a limited company, then a benefit on their salary (9% on this amount) will be added on their monthly salary. This benefit will be taxed monthly and paid through the PAYE system

 

[chrisgerth]

https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_iit_benefits_to_company_directors_from_interestfreeloan_2014-09-12.pdf?sfvrsn=68ba89d3_9

3.1 The benefits arising from interest-free/subsidised loans taken up in the capacity as directors/shareholders are regarded as perquisites of employment and is taxable under Section 10(1)(b) of the Singapore Income Tax Act (“ITA”). 3.2 For the purpose of ITA, the directors of a company are regarded as employees.

I personally would be very careful with it as most likely your personal tax residence country will consider the loan as financial benefit, which is taxable. You may be better off charging interest (and offsetting it with a consulting invoice from you) or alternatively keeping it off the books, i.e. balancing the payment and repayment without entering the loan.

Thanks, but in my case it would be a loan from Singapore Holding to non-director shareholder. So from the perspective of Singapore this would be fine. I just have to check local tax situation in receiving land (Hungary).

 

[Dandyline]

You did not really mention what exact structure you had in mind, from where you're getting your income, etc.
We have set up a branch office in Cyprus under the EE holding.
This way you can trade equities tax free since stock trading is exempt from tax in Cyprus and from Estonia holding you can lend the money to yourself, or distribute tax free dividends.
+ No need to stay on island, 0-days presence is required for tax residence in Estonia
+ No ghesy tax (social tax on dividends in Cyprus, which is otherwise applicable)
+ You can finance yourself without the money withdrawn being considered as income

Interesting setup. Seems like shareholder/director loans is prohibited in Estonia though?

 

[Don]

Interesting setup. Seems like shareholder/director loans is prohibited in Estonia though?

It is prohibited with private limited company, but not with partnership companies.

 

[JohnLocke]

Interesting setup. Seems like shareholder/director loans is prohibited in Estonia though?

The question in the thread title is not answered at all if you ask me. OP is asking for "countries where a interest free loan to a shareholder" is possible. I believe it is not possible at all in any country since it would be considered taxable income for the shareholder.

If you guys know which country allow this or which country allow a loan with interest that hasn't to be paid back within a year, you may post it here.

 

[Dandyline]

The question in the thread title is not answered at all if you ask me. OP is asking for "countries where a interest free loan to a shareholder" is possible. I believe it is not possible at all in any country since it would be considered taxable income for the shareholder.

If you guys know which country allow this or which country allow a loan with interest that hasn't to be paid back within a year, you may post it here.

Shareholder loans are possible for Singapore companies (no interest rate).

Its possible for Cyprus companies as well, with an annual rate of 9% which is added as income (first 19500€ non tax), so you can basically borrow 200k per year for free, and then clear the loan with tax free dividends.

 

[JohnLocke]

We are starting to get some good answers in this thread. There is a big difference between countries. For example, it is not legal to live in a Scandinavian country and take a loan in the form of believing it to be tax-free or legal even if it is legal in the country where the company is registered. In Scandinavian countries, this maneuver is considered tax evasion and can be punished with imprisonment.

 

[Dandyline]

We are starting to get some good answers in this thread. There is a big difference between countries. For example, it is not legal to live in a Scandinavian country and take a loan in the form of believing it to be tax-free or legal even if it is legal in the country where the company is registered. In Scandinavian countries, this maneuver is considered tax evasion and can be punished with imprisonment.

It was legal in Sweden until 2009 and a lot of people sold their companies to a CY holding company and borrowed tax free while still living in Sweden.

 

[JohnLocke]

So it has been 14 years since it was legal. That was when you could register a Seychelles company and get a bank account in Cyprus. It was when you could have a totally anonymous company in Cyprus with a bank account. It was also in that decade when it was possible to set up a BVI (British Virgin Islands) company completely anonymously and get a bank account anywhere without even visiting the bank! You could also get credit card processing for those companies without any problem.

We are now in 2023 - soon 2024, things have changed radically, nothing is as it was just 5 years ago. EVERYTHING has changed, some would say for the better - others would say for something bad and terrible. I will leave it up to each individual to judge.