Do you know what an interest-free loan is ? And how is it taxed? In this article we explain what it consists of and answer all your questions about it.
- An interest-free loan is subject to a varied casuistry, which affects its taxation. We explain the guidelines that you should know.
- In this article we analyze the main tax repercussions of interest-free loans on personal income tax, corporate tax and documented legal acts.
Interest – free loans are a financing instrument used with some frequency by SMEs. The reasons can be very varied. This means that its tax treatment is subject to extensive casuistry, which also depends on many elements of the context.
SHARE IT! Are you going to lend or borrow without interest? Pay attention to the fiscal keys of the operation.
For this reason, professional advice is very important if you are thinking of becoming an interest-free lender or borrower. In any case, there are some more or less common guidelines that you should know.
The tax on documented legal acts on interest-free loans
You pay this tax, among other cases, when you grant a public deed before a notary. Although, in principle, it would not be strictly necessary, this procedure is very convenient . The Civil Code establishes that contracts are mandatory regardless of the way in which they have been concluded. Therefore, you could even agree to a loan without interest.
The normal thing is that you formalize the contract through a deed and pay the tax of documented legal acts.
However, a public document is the best way to put it on the record . Keep in mind that there may be different means of proof. You could have a private document, there could be witnesses, you can question the parties, provide various types of documents… However, writing provides significant advantages. They attest to the fact (the constitution of the loan and the conditions that are marked in it) and the date of the document.
On the other hand, private documents are also subject to the tax on documented legal acts. The deed will provide you with more security in the face of the treatment of the operation in other taxes.
The loan without interest in personal income tax
This tax is only paid when one of the parties involved is a natural person :
- If it is the lender , it must be able to prove that it does not charge interest . Otherwise, an income could be imputed based on the legal interest rate of money.
- If it is the borrower , you will not be able to deduct interest as an expense of an economic activity, by not paying them.
However, it is very common for the operation to be established between related parties (loans between family members, between partner and company, etc.). In those cases, it will be necessary to make a market valuation of the interest and follow the rules of the Corporation Tax . However, in personal income tax, the usual thing is that the borrower cannot deduct any amount for interest, unless the use of financing has been necessary to obtain a certain income.
Loans without interest and corporate tax
In this tax, the situation is different depending on whether or not there is a relationship between the lender and the borrower. Among the most common assumptions of linkage we find the relationships of an entity with:
- Their partners or participants and their spouses and relatives up to the third degree.
- The directors or administrators and their spouses and relatives up to the third degree.
- Another entity of the group or in which the indirect participation exceeds 25%, even considering the joint participation of various related persons or entities.
- Their permanent establishments abroad.
The corporate tax rules influence several aspects of the taxation of interest-free loans in personal income tax. Among them, related operations and the calculation of income from economic activities in direct estimation.
Although it is the most frequent case, the lender can also be a person or entity that is not related to the borrower. One of the most common cases is the one in which the interest-free financing is received by a social entrepreneurship business.
Treatment in the Corporation Tax in case of linkage
A common case of linkage is operations between group companies . For them, the General Chart of Accounts establishes a valuation at the initial moment for their fair value. Therefore, the usual thing is that there is no difference between the accounting and tax treatment , unless we understand that there may be a difference between the market value (considered for tax purposes) and the reasonable one (the one collected in the accounting).
On the other hand, it is normal that the agreed price differs from the fair value. After all, the normal thing is not that the interest rates that are exchanged in a market situation are zero. In that case, the difference must be recorded according to the reality of the operation . Therefore, we must enter to assess what is being done . For example, among other cases, the operation may be equivalent to:
- A contribution to capital or to another item of own funds.
- The remuneration of another operation.
- The distribution of the results or equity of the subsidiary to the parent company.
In principle, it may be customary for this difference to be understood as a donation from the parent lender to the borrowing subsidiary. However, the General Accounting Plan does not allow income or expenses to be recognized when the donation is made by a partner or owner. The difference, therefore, should be recognized:
- If there are no other partners, such a higher value of the share in the lender’s accounting. In that of the borrower, it will produce an increase in own funds .
- In the event that there are and they have not lent or have done so in a smaller proportion, we will record an expense in the lender’s accounting . However, this expense would not be deductible from corporate tax, to the extent that it is considered a liberality.
Treatment in the Corporation Tax in the absence of a link
In this situation, the first thing is to know what the operation is due to . There may be cases of conflict in the application of the tax rule or simulation. However, the most common is that there is a liberality, the loss of which is not deductible for the lender.
As you can see, the interest-free loan should be used once the consequences in different legal and accounting fields have been assimilated . The taxes you end up paying will depend on it.
