Loans from a company to its shareholder: how to prevent HMRC from treating them as a benefit
Loans between a company and its shareholders: a common practice
In the day-to-day operations of many companies, especially family businesses or those with a small number of shareholders, it is common to see cash movements between the company and its shareholders. Among these, loans granted by the company to its shareholders are relatively frequent.
However, if these transactions are not properly formalised or do not follow arm’s length principles, HM Revenue & Customs (HMRC) may treat them as benefits or disguised distributions of profits to the shareholder
This situation may result in unexpected and sometimes costly tax liabilities for both the company and the shareholder.
In this article, we explore when a shareholder loan might be subject to scrutiny by the tax authorities and what measures should be taken to avoid such a reclassification.
When a loan is treated as a benefit to the shareholder
Article 25.1.d) of the Spanish Personal Income Tax Act (IRPF) provides that any economic advantage a shareholder receives from a company purely by virtue of being a shareholder – even if not in the form of a formal dividend – must be taxed as income from movable capital.
This includes what the Spanish Tax Agency refers to as utilidades or “benefits” – economic advantages obtained by a shareholder from the company that are not properly justified as genuine compensation
In this context, loans made by a company to a shareholder may be deemed benefits if their features differ significantly from those of a genuine financing arrangement.
Red flags for HMRC
The tax authorities tend to look for a combination of indicators which, when viewed together, may lead to the conclusion that the loan is, in reality, a disguised profit distribution.
The most common signs include:
- Lack of a written loan agreement.
- Overly flexible or undefined repayment terms.
- Absence of interest, or application of a nominal or below-market interest rate.
- Failure to disclose the loan as a related-party transaction in the annual accounts.
- Repeated use of shareholder accounts (such as accounting code 551) without actual repayments.
- Lack of solvency or financial capacity on the part of the shareholder to repay the loan.
Personal use of the funds unrelated to the company’s business.
This is not an exhaustive list, nor is it necessary for all of these elements to be present for the transaction to be subject to scrutiny. The presence of several such indicators may be enough for the tax authorities to challenge the authenticity of the loan.
Tax consequences if the loan is reclassified by HMRC
If the tax authorities determine that the transaction does not constitute a genuine loan, there are two main consequences:
1. For the lending company:
- It is deemed to have made a payment to a shareholder without applying the appropriate withholding tax (generally 19%).
- It may be liable for late payment interest on the unpaid withholding.
It may also face tax penalties for breaching its tax obligations (in particular, its duty to withhold)
2. For the receiving shareholder:
- The amount received is treated as income from movable capital.
- The shareholder must pay the corresponding personal income tax, plus late payment interest.
A penalty may also be imposed for failing to declare the tax liability.
This approach is supported by recent case law, which tends to uphold the administrative position where the taxpayer has failed to meet the burden of proof.
How to prove that a loan is genuine
To defend against a potential tax adjustment, it is essential to provide evidence of the loan’s economic substance.
This includes:
A written agreement signed by both parties, with clear and reasonable terms.
Submission of the loan agreement to the relevant regional tax authority (e.g., for stamp duty, even if exempt).
An interest rate in line with market conditions, unless a clear and justified exception applies.
A defined repayment term, with a realistic amortisation schedule suited to the circumstances of the transaction.
Actual and documented repayments. The best evidence of a loan’s authenticity is the shareholder repaying, in whole or in part, the principal and accrued interest according to the agreed terms.
Proper accounting records and disclosure in the company’s financial statements as a related-party transaction.
It is also advisable to avoid routinely using shareholder current accounts (such as accounting code 551) as a mechanism for the disbursement and repayment of funds without sufficient documentary justification.
Judicial criteria regarding shareholder loans
Spain’s National Court and various regional high courts have upheld the tax authority’s position in cases where shareholder loans had very favourable conditions or were not properly formalised.
Notable judgments include:
Judgments no. 868/2023, 1544/2015 TSJ of the Valencian Community, 4 October 2023.
Judgment no. 1066/2024, TSJ of Castilla y León, 27 September 2024.
Judgment no. 3109/2021, TSJ of Catalonia, 28 June 2021; also judgments no. 1923/2022 (17 March 2022) and no. 4212/2019 (30 April 2019).
Judgments no. 1973/2023, 1974/2023, and 1991/2023, TSJ of the Principality of Asturias.
Judgment no. 3094/2022, TSJ of Andalusia, 15 March 2022.
Judgments no. 1557/2016 (13 April 2016) and no. 2775/2014 (14 May 2014), National Court.
These rulings show that even when a loan agreement exists, the absence of interest, repayments, or guarantees may undermine the supposed loan’s credibility.
In other words, having a contract is not enough: the parties must provide evidence that the loan was performed and that there was genuine intent to repay. Accounting entries alone are insufficient unless backed by external documentation and actual payments.
Conclusion: plan shareholder loans carefully
Loans from a company to its shareholder are legal but must comply with certain essential requirements.
If the transaction is not properly formalised or contains unduly favourable terms, HMRC (or the Spanish Tax Agency) may reclassify it as a benefit or disguised profit distribution.
This reclassification can have serious tax consequences for both the company and the shareholder.
The best defence is thorough planning: formalise the loan, document it properly, comply with all legal requirements, and record it accurately in the company’s books. If the loan is intended to be repaid, that intention must be supported by clear and verifiable evidence.
Do you have a loan between your company and a shareholder that needs reviewing? At Devesa, we can help you assess the situation and prepare the documentation properly to ensure you’re protected in the event of a tax inspection.
Do you need advice? Access our area related to partnership loans to your partner: