How to take the tax sting out internal business loans

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Dividends withholding tax of 20% payable on the interest charged

Daniel Baines

If you are a business owner, you probably made a loan to your company when you started out to get the business going. Alternatively, you may have made a loan to your company later if your business needed some assistance with cash flow. You may now be wondering how this loan is treated from a tax perspective.

You, or any one of your other shareholders, would at some point presumably want the company to repay the loan owing to you. When your company is in a position to repay the loan, it may do so without any tax implications for the company or the shareholder; it is merely the repayment of a loan owing to the shareholder.

These types of loans can have negative tax implications, unlike a loan you made to your company. However, there are only potential negative tax implications if the loan is made to a shareholder who holds at least 20% of the equity shares or voting rights in the company and the loan is made by virtue of a share held and not for business or commercial reasons.

 

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