Large businesses
Practical information
Self-employed
SMEs
Last updated more than 5 years ago
When a business has a financing requirement to meet, it may take out a loan to obtain the necessary funds. The loan may be obtained from its partners / shareholders, or from a third party entity.
When it repays the borrowed capital, the company also pays interest which may be deducted from its taxable amount, under certain conditions.
To establish whether this interest is deductible, the following must be considered:
In no case is the repayment of borrowed capital ever deductible.
Any business, whether it is a sole proprietorship, a partnership or a capital company, may take out a loan (or seek financing by means of debt).
In principle, the business may deduct all interest paid to third parties.
However, the business may only deduct interest paid to its partners when the latter are separate from the company (in the case of capital companies) and subject to certain limits.
The borrowing business, irrespective of its legal form, may deduct interest paid on borrowings from its taxable base to an unlimited extent (no ceiling), regardless of the rates of interest applied or the amounts borrowed, provided that the loan is granted by a third party, i.e. an economic agent other than a shareholder.
When a sole trader borrows privately on behalf of the business, the interest relating to these loans is regarded as payable as part of the business' interest, and not as part of the interest payable by the business manager in a personal capacity. It is therefore deductible from the business profit.
The deductibility of interest on loans taken out with third parties is unlimited, but with certain restrictions in the case of bonds and equity loans.
Bonds include:
Equity loans allow the lender to be remunerated based on the business' profitability (a share in the profits and/or losses and possibly a fixed rate of interest).
The borrowing business may deduct interest paid from its taxable amount, as is the case for any loan.
However, the ACD also applies withholding tax to interest paid.
Sole proprietorships and partnerships may not deduct loan interest paid to their partners from their taxable amount.
Indeed, owing to the difficulty in separating the business from the entrepreneur, the latter may not deduct the interest that he pays to himself from his taxable profit.
Interest paid by the business to its owner constitutes a private withdrawal and not expenses that are deductible from the business profit.
Capital companies may deduct loan interest paid to their partners from the taxable business profit.
The partner could therefore be tempted to opt to finance the company through loan capital rather than by way of a capital contribution, thus choosing to be remunerated through interest (deductible for the company) rather than in the form of dividends (non-deductible).
However, in order to prevent companies from seeking financing from loan capital alone in order to reduce their tax base, tax law sets certain limits.
A company that borrows from its partners must comply with certain limits in order to avoid excessive rates of interest and excessive debt relative to the capital contributions.