Loans from one company to another

S

san siro

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I am majority shareholder in company A and want to lend money to Company B in which I am 50% shareholder to get over cashflow issues. The loan would be for 12-18 months.

Are there any issues / tax implications with this type of transaction ?
 
implications of lending money from one company to another company with a common shareholder/director.
1- in the accounts of company A, company B would be a creditor and would go under the following heading amounts due to one connected company, also in company A accounts the transaction should be recorded as way of a note as its a related party transaction.
2 in the accounts of company B, company A would be a Debtor and would go under the following heading amounts owed by one connected company, also in the notes of company B the transactions should be recoreded as way of a note as its a related party transaction.

3 - as far as i can see there would be no tax implications for this type of transaction as it is common and i see it all the time, but if company B repays company A the capital sum plus interest the Company A be taxed on that interest and Company B be able to offset the interest against corporation tax
 
san siro said:
I am majority shareholder in company A and want to lend money to Company B in which I am 50% shareholder to get over cashflow issues. The loan would be for 12-18 months.

Are there any issues / tax implications with this type of transaction ?
Click to expand...

The making of such a loan may be prohibited under Section 31 Companies Act 1990.

Also, you should seriously consider any strain that the making of such a loan might put on company A! Repaying the loan might become an issue of company B is in any sort of trouble as creditors may claim faudulent preference. So I susggest you get a loan agreement set up if you are permitted/decide to go ahead with this.
 
San Siro,

There may well be Company Law issues here. If both companies are not grouped by way of parent - subsidiary relationship, then there are restrictions on the lending between both companies. If you are deemed "connected" with the company that you have a 50% shareholding in (which I think you will) then you will only be allowed to make loans from one company to the other in restricted circumstances. S31 of the Companies Act is the relevant reference point for you.
 
My instinctive thoughts are that it is hard to do it without having a parent/holding company in place but I'm open to correction.

Do you have a directors loan account balance with company A sufficient to cover the amount you want to lend? If so, you could effectively transfer that directors loan account from company A to company B.
 
Section 31 CA90 does not apply to loans "intra-group" but this is not a group, just two separate companies with at least one common owner. I would be very wary of such transactions as breaches of S.31 are now very dimly viewed by CRO/ODCE. Check Company Law first.
 
Thanks for your replies.

My basic problem is. I have money in Company A that is "not required" in company A. My wife and I are the directors and 100% shareholders of Company A. I am a 50% shareholder in Company B and the other 50% shareholder is not connected with me. Company B needs funding.

Delima is, if I take money out of Company A, it's treated as income and therefore taxable, so I have less left over to put into Company B.

Is it possible for Company A to lend to Company B or is this prohibited ?

Does it change the situation if my shareholding in Company B is less that 50% ?
 

San Siro,

If the money in company A is not of any benefit perhaps you should consider liquidating the the company. If you do this the shareholders will only have to pay capital gains tax. As I am sure you are aware capital gains tax has increased in the last two budgets and may increase again. You may also find that by making the loan that you will be creating an income tax liability anyway as certain types of loans especially if they end up being unpaid!

I do not know what amount of money you are talking about but assuming it is money you and your wife could put to good use I would strongly recomend you review the position of company B before you proceed. Sorry but in the current climate I would be worried that you would lose the money that you put into company B.

I do not believe that the percentage shareholding has any bearing on the problem as it would appear you are opperating a close company.
 
Thanks jack2009,

I don't want to liquidate Company A as it's still trading.

Company A has funds that it doesn't require at present. Is it possible for Company A to subscribe for some kind of Redemable Preference Share in Company B ? In this case it would't be a loan but a share subscription ? Company A could then redeem them at the appropriate time ?

Thanks for your help again,

Is this a workable solution ?
 
Dewdrop,

Best to look at earlier thread for explanation of what I'm trying to achieve ?
 

Sorry San Siro,

The short answer is that I do not know. Sorry I miss read your earlier text and thought company A was non trading.

I am sure there are various restrictions on actually redeeming the shares. I am not great with the company secreterial side of things but wonder if setting up the redeemable shares correctly would be costly. I would be worried that the tax authorities may look at the substance of the transaction and insist on the investment being classified as a loan and looking to charge income tax. Company A will be charged tax on the repayments from company B. Again, concerned about the money getting locked into company B.
 
Jack 2009,

Thanks for your comments. Much appreciated.

Michael
 
San Siro,

You have a few options as follows,

  1. If the amount of the loan is less than 10% of the net assets of the company making the loan then the loan can be made to the other company. The issue is if it is greater than 10% then the auditors of the company would have a reporting requirement to the ODCE.
  2. You could get a golden share issued from one company to the other. What this has the affect of doing is "grouping" the companies and you are then entitled to makes loans over and across between the companies.
  3. Finally you could look at company A invoicing company B for consultancy work or something that would be seen as a trading invoice. However I don't think this is a runner as it would create VAT/CT problems etc.
To conclude number 1 is the most workable and cheapest option. Number 2 has a cost associated but the cost is not substantial. Let me know if you have any further queries.
 
Henrieta,

Thanks for your comments.

The amount is greater than 10% of net assets, so 1. is not workable.

If I understand correctly a golden share woudl give me control over the company. Is this correct ? The other shareholder, owner of other 50% may not agree to this.

A golden share could be just one single share and he would still own "almost" 50% of the equity, but he would have in effect handed over control to me if he agreed to a golden share. Is my correct ?
 
San Siro,

The Golden Share would give the power to control the make up of the board of directors in the issuing company (company B) so the purchasing company (Company A) could therefore control Company B after the issue of this golden share. Therefore you are correct in that the other shareholder would probably not agree to this.

You could look at turning it around and getting Company A to issue the golden share to Company B. This will have potential issues for you though as you are effectively handing out a measure of control over your performing company to the shareholder of the non performing company. You will seriously need to consider this issue. If you go ahead with this suggestion it will faciliate the inter company lending.

One point to note is that if a golden share is issued neither company will be entitled to the audit exemption so you will need to have audits on both companies going forward if you do go down this road.

Your understanding is correct in the last paragraph above.
 
The Golden Share is pretty easy to do and is the most straightforward option. It does not change tax etc as it is not a group for CT or accounting purposes.

It depends on your relationship with the other shareholder in company B.

If you are putting in the loan via a company controlled by you it is reasonable that you have control of that company. Therefore it company B issues the share to company A you will have control but no additional dividend or rights on wind up.
 
Henrieta, Paddy 26,

It would apear that the golden share is the only route. I need to convince my fellow shareholder to allow me to do that ?

Are there any issues with Company B redeeming the golden share once the it (company B) has repaid the loan to company A, therefore restoring the situation to that existing prior to the loan being made.
 
If you have a director's loan in Company A which was in Credit (ie Company A owe you money) then you could take the loan by way of director's loan and then you could loan Company B the money personally.

Bear in mind that the balance of your director's loan a/c in Company A would still have to fall under the 10% rule mentioned by Henrietta above.

eg

Suppose Company A owes you €40K and the Net Assets are €500K

You could effectively get Company A to loan you €90K as the €50K you would then owe Company A would still be within the 10% of the Net Assets of Company A.

That is my understanding of the company law aspect - perhaps this could be confirmed.
 

From a company law point of view you are correct! However, from reading the previous posts I dont believe your figures apply to the case in hand.
 
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