Loan to a Limited Liability Company from a Shareholder Who Is a Management Board Member: Legal and Tax Requirements
A loan granted to a limited liability company (sp. z o.o.) by its shareholder is one of the more commonly used tools for recapitalising a company. It is a flexible and relatively simple solution, but where the lender is also a management board member, significant formal requirements arise, and failure to observe them may render the agreement invalid. In this article we discuss the following issues:
- Special representation of the company in agreements with management board members,
- The procedure for the appointment of a proxy by the shareholders' meeting,
- The form of the loan agreement and the possibility of signing it with a trusted profile (profil zaufany),
- Tax aspects: tax on civil law transactions (PCC), VAT, corporate income tax (CIT) and personal income tax (PIT) on interest.
The Key Requirement: Special Representation Under Article 210 § 1 CCC
The basic rule is that a limited liability company is represented by its management board. The Commercial Companies Code (CCC), however, provides for an exception of fundamental importance. Under Article 210 § 1 CCC, in an agreement between the company and a management board member, and in a dispute with that member, the company is represented by the supervisory board or by a proxy appointed by a resolution of the shareholders' meeting.
You can read about other ways of recapitalising a limited liability company in the article: Ways of Recapitalising a Limited Liability Company
This provision applies whenever the other party to an agreement with the company is a person holding the office of management board member, regardless of whether that person is also a shareholder, an employee or a third party. If the management board signs the agreement for both parties in such circumstances, the agreement is absolutely invalid under Article 58 of the Civil Code. This position is well established in the case law of the Supreme Court.
A Proxy Appointed by a Resolution of the Shareholders' Meeting
A practical solution is for the shareholders' meeting to appoint a proxy to conclude the agreement on behalf of the company. The procedure is as follows:
Step 1: resolution of the shareholders' meeting appointing a proxy to conclude a specific agreement (or agreements) with a named management board member. The resolution should define the scope of the proxy's authority and, in particular, state with which management board member and on what terms the proxy is to conclude the agreement.
Step 2: conclusion of the agreement by the proxy. On the company's side, the agreement is signed solely by the appointed proxy, not by the management board. On the lender's side, the management board member signs the agreement in their own name as a natural person.
The proxy may be any natural person with full capacity to perform legal acts: a person from outside the company, an employee or an attorney-at-law (radca prawny). If loans are granted by several shareholders, the company must be represented by a proxy for each loan, which should be taken into account when drafting the resolution.
Form of the Loan Agreement
Under Article 720 § 2 of the Civil Code, a loan agreement with a value exceeding PLN 1,000 requires documentary form. Documentary form, governed by Article 77² of the Civil Code, is met by making a declaration of intent in the form of a document in a manner that allows the identity of the person making the declaration to be established. Neither written form nor a notarial deed is required.
In practice, the documentary form requirement is met by, among other things, a signed PDF document sent electronically, an email that clearly identifies the sender and a document bearing a trusted signature (podpis zaufany, using a trusted profile). A trusted signature is not a qualified electronic signature and is not equivalent to written form, but it is fully sufficient to meet the documentary form requirement.
Tax Aspects
Tax on civil law transactions (PCC)
A loan granted to a capital company by its shareholder is exempt from PCC under Article 9(10)(i) of the Act on Tax on Civil Law Transactions. This exemption does not cover the reverse situation, where the lender is a capital company and the borrower is a shareholder.
Value added tax (VAT)
If a shareholder grants a loan privately as a natural person, outside any business activity, the transaction is not subject to VAT at all, because the lender is not acting as a taxpayer within the meaning of Article 15 of the VAT Act.
If, on the other hand, the shareholder acts as a VAT taxpayer, granting a cash loan is a financial service exempt from VAT under Article 43(1)(38) of the VAT Act.
Corporate Income Tax (CIT): Interest as a Cost for the Company
Interest paid by the company is a tax-deductible cost for the company. The cash rule is important, however: under Article 16(1)(11) of the CIT Act, interest accrued but not paid is not a tax-deductible cost. The cost arises only when the interest is actually paid. This means that a company that takes out a loan in the middle of one year and repays it with interest at the beginning of the next will not recognise any cost in the year in which the loan was granted.
The interest rate on the loan should be set on market terms, that is, on terms that unrelated parties would agree between themselves, in accordance with Article 11c(1) of the CIT Act. Interest-free loans and loans bearing interest below market rates may be challenged by the tax authorities. The obligation to prepare local transfer pricing documentation arises where the value of the transaction exceeds PLN 10,000,000 per year. For loans granted by shareholders for the company's day-to-day needs, this threshold is usually not reached.
Personal Income Tax (PIT): Interest on the Shareholder's Side
Interest paid to shareholders is their income from monetary capital referred to in Article 17(1)(1) of the PIT Act. It is subject to a flat-rate tax of 19% (Article 30a(1)(1) of the PIT Act). The tax obligation arises when the interest is actually paid or made available to the taxpayer (Article 11(1) of the PIT Act).
In this respect the company acts as the tax remitter: it withholds the tax from the interest paid and transfers it to the account of the competent tax office by the 20th day of the month following the month in which the tax was withheld (Article 42(1a) of the PIT Act). The company files the annual PIT-8AR return by the end of January of the year following the tax year in which the payment was made.
Shareholders do not report this interest in their annual tax returns: the flat-rate tax withheld by the remitter is final.
Summary
A loan from a shareholder who is also a management board member is permissible and, if structured correctly, can be an advantageous tool for financing the company. It is essential to meet the requirement of Article 210 § 1 CCC: when the agreement is signed, the company must be represented by a proxy appointed by a resolution of the shareholders' meeting, not by the management board. Breach of this requirement renders the agreement absolutely invalid. A loan from a shareholder to the company is exempt from PCC, and the interest paid is subject to a flat-rate PIT of 19%, which the company, as the tax remitter, withholds and pays to the tax office.
