Whether it is necessary to calculate interest on received/given loans depends on several factors. Considering that the topic is quite extensive, we will elaborate interest on given loans in our next article.
Interest on received loans
If a trading company receives a loan from a NATURAL PERSON (citizen), it can be:
• interest-free contract
• with agreed interest
If the interest on the loan received from a natural person is contracted, then the company receiving the loan/paying the interest (at the time of interest payment) is obliged to calculate and withold tax on CAPITAL INCOME (10%) + surtax.
If the interest is paid to a NON-RESIDENT – it is necessary to calculate WITHHOLDING TAX.
If the company receives a loan from a LEGAL ENTITY (entrepreneur), then the following aspects should be taken into account.
1. If the company receives a loan from an UNRELATED (legal entity), whether it is a resident or a non-resident, the loan can be contracted:
• interest-free
• or a “market” interest rate can be agreed upon
2. However, if the loan is received from RELATED (legal entity), the tax assessment is different, whether it is a resident or non-resident entity.
2.1. If the company receives a loan from RELATED (legal entity) – RESIDENT, the loan can be contracted:
• without interest
• or with “market” interest
*with EXCEPTION – if any of the contracting parties (recipient or loan provider):
• are in a more favorable tax position (e.g. they pay income tax at rates that are lower than the prescribed rate or are exempted from paying income tax due to the fact that they operate in subsidized areas)
• or has a tax loss carried forward
than Article 14. paragraph 3. of the Law on Profit Tax (Official Gazette 177/04 to 114/22) applies.
Which means that for the loan received by the RELATED (legal entity) – RESIDENT who is in a more favorable tax position, it is necessary to calculate the minimum interest rate prescribed by law, which for the year 2022 is – 2.68%. This rate was determined in the Decision on publication of the interest rates on loans between related parties for the year 2022. (Official Gazette 139/21). Thus, the agreed interest calculated at the legally prescribed rate will be a tax-deductible expense. The contracting parties can agree on an interest rate higher than that prescribed by law, but then the difference between the interest calculated at the higher rate and the interest calculated at the legally prescribed rate (2.68%) will be a taxable expense i.e. it will be an increase in the tax base when calculating profit tax.
2.2. Furthermore, the provisions of Article 8./Article 14. of the Law on profit tax is being applied on loans received by RELATED (legal entity) who are NON-RESIDENTS.
Article 8. refers to interest on loans received by the company from a NON-RESIDENT shareholder who holds at least 25% of shares or voting rights in the company. If, in the tax period, the loans of such non-resident shareholder exceed four times the amount of that shareholder’s share in the capital or voting rights, (which is determined in relation to the amount and the duration of the loans in the tax period), then the interest calculated on that part of the capital that exceeds quadruple amount of the share is to be a non-recognized expense for tax purposes.
NOTE – The lender, a INDIVIDUAL or LEGAL PERSON, who is a member of the company (owner of a business share), can decide to waive the loan, then the loan amount will be recorded in favor of INCOME or as an increase in CAPITAL RESERVES of the company receiving the loan.