In practice, it often becomes necessary to attract money from individuals to legal entities. For this, various structures are used - "temporary financial assistance", "gratuitous financial assistance", "temporary contributions of the founders". If money is attracted on the basis of repayment and urgency, such transactions are recognized as a loan, regardless of how they are named in the concluded agreement. Is it possible for a legal entity to attract loans from individuals? Can individuals receive remuneration for these loans? What are the tax consequences of such transactions?
WHEN IS THIS LOAN APPLICABLE?
A loan to a legal entity can be provided:
- a participant (participants) of a legal entity;
- director or other employee;
- third party.
In accordance with paragraph 1 of Article 55 of the Law of the Republic of Kazakhstan "On Limited and Additional Liability Partnerships", members of the executive body of an LLP are prohibited from: without the consent of the general meeting, to conclude transactions with the partnership aimed at obtaining property benefits from it (including contracts of gift, loan, gratuitous use , buying and selling, etc.). Thus, if a loan agreement entails the payment of remuneration to the director of the LLP, then such an agreement must be approved by the general meeting of participants (the sole participant).
The purposes of attracting such a loan may be:
- replenishment of working capital;
- payment under the concluded transaction;
- repayment of existing debt.
Reasons for borrowing:
- there is no money from the legal entity itself;
- unwillingness to transfer money to a legal entity on a permanent basis (for example, to increase the authorized capital);
- unwillingness to pay extra taxes (in case of a gratuitous irrevocable transfer of property to a legal entity, the latter will have taxable income).
LOAN WITH INTEREST PAYMENT
IS SUCH AN AGREEMENT POSSIBLE?
In accordance with paragraph 3 of Article 715 of the Civil Code, legal entities and citizens are prohibited from attracting money in the form of a loan from citizens as an entrepreneurial activity, and such agreements are recognized as invalid from the moment they are concluded. This prohibition does not apply to cases where the borrowers are banks that have a license from the authorized state body to accept deposits, as well as to cases of accepting money in exchange for securities, the issue of which is registered in accordance with the procedure established by law. This rule served as the basis for the existence of a widespread point of view, according to which a legal entity under no circumstances can attract a loan from an individual with payment of remuneration to the latter. This position was sometimes taken by the tax authorities in the past when giving clarifications.
However, this ban is intended to protect citizens from fraud and the organization of various "financial pyramids". Attracting money in the form of a loan from citizens in the form of entrepreneurial activity, in other words, means accepting deposits from the population with the payment of remuneration, which refers to banking operations and requires a license.
At present, the prevailing point of view is that this restriction applies only to cases where a loan is used as a way of doing business.
In accordance with paragraph 1 of Article 10 of the Civil Code of the Republic of Kazakhstan (General Part), entrepreneurship is an initiative activity of citizens and legal entities, regardless of the form of ownership, aimed at generating net income by satisfying the demand for goods (works, services), based on private property (private entrepreneurship) or on the right of economic management of a state enterprise (state entrepreneurship). From this concept it follows that entrepreneurial activity is permanent and systematic. It follows that lending money, not for the purpose of entrepreneurial activity, even for a fee, is not prohibited.
This position is currently supported by the tax authorities (see, for example, Letter of the Tax Department for the city of Almaty of the Ministry of Finance of the Republic of Kazakhstan dated January 14, 2010 No. ND-06.1-11/67-yu).
TAX IMPLICATIONS
FOR A LEGAL ENTITY-BORROWER
In accordance with paragraph 2 of Article 13 of the Law of the Republic of Kazakhstan "On Accounting and Financial Reporting", income represents an increase in economic benefits during the reporting period in the form of an inflow or increase in assets or a decrease in liabilities that result in an increase in equity, other than an increase related to with contributions from persons participating in the capital. If there is an obligation to repay the loan received, the money received shall be recognized in the borrower's accounting records as liabilities, which, in accordance with paragraph 1 of the same article of the Law, are understood to be the existing obligations of an individual entrepreneur or organization arising from past events, the settlement of which will lead to the disposal of resources containing economic benefits.
Thus, the amount of the loan subject to repayment is not recognized as income of the legal entity-borrower, and, accordingly, is not subject to inclusion in the total annual income as property received free of charge.
FOR AN INDIVIDUAL BORROWER
Since the loan agreement provides for the payment of interest, the individual lender receives income that must be subject to individual income tax at the source of payment at a rate of 10% (Article 158 of the Tax Code of the Republic of Kazakhstan).
The legal entity in this case acts as a tax agent.
At the same time, depending on whether the lender is an employee of the legal entity-borrower, income will be taxed as:
- employee income (Article 163 of the Tax Code);
- income of an individual under civil law agreements concluded with a tax agent in accordance with the legislation of the Republic of Kazakhstan (Article 168 of the Tax Code).
LOAN WITHOUT INTEREST
IS SUCH AN AGREEMENT POSSIBLE?
With regard to the conclusion of an agreement on the provision of a loan by an individual to a legal entity without payment of remuneration, the legislation, including Article 715 of the Civil Code, does not contain restrictions.
TAX IMPLICATIONS
FOR A LEGAL ENTITY-BORROWER
By analogy with a compensatory loan agreement, the amount of the loan to be repaid is not recognized as income of the legal entity-borrower, and, accordingly, is not subject to inclusion in the total annual income.
Currently, the tax authorities consider the provision of interest-free financial assistance on a repayable basis as a loan transaction, and consider it a gratuitous provision of services.
The arguments for this are as follows.
In accordance with subparagraph 6) of paragraph 2 of Article 231 of the Tax Code, the turnover for the sale of works, services means any performance of work or provision of services, including gratuitous, as well as any activity for remuneration other than the sale of goods, including the provision of credit (loan , microcredit). According to subparagraph 16) of paragraph 1 of Article 85 of the Tax Code, the total annual income includes all types of income of the taxpayer, including income in the form of property received free of charge. And according to Article 96 of the Tax Code, the value of any property, including works and services received by the taxpayer free of charge, is his income. Unless otherwise established by the Tax Code, the value of property received free of charge, including works and services,
Thus, the tax authorities include in the total annual income of the borrower the cost of the service in the form of gratuitous use of the loan. At the same time, the amount of such income should be determined according to the accounting records of the borrower in accordance with international financial reporting standards and the requirements of the legislation of the Republic of Kazakhstan on accounting and financial reporting.
The procedure for determining the cost of a loan service received free of charge has not been specifically defined or approved. Currently, taxpayers independently determine for themselves in the accounting policy how this income will be calculated. The taxpayer must include the self-calculated remuneration in his income as the cost of the service provided free of charge.
Paragraph 11 of IAS 18 Revenue states that when the contract is effectively a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an implied rate of interest. The implied rate of interest is the most accurately determined of the following:
- (a) the prevailing rate for a similar issuer financial instrument with a similar credit rating; or
- (b) an interest rate that discounts the face amount of a financial instrument to current cash sales prices of goods or services.
The difference between fair value and the nominal amount of consideration is recognized as interest income in accordance with paragraphs 29–30 of IAS 18 and in accordance with IAS 39. In accordance with paragraph 48A of IAS 39 IAS 39 Financial Instruments: Recognition and Measurement The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, an entity establishes fair value using a valuation technique. The purpose of applying a valuation method is to determine what the price of the transaction would be at the measurement date in an exchange between independent parties motivated by normal business considerations. Valuation techniques include the use of information about recent market transactions between independent, knowledgeable,
Thus, taxpayers need to proceed from the current prices for similar services if they received them for a fee. The cost of providing a loan is the amount of the fee. At the same time, to calculate the cost, it is necessary to take into account not bank interest rates, but rates on loans provided by non-financial organizations. The accountant should justify the application of these rates by collecting and analyzing statistical information on similar loans.
Consequently, the amount of income recognized by the taxpayer who received a loan or, in other words, gratuitous (interest-free) financial assistance on a repayable basis, in accounting, taking into account the application of IFRS, legislation on accounting and financial reporting, is the amount of income in the form of material benefits from savings on remuneration for such assistance is included in the total annual income of the borrower and is subject to corporate income tax.
FOR AN INDIVIDUAL BORROWER
Since the individual who issued the loan does not receive income in this case, he does not have any tax obligations.