Loan granted to affiliated companies

A newly established company, X SRL, liable to VAT and to income tax, has two natural persons as founding members  with their participation quotas of 30%, respectively 70%.

Each of these associates hold the position of administrator at other company liable to VAT and income tax.

Are the three companies regarded as affiliated? How can one of the companies lend money to the newly established one? Should it be achieved based on a determined loan agreement (exclusive of interest) or based on an advance invoice (whose cancellation would occur once the advance payment is reimbursed) ?

According to art.7 (26) from the Tax Code, the companies are affiliated because they hold indirectly – through the holdings of the natural persons- more than 25% of the shareholdings.

Occasional loans – in such way that they don’t acquire professional titles- between companies are not forbidden by law.

Taking into account the statute of affiliated companies, X SRL must pay attention not to infringe art. 7 (33) of the new Tax Code:

“33. The arm’s-length principle – when the terms and conditions set in the economic or financial relationships between affiliated persons differ from those which would have occurred between unrelated persons, any profits, which under the absence of those particular terms and conditions would have been achieved by one of those persons but haven’t because of those particular terms and conditions, can be regarded as profit of that person and taxed accordingly.”

Hence, it is preferable for the loan to be granted with an interest which would have been charged by other non-affiliated company.

Certainly, another non-affiliated company would have had the right to grant this loan with no interest but in order to apply a careful method, it is indicated that the loan agreement provides an interest.

One should mention also that the legislation provides no mandatory minimum interest.

The interest must be established based on the following criteria: the amount and the length of the loan, its nature and purpose, the guarantee, the foreign-exchange risks etc.

For example, the minimum interest applied by banks can be applied or the minimum interest approved by art.27 of the Tax Code can also be applied:

“(7) For the loans granted by other entities, except for those provided by section (6), the deductible interests are limited to:

  1. a) The level of the interest rate established by the monetary policy of BNR (The National Bank of Romania), corresponding to the last month of the trimester, for foreign currency loans, and
  2. b) The level of the annual interest rate of 4%, for foreign currency loans.

The level of the interest rate for foreign currency loans are upgraded through a governmental decision.”

It is highly important that when preparing the loan agreement no essential elements be disregarded, without whose existence the tax office might reconsider the operation, elements such as: reimbursement deadlines, penalties for not meeting these deadlines etc.

Practically, the agreement must be concluded in the exact same way it would have been concluded if the parties involved were not affiliated, by meeting the market terms and conditions.