Expert group opinion on loan interest for employee shareholdings

The payroll tax expert group has issued an opinion about setting a commercial interest rate on a loan-to-purchase plan taken out to finance the purchase of shares in the employer’s business

In this expert group opinion the tax authorities give various guidelines for setting a commercial/competitive interest rate for a loan from the employer which the employee enters into to purchase shares in the employer’s business. 

These guidelines are - in essence - as follows:

• If the loan-to-purchase amount is no more than €75,000, in principle, the lowest market interest rate for a personal loan or a securities-based loan may be applied
• If the loan-to-purchase amount is more than €75,000 and the loan to value (LTV) is 70% at most, in principle, the conditions and interest rates applicable to securities-based loans may be applied
• If the loan-to-purchase amount is more than €75,000 and the LTV is 100%, the interest rate on the loan can essentially be derived from the risk and return on the equity instrument that it finances
• If the loan-to-purchase amount is more than €75,000 and the LTV is between 70% and 100%, the interest rate can be set somewhere between (1) the interest rate charged by securities-based loan providers and (2) the loan capital cost of the financed equity instrument. Essentially, the interest will be set through a comparison

The expert group opinion further considers other aspects, such as the elements of a loan-to-purchase plan and loan to value. 

The expert group opinion also states that the employer and the employee are free to apply a different method, provided that the commercial nature of the interest rate charged can be demonstrated, bearing in mind the conditions applicable to a loan-to-purchase plan and the employee's financial situation, taken as a whole.