What is a current account?‍

Of course, the private limited company and you as the controlling shareholder are strictly separate entities. In practice, however, financial matters are often intertwined. This is because, for example, you may pay personal expenses from the company account or deposit money into the company account, and vice versa. In principle, this all leads to mutual claims. However, in practice, this would be an unworkable situation, which is why we use a current account.

The current account is a balance of the costs and amounts lent back and forth between the director and the company. If there were no current account, debts would have to be continuously reconciled. However, it is not an empty shell. When one party has a claim against the other based on this balance, there is actually a debt.‍

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Fiscal requirements and consequences‍

Since the current account is a real debt, it is always advisable to document the current account in an agreement. This agreement sets out the maximum amount of the debt, when and under what conditions the loan must be repaid, and what interest is due on the debt. If this is not properly documented, the tax authorities may consider the current account to be a distribution of dividends, subject to dividend tax.

The law stipulates that no interest is due on current account debts of less than €17,500. This is again based on the idea that the current account must be workable in practice. Otherwise, the interest would have to be recalculated per transaction, which is not feasible in practice. Therefore, no interest needs to be charged on current account debts below this threshold.

The interest charged on the current account has tax consequences. Obviously, the interest can go both ways. I will explain the tax consequences for both situations:
• Director pays interest to the company on the current account: The interest received by the company is subject to corporate income tax, and the interest is not deductible for the director.
• Company pays interest to the director on the current account: The loan granted by the director to the company falls under a special scheme, the so-called “tbs-regulation.” This means that the interest received is subject to income tax in box 1, which is taxed up to 49.5%. The interest paid by the company is deductible from its profit. This reduces corporate income tax.

To prevent current accounts from becoming too high and thereby making them practically impossible to repay, and also to prevent tax liability on current accounts through dividend tax (indefinitely) being postponed, the legislator has introduced new legislation as of January 1. This is called the law against excessive borrowing. This regulation states that any part of the current account of the director to the company that exceeds €700,000 will automatically be treated as dividends.
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Repayment of Current Account‍

It is customary when preparing the annual financial statements to determine the balance of the current account each year. Due to the above, it is wise to determine each year whether and how much of the current account is to be repaid. The current account can be repaid in three ways: • Repaying the current account debt by paying back the amount • Allowing the current account debt to continue • Repaying the current account debt by distributing dividends

The first two options are self-explanatory. The third option will be explained using a numerical example. Suppose you have a current account debt of €100,000. If the company pays out a net dividend of €100,000, the debt can be repaid. Dividends are not paid, but are charged against the debt. However, tax must be paid on the dividends.
Since you are distributing a net dividend, you must first calculate the gross dividend, which is €117,647 (100,000/85*100). A total of 26.9% tax must be paid on this amount. This happens in two stages, first dividend tax of 15% is paid by the company, which amounts to €17,647. Then, as a DGA, you will pay an additional 11.9% in income tax, which amounts to €14,000.

Therefore, if you have a current account debt of €100,000, it can be repaid by paying €31,647 in taxes.

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