Fiduciary Insights · Case Study II
A shareholder loan sounds straightforward: the company lends money to its owner, the owner repays it. In practice, shareholder loans are one of the most reliably mishandled instruments in Swiss corporate finance. When a loan carries no interest, has no repayment schedule, and sits on the balance sheet year after year without movement, the Swiss Federal Tax Administration (ESTV) and the cantonal tax authority do not see a loan. They see a hidden profit distribution — and they assess 35% withholding tax accordingly. This case study shows how that happened to one of our clients, and what documentation is required to keep a shareholder loan outside the scope of verdeckte Gewinnausschüttung.
Martin F. is the sole shareholder of a Zug-based technology services AG. In 2021, the company had a strong year and Martin took an advance of CHF 250,000 to fund a property purchase in his personal name. The amount was booked as a loan receivable on the company balance sheet under "other receivables from shareholders." No loan agreement was drawn up. The interest rate was set to zero. There was no repayment schedule.
The loan sat unchanged for three years. Annual accounts were filed, the auditor noted the receivable, and nothing was done. When Martin engaged us to take over the bookkeeping and annual accounts preparation in late 2024, we flagged the loan immediately. By that point, the ESTV had already opened an inquiry following a routine review of the company's withholding tax filings.
Swiss tax law does not prohibit shareholder loans. What it requires is that the loan terms reflect what an unrelated third party would agree to — the arm's-length principle. The ESTV operationalises this through annual safe harbour interest rate circulars. For 2024, the minimum rate on loans to shareholders or related parties financed from company equity was 1.5%. For 2025, it was reduced to 1.0%.
When a loan carries an interest rate below the safe harbour — including zero — the difference between the safe harbour rate and the actual rate is treated as a benefit conferred on the shareholder. That benefit is a hidden profit distribution (verdeckte Gewinnausschüttung), subject to 35% withholding tax under Art. 4 para. 1(b) of the Federal Withholding Tax Act (VStG).
But the interest shortfall is only half the problem. When the principal itself shows no realistic prospect of repayment — no schedule, no collateral, no demonstrated capacity of the shareholder to repay — tax authorities may go further and reclassify the principal as a hidden distribution. In Martin's case, the ESTV assessed both: three years of missing interest, and a portion of the principal.
Loan principal: CHF 250,000
Missing interest (2021–2023 at safe harbour rates): approx. CHF 10,500
Withholding tax on interest shortfall (35%): approx. CHF 3,675
Principal portion reclassified as distribution: CHF 250,000
Withholding tax on principal (35%): CHF 87,500
Default interest (5% p.a. on unpaid WHT): additional CHF 13,125
Total ESTV assessment: approximately CHF 104,300
Figures are illustrative. Actual amounts depend on ESTV audit findings and applicable years.
The reclassification of principal as a hidden distribution is a more serious outcome than the interest assessment, and it requires the tax authority to demonstrate that repayment was objectively improbable at the time the loan was made or by the time of assessment. The ESTV applies several indicators:
In Martin's case, five of the six criteria were met. The ESTV position was that the CHF 250,000 was never a genuine loan — it was a distribution that had been dressed up as one to avoid withholding tax and the shareholder's personal income tax on dividend income.
The ESTV assessment addressed withholding tax only. The Steuerverwaltung Zug conducted a parallel review and reclassified the hidden distribution as income in Martin's personal tax return for 2021. Because he had not declared CHF 250,000 in dividend income, there was a retrospective assessment with late payment interest. The partial taxation benefit (70% for cantonal purposes under Teilbesteuerung) was available, which reduced the personal income tax impact — but the base was now CHF 175,000 in additional taxable income at his marginal rate, applied three years retrospectively.
The total cost — withholding tax, cantonal income tax arrears, default interest, and professional fees to manage the challenge process — substantially exceeded what a structured dividend distribution would have cost in the first place. See our tax advisory service for how we approach retrospective assessments.
If your company advances funds to you as a shareholder, the following documentation is required from day one to keep the loan outside the scope of hidden distribution analysis:
We review shareholder loan positions as part of our bookkeeping and annual accounts service. Any loan balance outstanding for more than 12 months without repayment movement is flagged at the accounts review stage, before it reaches the tax filing.
After the ESTV settlement, Martin's structure was reorganised. The outstanding loan was formally written off against distributable reserves (which required a shareholders' resolution and board approval), and the write-off was treated as a dividend for withholding tax purposes — which had effectively already been assessed. Future cash requirements are now handled through a formal board resolution approving interim dividends, with 35% withholding tax withheld at source and reported to the ESTV on Form 103 within 30 days. The tax is recovered by Martin in his personal return. It is more administratively structured — but it is clean, and there is no re-assessment risk.
The ESTV publishes safe harbour rates annually. For 2024, the minimum rate on loans to shareholders financed from equity was 1.5%. For 2025 it is 1.0%. Interest below the safe harbour rate is treated as a hidden profit distribution subject to 35% withholding tax. Always check the applicable circular for the year in which the loan is made or restructured.
Yes — if the loan shows no realistic prospect of repayment. The ESTV looks at whether a written agreement exists, whether interest has actually been paid, whether a repayment schedule was followed, and whether the shareholder has documented capacity to repay. A loan with no agreement, no interest, and no repayment movement over several years is highly vulnerable to principal reclassification.
You need a written loan agreement signed before disbursement, an interest rate at or above the ESTV safe harbour, actual interest payments flowing through the accounts, a fixed repayment schedule that is adhered to, and documented evidence of the shareholder's capacity to repay. Loans should be reviewed annually and formally renewed if extended. Your fiduciary should flag any balance with no repayment movement within 12 months.
We identify hidden distribution risk in existing loan structures and advise on compliant alternatives.
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