Do I Need a Director's Loan Agreement?

Why Revenue Cares About Director Loans

Director loans are one of the most common transactions in Irish SMEs - and one of the most scrutinised by Revenue. When a director borrows money from their company without documentation, Revenue may treat the withdrawal as salary (triggering PAYE, PRSI, and USC) or as a distribution (triggering income tax at the director's marginal rate). Either way, the tax consequences are significantly worse than a properly documented loan.

Conversely, when a director lends money to their company without documentation, Revenue may question the deductibility of interest payments and challenge the true nature of the transaction.

Section 239: Board Approval Required

Section 239 of the Companies Act 2014 restricts loans from a company to its directors. All loans to directors require board approval, documented by a board resolution. If the loan exceeds 10% of the company's relevant assets, shareholder approval is also required. Failure to comply with Section 239 does not invalidate the loan, but it constitutes a criminal offence by the directors who authorised it.

A director's loan agreement should include a board resolution template, confirming that the loan was properly authorised.

Benefit-in-Kind: The Hidden Tax

If a company lends money to a director at no interest, or at a rate below the Revenue-specified rate, the difference is treated as a taxable benefit-in-kind under Section 122 TCA 1997. The BIK rates are currently 4% for home loans and 13.5% for all other loans. The director pays income tax, PRSI, and USC on the deemed benefit, and the company has reporting obligations.

A written loan agreement that specifies the interest rate, and notes the BIK implications if the rate is below the Revenue threshold, creates the documentation that Revenue expects to see.

Lending TO the Company

Directors frequently lend money to their own companies, particularly in the early stages or during cash flow difficulties. While Section 239 does not restrict loans in this direction, documentation is still essential. A written loan agreement establishes whether interest is payable (and at what rate), the repayment schedule, and what happens if the company cannot repay on time. This documentation protects the director if the company later faces financial difficulties or if other shareholders dispute the terms.

Interest paid by the company on a director's loan may be tax-deductible for the company and taxable income for the director - the documentation is essential for both tax returns.

Every Loan Needs a Paper Trail

Whether the loan goes from company to director or director to company, the message is the same: document it. A written loan agreement costs a fraction of the tax liability that arises from an undocumented transaction. It should specify the parties, the loan amount, the purpose, the interest rate (or confirm interest-free with BIK noted), the repayment schedule, and the board resolution approving the loan. Your accountant will thank you at year-end, and Revenue will have no grounds to reclassify the transaction.

This is a self-service document generation tool. It does not constitute legal advice. For complex or high-value situations, we recommend consulting a solicitor.