There is no particular rate required under legislation with regard to interest a company pays to its directors for the loans they advance to it. This means that it is up to the directors themselves to decide on the rate.
However there are tax implications to consider if interest is paid to directors by the company.
Tax deduction for the company, up to a “specified limit” of interest.
The company can claim a tax deduction for the interest it pays to directors if that interest does not exceed the “specified limit”.
The specified limit is 13% of the lower of:
- The total of all loans advanced to the company by directors, and
- The issued share capital of the company.
The company must withhold income tax at the standard rate (currently 20%) on the payment of this interest to the directors and return this tax to Revenue.
Excess interest over the “specified limit”
If the amount of interest paid exceeds the specified limit, the excess is not deductible against the company’s taxes.Instead the excess interest is treated as a distribution (i.e. like a dividend) and so the company must deduct 20% DWT at source and pay this to Revenue.
Directors’ income tax liability
Please bear in mind that whether or not the interest paid is within the specified limit, the gross interest amount will be taxable income in the hands of the directors. They will therefore be liable to income tax at their marginal rate and a tax credit will be available for the DWT / withholding tax (as appropriate) that the company deducted at source.