A recently issued consultation document from Inland Revenue has put the spotlight on overdrawn shareholder current accounts.

It is common practice in closely held companies for the shareholders to take drawings throughout the year or for them to remove more money from the company than they have contributed, resulting in an overdrawn shareholder current account.
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Presently, if at the end of the year, the shareholder pays interest on the overdrawn balance at the prescribed rate of interest then there is no adverse tax consequence. Sometimes, shareholder employees declare the overdrawn balance as a salary at year-end and then pay the tax on that amount, also obviating any tax issues arising from the overdrawn balance.

However, in our insolvency practice we frequently find an overdrawn current account where neither interest has been paid, nor a shareholder salary has been declared. In most instances, the repayment of those balances only occurs after extensive recovery action has been taken against the shareholders and in many cases no such recoveries are made at all. We believe this is one of the reasons why the matter is now attracting wider attention.
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Consultation is underway on this matter, and the main proposal is that certain shareholder loans of $50,000 or more, if not repaid within 12months after the relevant balance date, would be treated as dividends. This could trigger additional tax liabilities where imputation credits are insufficient, with a higher impact on trusts and individuals taxed at the top marginal rate of 39%.
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The document further proposes that when a company is removed from the Companies Register with outstanding shareholder loans, those balances would become taxable income to the shareholder at the time of deregistration.

While Inland Revenue has described the paper as a discussion document, it appears likely that some form of legislative change will follow. Notably, Inland Revenue has indicated that any resulting changes would apply retrospectively for certain shareholder loans advanced on or after 4th December 2025.

Given this, we recommend that shareholders and companies take proactive steps now to mitigate the risk of adverse tax outcomes. The proposal would apply only to certain new shareholder loans advanced on or after 4 December 2025.

Therefore, the following actions may be worth considering:
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  • Repaying any overdrawn shareholder current account balances or introducing funds into the company to offset those balances, where cashflow permits.
  • Presently the prescribed rate of interest is 6.29% p.a. and it may be possible to negotiate a lower rate with a commercial bank (particularly if underpinned by a residential mortgage) to pay down the shareholder loan account.
  • Undertaking a detailed review of shareholder current accounts to identify any expenses that may have been incorrectly allocated and correcting those entries where appropriate.
  • Considering the declaration of a shareholder salary or dividend to reduce or eliminate the overdrawn balance.
  • Review existing shareholder loans (advanced prior to 4 December 2025) to ensure that these are appropriately documented with commercial repayment terms and interest conditions.


Should you wish to discuss any of these updates, please get in touch with your Ecovis KGA consultant, who will be happy to assist.