Shareholders’ loans were previously abused avenues for tax evasion: interest rates were manipulated to allow tax-free repayments instead of declaring dividends, but SARS have tightened their policing of this practice. Questions often arise in this regard as to the maximum interest rate which may be charged and how this is taxed. In preparing a loan agreement or shareholders’ agreement, parties must beware of the repayment plan and take care to structure this so that the payment of interest is not perceived by SARS to be a deemed dividend or that the loan has funded payment of a dividend. This will have implications for the deductibility of interest as an expense to the company. Above all, the purpose of the loan to the company should be to generate income.

Some valuable considerations when preparing a loan agreement or shareholders’ agreement include the application of the National Credit Act, the maximum interest rate that may be charged, the tax implications for the shareholder personally and the tax implications for the company.

Does the National Credit Act apply?

The National Credit Act would not ordinarily apply to a shareholder’s loan to a company of which they are a shareholder in. However, it is possible that it could apply where the transaction is at arm’s length and where the asset value or turnover of the company is less than R250 000 per annum. This is an extremely unusual situation practically – as most of these loans are made by someone with a personal connection to the company.

The NCA repealed the Usury Act in 2007 and is the prevailing legislation dealing with consumer loans.

Is the interest taxable – payable by the shareholder to SARS?

Yes, generally interest earned by a person is payable to SARS as it forms part of “gross income” as defined in the Income Tax Act No. 58 of 1962 (the Act). However, an amount of R23 800 per annum is excluded per the exclusions in Section 10(1)(i) of the Act. This figure was previously adjusted annually but has, since 2015, been fixed at R23 800 due to the introduction of the tax-free savings accounts. The deductible amount is greater for persons over the age of 65 years old, at R34 500 per annum. These figures are published on SARS website, found at:

Note that this deductible amount is applied on the total interest earned by a person from any source, not specifically from interest on this type of loan alone.

What tax is payable by the company for interest paid to the shareholder?

Interest paid to a shareholder on their loan account must be distinguished from declared dividends, on which a company pays withholdings tax of 20%.

Ordinarily, the interest expense is deductible for a company’s tax purposes.

Companies must take care that they do not borrow in order to pay a dividend as this will not be considered expenditure for the production of income and therefore the interest paid will not be deductible. [CIR v G Brollo Properties (Pty) Ltd (1994 AD)].

However, there are instances where the declaration of a dividend and a simultaneous loan agreement do not necessarily disallow the deduction of the expenditure of interest on the loan. The purpose of the loan agreement must be to generate income (SARS v Scribante Construction (Pty) Ltd (64 SATC 379)). In these instances the courts will look broadly at the circumstances and the reasoning behind the company’s financial decisions in declaring the dividend.

What is the maximum interest a shareholder may charge to a company?

There is no maximum interest rate a shareholder may charge on their loan to the company. Without the application of the National Credit Act, we are left to look to case law for guidance on the circumstances where interest rates are considered exorbitant or usurious.

In African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC and others [2011] 3 All SA 345 (SCA) (the leading case on usury post-repeal of the Usury Act), the Supreme Court of Appeal upheld an appeal from the High Court and enforced a loan agreement charging interest of 6.5% per month. The National Credit Act did not apply to this transaction as the loan amount exceeded the threshold at the time, as prescribed by the regulations. Since the NCA was in effect, the Usury Act was also not applicable to this transaction.

The SCA held that in the absence of legislation, whether or not a transaction is usurious fell to be determined in terms of the common law – which does not fix a rate of interest beyond which a transaction is considered usurious. Without more concrete guidance, to determine if there is an instance of usury there would need to be an element of fraud, oppression or extortion present in the transaction. Naturally, this is contrary to the spirit, purport and objects of the Constitution – in terms of which all law must be interpreted.

Accordingly, interest rates must be interpreted with regard to the context of the contract in terms of which they are charged. Interest rates as high as 30% per annum (the top end of some academics’ research) are perfectly legal. However, when preparing a claim for outstanding interest amounts owing, parties must be aware of the in duplum rule and may not claim arrear interest that is in excess of the outstanding capital amount.


Contact us today for a consultation with one of our experienced commercial attorneys if you are considering entering into a loan agreement with the company you are a shareholder of.

About the author

Megan started her articles with Dunsters in 2020 and is a graduate of the University of Cape Town (B.COM PPE, LLB). Megan is in the commercial team at Dunsters and enjoys working on drafting all kinds of contracts as may suit our clients’ needs. Her areas of interest lie broadly in the commercial sphere, with a more specialised focus on technology and the law. Megan also writes and oversees the editing of our insights and articles.

In her spare time Megan is Chairperson of the Cape Town Candidate Attorneys’ Association, loves to paint and prefers to spend her weekends outdoors. Cold-water swimming, running and hiking, she is keen on all the outdoor activities Cape Town has to offer.

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