For several years, Cameroon has been engaged in a vast campaign to broaden the tax base, secure tax revenues and fight against fraud and tax evasion. This is certainly the reason why the country signed the OECD Multilateral Convention in 2017 to combat Base Erosion and Profit Shifting (BEPS). There is no doubt that Multinationals and intercompany transactions are prime areas for tax avoidance. Loans put at the disposal of companies by shareholders are not different and Tax officials and the Tax Legislator have kept an eye opened on them. Thus, the 2014 and 2021 finance laws revised and strengthened the rules applicable to the loans in question, especially the deductibility of the associated interests. This led to significant amendments of Section 7-B of the General Tax Code (GTC) relating to financial costs, with the aim of inhibiting thin capitalization. The various circulars outlining their implementation modalities came up with more insights, which taxpayers should compulsorily master in order to avoid issues with Tax Authorities. The current tax regime of those interests is comprised mainly of the eligibility conditions and the restriction of their deduction as well as the possible sanctions.
-Eligibility conditions for deducting interests on loans made by shareholders
Section 7-B of the current GTC sets two cumulative conditions for companies to be likely to deduct the interests on loans made by shareholders. This includes the full payment of the subscribed share capital and the existence of a written and registered loan agreement. As far as the first condition is concerned, the circular to implement the 2021 finance law specifies that, the shareholders must pay up all the contributions in cash or in kind before any loans are made available to the company. In addition, such an obligation does not only target the lender of funds, but all the other shareholders. As evidence of this, the interests remunerating the loan granted by a shareholder who has fully paid up his shares are not deductible for tax purposes if all the other shareholders have not fully paid up their shares.
As for the second requirement, the circular emphasizes that the transactions between companies and their shareholders or affiliates should be documented by either current account agreements or loan agreements. More importantly, the agreement must be subject to stamp and registration duties. However, the obligation to register the agreement is a little bit surprising, as a shareholder loan agreement does not attract registration duties. For example, Section 546-B-5 of the GTC states as that:
“(…) the following shall be registered free of charge (…)
5) Current account contracts, including shareholders current accounts.”
In our view, the new approach of tax officials that consists in subjecting the deduction of loan interest to the prior registration of loan agreements turns out to be nothing more than a subtle means of trampling on the exemption mentioned before. Henceforth, taxpayers must cope with the new rules and comply with the instructions on how to deduct the interests on loans.
-Restriction of the deduction of interests on loans paid to shareholders
There are two main limits faced in the deductibility of interests, namely the applicable rate and the number of shares held by shareholders. Concerning the first limitation, Section 7-B of the GTC provides that:
“Net taxable profit shall be established after deduction of (…)
(…)
B- Interest on sums of money left or placed at the disposal of the company by partners in addition to their capital shares, irrespective of the form of the company, within the limit of those calculated at the rate of Central Bank (BEAC) advances increased by two percentage points (…).”
This means that, if the BEAC’s rate is 3.5% the lending rate shall not exceed 5.5%. Otherwise, the deduction is admitted within the limit of 5.5%. As regards on the second restriction, it varies depending on whether the lending shareholder has less or at least 25% of the share capital. In the first hypothesis, interests are fully deductible if they are calculated as indicated in the above-mentioned paragraph. In the second hypothesis, in addition to complying with the rate, the same Section 7-B of the GTC sets two other rules. The first one is the limitation of deductibility based on the company’s equity. This limitation applies where the loans granted exceed one and a half times (1.5) the company’s equity. If the amount of the loan is lower than one and a half times the company’s equity, the company can deduct the interest within the limits of the rates for BEAC plus two points. The second rule is the limitation of deductibility actions based on the gross operating income of the company, which applies where interests paid to shareholders exceed 25% of the gross operating income of the company. Obviously, failure to comply with these restrictions leads to tax exposure.
-Fiscal sanctions
When the eligibility conditions and the conditions for the tax deduction on interests remunerating the loans made by shareholders or affiliates are not met, the company must add back the non-compliant portions of the said interests to the assessable profit of the year. Such portions deal with
-The excess amount of interests resulting from the non-compliance with the BEAC rate increased by two percentage points,
-Interests resulting from the portion of the loan exceeding one and a half times (1.5) of company’s equity,
-The amount of interests exceeding 25% of the gross operating income.
As per Section 36 of the GTC, the 2014 and 2021 finance laws as well as their implementing circulars, these portions of interests are subject to corporate tax (33%) and distribution tax (16.5%). According to Sections M95 and following of the Manuals of Tax Procedures, there are also penalties (10 to 50%) and interests (1.5 to 30%) for late payment whenever the adjustments occur in the frame of tax audits.
To sum up, the tax regime for the deduction of interests relating to shareholders’ current accounts is tricky and therefore needs careful attention or skill. Companies and their shareholders should make sure that they act according to the legal requirements. They should not depart from the eligibility rules, especially the prior rules concerning full payment of subscribed capital and the obligation to register the loan agreement. Furthermore, they should follow the restrictions on the deduction exactly as mentioned in the GTC. That is, the lending rate, the limitations based on the company’s equity or the gross operating income of the company. This is the only way to prevent and avoid the associated heavy tax risks, in order to save the company’s cash. In this perspective, we believe that companies should address the various issues long before the implementation of loans.
Author, Albert Désiré Zang, Managing Partner