A loan agreement is a written document that proves that one person (the borrower) owes another person (the lender) a specific amount. The loan agreement sets out the key terms of the loan, including the loan amount, interest, repayments and due date.

Loan agreements are often used in connection with family loans, private loans or business loans and serve as legal protection for both parties. The document is also important as documentation of the loan relationship for the tax authorities.

A written loan agreement creates clarity and documentation for the loan relationship. Without a written agreement, the Danish Tax Agency may regard the transfer as a gift or taxable income, which can trigger gift tax or income tax.

With a correctly drafted loan agreement, you can avoid misunderstandings and tax issues and clearly show that the amount is a loan and not a gift.

A loan agreement can have implications for both income tax and gift tax:

• For the borrower, the loan is normally tax-free as long as it is a genuine loan and not a gift.
• For the lender, interest income may be taxable as capital income.
• If interest and repayments are waived in a family relationship, the Danish Tax Agency may in some cases regard this as a gift, which triggers gift tax.
• There are also situations where interest-free and repayment-free loan agreements can be established in family relationships.

It is therefore important to obtain professional advice to ensure that the loan is treated correctly under the applicable tax rules.

A valid loan agreement should as a minimum contain:

• The parties’ full names and civil registration numbers
• Date of the agreement
• Loan amount
• Interest and any repayment terms
• Maturity date
• Signatures of both parties

If it is a family loan, it should clearly state what the purpose of the loan is, and that the amount is a loan and not a gift.

Family loans are very common, but also often the cause of tax misunderstandings. A correctly drafted loan agreement documents that the arrangement is a genuine loan.

A market rate of interest can be agreed, or in some situations an interest-free loan can be agreed, but you should always be able to document the purpose and terms to the Danish Tax Agency.

If the loan agreement is not correctly drafted, the lender and borrower risk being charged gift tax or income tax on the amount.

Yes, a loan agreement can be interest-free, especially for certain loans between family members. However, there may be tax risks, because the Danish Tax Agency may regard the lack of interest as a financial benefit and thus as a gift.

You should therefore always have an adviser assess whether the lack of interest may have tax consequences. SkatteInform can assist with this.

If interest has been agreed, the lender must as a rule pay tax on the interest income as capital income.

For the borrower, the interest is normally tax-deductible, also as capital income, subject to the general rules and limitations in Danish tax law.

Yes, it is possible to forgive all or part of the debt. However, forgiveness of debt can be regarded as a gift for tax purposes and thus trigger gift tax, especially in family relationships within the gift tax circle.

Outside the gift tax circle, forgiveness of debt can trigger taxable income for the debtor. Therefore, any forgiveness of debt should be properly documented and assessed under the applicable tax rules.

A simple loan agreement is typically used for private loans and only applies between the parties.

A negotiable loan instrument, on the other hand, can be transferred to a third party, for example a bank or a debt collection company.

For private loans, a simple loan agreement is almost always used.

A loan agreement may look simple, but small errors can have major tax consequences. A professional adviser can ensure that the loan agreement meets all formal civil law requirements, and that you do not risk gift tax or double taxation.

At SkatteInform we help both private individuals and businesses to draft and review loan agreements, assess tax consequences and optimise loan arrangements to avoid errors and misunderstandings.