What about current accounts in a business transfer? 5 possible solutions

In preparing for a company transfer, checking the financial accounts is essential. A basic check involves verifying all receivables and payables using statements from counterparties. Each party’s receivable must exactly match the liability recorded in the counterparty’s books. Typically, this is audited annually on a sample basis by the accountant or auditor and noted in the statement accompanying the annual accounts.

A significant focus is on shareholder’s current accounts. Here, the counterparty is the shareholder director or co-partner. If a shareholder lends money to the company, the company may pay interest. For 2024, the legally set reference rate is 8.02%. (Source: Practicali)

What is a current account?

A shareholder’s current account reflects the shareholders’ obligations or claims with the company in accounting terms.

Amounts the shareholder/director owes are on the liability side of the balance sheet and are called current account liabilities.

Amounts the shareholder/director owes the company are on the asset side of the balance sheet and are called current account assets.

Tip: In preparing for a transfer, ensure all shareholder’s current accounts are settled in advance. Shareholders-directors often aren't aware of their claims or debts with the company. Documentation is often missing (a loan contract is rarely drawn up).

Current accounts often arise unintentionally. Some examples:

1. A current account asset arises when actual money is distributed from the company, e.g., as an advance on future remuneration or dividend.
2. Shareholder directors may withdraw money from the company for personal purchases. This is fiscally discouraged, as a "benefit in kind" for the director. Social security contributions and personal tax are due on it.
3. A current account asset arises when the company pays costs that the manager should actually bear, inadvertently creating debts from the director-owner to the company.

Maintaining a current account asset is strongly discouraged. Lenders almost always view it as a negative sign.

A current account liability can also arise in various ways.

1. When money is lent to the company by the shareholder(s), or made available permanently, e.g., as an alternative to a capital increase.
2. If the dividend payment has not yet been made or compensation has not yet been transferred, creating a current account liability (the company’s debt to the shareholder).
3. In the transformation from a sole proprietorship to a company. The goodwill and/or fixed assets were "sold" to the company but not paid. This means the company has an outstanding debt to the sole proprietor, now a shareholder. This debt is recorded as a current account liability in the company.

A current account liability is often considered a positive element by lenders, especially when it has a permanent nature. In that case, such a loan from the shareholder to the company can be seen as a strengthening of the company's equity (subordinated loan).

For the shareholder(s), maintaining a current account liability offers a particular tax advantage: the company pays interest on the current account amount. This interest is generally a tax-deductible expense for the company. For the shareholder, only a 30% withholding tax is due on this interest income. This is a lower tax burden than via dividend distribution or salary.

There are 2 fiscal limitations (simplified):

1. The amount of the current account liability must not exceed the actual paid-up capital increased by the taxable reserves.
2. The applied interest rate must not be higher than the legally established reference interest rate. For 2024, this legally established reference interest rate is 8.02%.

These fiscal limitations do not prevent the current account amount from being (much) higher than the company's capital.

In the Belgian financial statements, current accounts are listed under 'other receivables' (current account asset) or 'other liabilities' (current account liability). A distinction is also made between short or long term:

Caution: Under the categories "other receivables" or "other debts," amounts other than current accounts with the shareholder may also be listed. An example "Recoverable VAT" is also listed under "other receivables."

In a business transfer through a share transfer, it is absolutely necessary to avoid leaving the current account passive

If no agreements are made about the current account at the time of acquisition, the company remains liable for this amount, and possibly also the interest on it, to the former shareholder. The current account does not automatically transfer to the new shareholder. Even the fact that the former managing owner has resigned as director does not affect his claim. The former managing owner then retains an immediately claimable receivable from the company in which he no longer has control.

How can this be resolved?

1. Conversion into capital

The shareholder can convert his passive current account into capital via a capital increase before the business transfer. This can be a useful way to strengthen the company's equity. Sometimes lenders may require this to maintain credits.

2. Repayment of the current account

If there are sufficient funds in the company, it is advisable to repay the current account with these before the business transfer. It is also possible to use existing credit lines for this, or in special cases, the company can take out new credit.

3. Convert the passive current account into a loan with a repayment plan

If there are not enough liquid assets in the company, it can be agreed as part of the acquisition agreement to repay the claim of the former shareholder with a repayment plan (conditionally or unconditionally, for instance, depending on the future results of the company).

4. The passive current account can be offset against the acquisition price to be paid

Once parties have reached an agreement on the acquisition price, it often refers to the "enterprise value."

The amount actually to be paid to the shareholder is the shareholder value. That is the enterprise value plus available liquidities minus interest-bearing debts.

5. The current account can be transferred to the new shareholder

As part of the business transfer agreement (especially in companies facing difficulties), it can be agreed to transfer the claim of the former shareholder to the new shareholder (this can be for an amount lower than the nominal value, and possibly for a symbolic euro).

To do this, a strict procedure must be followed:

1. The transfer, especially the reason for the transfer of the claim, should be clearly written into the share transfer agreement.
2. A separate agreement for the transfer of the receivable must be drawn up.
3. A notification (preferably registered) of the transfer of the claim to the company according to Article 1690 of the Belgian Civil Code must be carried out.

If the new shareholder can make a business success of the company, then that debt can be repaid to him tax-free.

5. Opt for a business transfer via the transfer of business assets (instead of share transfer)

In a business transfer via the transfer of business assets, the company, including the current accounts, remains unchanged. The proceeds from the sale of the business assets are used to repay all debts of the company, including the passive current account.