In practice, businesses facing working capital difficulties often seek loans from individuals or other businesses, and these loans are interest-free. For such transactions, accountants need to understand and accurately determine whether they are loans or borrowings in order to properly record them in the appropriate accounts.
Civil law clearly distinguishes between two forms of transactions: lending and borrowing.
The objects involved in a loan transaction have the following characteristics: They are specific objects; they are not consumed and retain their original properties, shape, and functionality; they are used for a specific purpose and must be returned in the same form. In a loan transaction, the lender only transfers to the borrower the right of possession and use of the borrowed object. The borrower does not have the right to dispose of the borrowed object. For example, when borrowing a laptop, the lender transfers the right of use to the borrower, and the borrower must return the exact laptop to the lender at the end of the loan period or when it is demanded back.
Conversely, in lending transactions, the payment object can be consumed, and when the repayment is due, the payment object can be converted into money or other assets of equivalent value as agreed upon by both parties. The lender does not have the right to demand that the borrower return the exact borrowed asset. When lending, the lender transfers all three powers: the right of possession, the right of use, and the right of disposal to the borrower, but does not lose ownership. When the agreed-upon repayment deadline arrives, ownership transforms into the right to claim the debt, and the lender will exercise their right to claim the debt as stipulated. For example, when borrowing money, if the borrower cannot return the exact same banknote with the same serial number as when received, the lender transfers the right of disposal to the borrower; therefore, this is considered a loan, not a borrowing.
Is an interest-free loan considered a loan?
Article 463 of the 2015 Civil Code stipulates loan agreement It is an agreement between parties whereby the lender delivers assets to the borrower. When the repayment is due, the borrower must return to the lender assets of the same type, quantity, and quality, and only has to pay interest if agreed upon or stipulated by law.
Therefore, in a loan agreement, the borrower may or may not pay interest to the lender, depending on the agreement between the parties or as stipulated by law. Similarly, a loan with no interest or a 0% interest rate should still be considered a loan.
Based on the above regulations, the accountant must record this amount in the loan account as it truly is, and not in the payable account.
Risks associated with recording a loan with no interest or a 0% interest rate.
A loan with no interest or a 0% interest rate indicates that the lender is a related party, and this is a non-market-rate transaction. For such transactions, tax authorities will investigate the related costs of the loan, the reasonableness and validity of its use, and any irregularities found will result in tax recovery and penalties for late payment and administrative violations. The penalty will vary depending on the severity of the violation.
Therefore, in addition to determining the nature of the transaction for accurate accounting, accountants must also determine the legitimacy of whether the transactions are loans or borrowings, and related transactions, to avoid tax risks for the business.