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A startup company is doing a share transfer between a new co-founder and existing co-founders. The new co-founder will purchase the shares from the existing co-founders through a loan agreement between them (unsecured loan). In addition, there will be a non-refund clause in the case that the company goes bankrupt (the debt dissolves).

So my question is how to determine a fair interest rate (so that tax authorities do not come after us) for such a loan? As a starting point, I am using a median interest rate from companies providing unsecured loans. But then the non-refund clause should add a risk premium, right? How should this be calculated?

Also, this is not a US case, but Scandinavian. But the fundamentals should apply here. I have landed on a ~7.5% nominal interest rate for the unsecured loan without an additional risk premium.

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  • $\begingroup$ Sounds more like a corporate finance question to me. $\endgroup$
    – KaiSqDist
    Commented Feb 5 at 15:45

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This is my interpretation of the situation.

Suppose that we are dealing with one existing Founder, who establised the company with 100 shares at 1 SEK each.

Then he loans 100,000 SEK to the new founder to purchase 50 (50%) shares.

The new founder has nothing to declare initially. The existing founder now has a capital gain on a sale of shares to declare of 99,950 SEK.

  1. If the loan is repaid without default and without shares dissolving then the existing founder has income from interest to declare at the specified interest rate. Both the existing and new founders will have capital gains to declare on further share sales.

  2. If the loan is written off due to share collapse then the follwoing is applied:

  • Existing shareholder has a capital (loan) loss of 100k (declaring any interim interest received as interest income) This would be quite bad in a year where there are no offsetting capital gains for the existing shareholder.
  • New shareholder has a loan of 100k declared as income (or capital?) and a capital loss of 100k from loss of shares. This would be quite bad for the new shareholder if these could not be netted.

I think your suggestion regarding the interest rate is in general fairly sensible. I would expect that there must be a range of interest rates which would otherwise be arguably viable.

Please note my answer is not at all based on any form of tax law, just a vague understanding of the principles in general.

Interested if this seems to apply to your situation.

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