Shareholder loans are the most common ”other receivables” on the balance sheets of small and medium-sized enterprises, and they are also one of the accounts most frequently targeted in tax audits. Many business owners still believe, ”The company is mine, so I’ll just borrow the money for now and settle it at the end of the year,” but the logic behind tax audits in 2026 has completely changed.

The Three Conditions for Triggering a Deemed Dividend

Pursuant to Article 2 of Cai Shui [2003] No. 158 and relevant provisions, shareholder loans are treated as dividend distributions and must befulfillmentThree conditions:

1. Not repaid after the end of the tax year—That is, any amounts outstanding as of December 31 of each year
2. Not used for the company's business operations—Unable to prove that the funds were used for business purposes
3. The borrower is an individual investor (a natural person shareholder)—This section does not apply to corporate shareholders.

If all three conditions are met, the tax authorities have the right to classify the income under the category of ”interest, dividends, and profits,”Personal income tax is levied at the 20% tax rateThe

Example: In March 2026, a shareholder borrowed 2 million yuan from the company. As of December 31, the loan had not been repaid and had not been used for business operations. During an audit, the loan was treated as a dividend, resulting in a requirement to pay 400,000 yuan in back personal income tax, plus late payment penalties.

It is important to distinguish between a common point of confusion:Loans from the Company to Shareholders(Recorded as “Other Receivables”) The rules regarding deemed dividends under Document No. 158 apply; whereasShareholders Lend Money to the Company(Classified as “Other Payables”) This provision does not apply, but it will trigger a separate set of related-party transaction and anti-tax avoidance audits. The focus is different, and the risks are entirely different.

Three New Variables in 2026

Variable 1: Interest-free loans are no longer treated as taxable transactions. Following the implementation of the *Value-Added Tax Law*, the provision of loan services without consideration is no longer deemed a taxable transaction and, in principle, does not give rise to value-added tax. However, according to publicly available interpretations, the VAT exemption for interest-free loans between entities within a group—as provided in Announcement No. 68 of 2023 issued by the Ministry of Finance and the State Taxation Administration—has been discontinued effective January 1, 2026. After 2026, this announcement will no longer be cited as the basis for tax exemption (subject to official announcements).

Variable 2: The anti-tax avoidance provisions remain in place. The *Regulations for the Implementation of the Value-Added Tax Law* include a general anti-avoidance provision; if a loan provided without interest lacks a reasonable commercial purpose and results in a loss of tax revenue, the tax authorities have the right to determine the sales amount for tax adjustment purposes. With regard to corporate income tax, the special tax adjustments for related-party transactions under Article 41 of the *Corporate Income Tax Law* also apply.

Variable 3: Cash Flow Verification. “The practice of ”repaying at year-end and borrowing again in January of the following year”—a cycle designed to balance the books—used to effectively circumvent the formal requirement of ”unrepaid balances at year-end.” However, with year-round transaction records now subject to thorough scrutiny, loans that remain outstanding for extended periods without a genuine business purpose are identified by the system as disguised dividends.

Three Compliance-Based Reconciliation Solutions

Option 1: Repay the loan directly with the recovered funds. For companies with ample cash flow, clearing the balance in full by December 31 is the cleanest approach. The key lies in ”actual repayment,” not merely adjusting the books.

Option 2: Offset the outstanding balance with profit dividends. If there are retained earnings on the books, follow the standard dividend distribution process: first, offset losses from prior years; set aside statutory reserves; issue a dividend resolution from the shareholders’ meeting; withhold and remit individual income tax in accordance with the law; handle the accounting in accordance with regulations; and use dividends payable to offset outstanding amounts owed by shareholders. Note: If dividends are not distributed in proportion to capital contributions, written confirmation from all shareholders must be retained.

Option 3: Debt-to-Equity Swap. If the loan is essentially a shareholder contribution, a shareholders’ meeting resolution may be issued to convert the debt into equity, and the business registration information should be updated simultaneously. This applies to situations where there is a genuine intention to increase capital; it cannot be ratified retroactively.

Four Lines of Daily Defense

• All Shareholder LoansSign a written contract... clearly specify the amount, term, interest rate, purpose, and repayment method, and avoid verbal agreements
• Interest Rate RecommendationsNo less than the interest rate for similar loans during the same period or the LPR, Companies recognize interest income and pay taxes, thereby avoiding the risk of adjustments to related-party transactions involving interest-free loans.
• If intended for business use, retainPurchase Contracts, Invoices, Reimbursement Vouchers, Business Trip Approvals, Business GuidelinesThe complete chain of evidence
• Set Up Shareholder AccountsSpecial Ledger, Clean up your accounts regularly to avoid large, long-standing outstanding balances

There is another often-overlooked requirement: Interest paid by a company on loans from shareholders must meet the following conditions: a contract must be signed; the interest rate must not exceed the rate for similar loans from financial institutions during the same period; and an invoice must be obtained;The ratio of debt investments to equity investments in related parties shall not exceed 2:1.Interest is deductible before taxes only if certain conditions are met; interest exceeding the specified percentage is not deductible.

Qicaiying offers businesses specialized services for reviewing shareholder transactions, standardizing accounting practices, and conducting annual tax health checks, thereby eliminating risks before an audit takes place.