Business capital is not a personal transfer with a logo on it. A bank, a co-founder and a tax authority will each ask what the payment was. Loan, equity, management charge, dividend and payment for services are different answers with different papers. Pick the true one first.
Purpose and paper
A loan wants an agreement. Equity wants a subscription or a share issue. A dividend wants the authority to pay one. A recharge wants an invoice that matches work. If none of these exists, you do not have a tidy transfer. You have an unexplained movement of company money. Write the document before the payment, and keep it with the bank confirmation.
Controls and the route
Two approvers, a beneficiary you have verified, and a currency plan. If the sum must arrive as a known amount, price the amount received and ask about intermediary fees. If the rate is fixed, read the cancellation terms. Do not route company money through a founder’s personal multi-currency account because it was faster last time. That shortcut becomes the explanation you cannot give.
Tax is a characterisation question
The same cash can be a dividend, a loan or a fee, and those words are not interchangeable at filing time. Withholding may apply. A permanent establishment or a transfer-pricing question may apply if entities in two countries are dealing with each other. This article will not characterise your payment. An adviser with the agreement can help you avoid characterising it by accident.
Treat a movement of capital as a transaction with documents
Sending money between your own companies, drawing it out to yourself, or bringing in funds from an investor are different transactions. They need a reason the bank can read and a reason an accountant can book: a loan, a capital contribution, a dividend, a payment for services. The label should match the documents. Calling everything a transfer is how intercompany money becomes inexplicable. Ask your adviser which label is right before the payment, not after a bank has frozen it and asked you to choose.
Banks will ask for source of funds on amounts that are unusual for the account, and sometimes on amounts that are not, when the corridor is new. There is no figure for ‘unusual’ here. Ask what they need for the payment you plan. Investor money needs the investor’s story as well as yours. Warn them. A round that is documented for a shareholder agreement and undocumented for the bank is only half finished.
Decide tax and banking together, then keep the board paper
A dividend, a loan and a capital injection can be taxed differently in the country of the payer and the country of the recipient. Treaties and local rules decide. Get advice for the route you mean to use, and minute the decision. Then send the money in line with the minute. A payment that contradicts the minute is a problem for both the tax file and the bank’s file.
Keep the agreement, the valuation or calculation if there was one, the bank confirmation and the advice in one place. If exchange rates mean the amount booked differs from the amount that arrived, record both and record the rate. Future you, and any buyer of the company, will not want to reconstruct a cross-border treasury from a messaging app.
Before you act
If the money is going to you personally, pause longer than if it is going to another company you own. A distribution, a loan and a repayment of a loan you made earlier are easy to confuse in a banking app and hard to unpick in a tax return. Ask the adviser which one this payment is, and ask the bank whether the reference should say so. Where exchange control or extra documentation exists for the corridor, the bank will usually be the first to mention it. Do not assume a quiet corridor stays quiet because the last payment was quiet. Keep the board paper and the advice even when everyone involved already agrees, because the person who asks next may not have been in the room.
A practical checklist
- Legal reason named.
- Document signed.
- Board or shareholder authority if it is required.
- Beneficiary verified.
- Amount received priced.
- Receiving bank warned if the sum is large.
- Personal accounts kept out of the route.
Questions to ask
- Is this a loan, equity, a dividend or a fee?
- Who has authority to send it?
- What will the bank ask to see?
- How much arrives, and who can deduct a fee?
- Does withholding apply?
- What do we record in each company’s books?
Common mistakes
- Sending and documenting later.
- A founder’s personal account as a bridge.
- Calling everything a loan and never writing the loan.
- Ignoring withholding.
- One approver for a sum that could hurt the company.
WiT Access provides general information and comparison resources. Nothing on this website constitutes financial, tax, legal or investment advice. Always consider obtaining advice from an appropriately qualified professional.
