Participating Loan: Few financial instruments generate as much confusion —and as much potential— as the participating loan. For the Commercial Registry it is almost equity; for the bank it is almost a shareholder; for the tax authorities, depending on who grants it, it can be a deductible expense or a disguised dividend; and for a commercial-court judge, in 2026, it is still not clear whether it gets paid before or after the rest of the creditors. It is, in short, a hybrid: neither wholly debt nor wholly equity. And it is precisely that amphibious nature that makes it one of the most useful —and most misunderstood— tools for strengthening a company’s balance sheet without its owners losing control.
This guide reviews the participating loan from every angle that truly matters to anyone who runs or holds a stake in a company: what it is and why it counts as equity, how it avoids the dreaded cause for dissolution due to losses, how it is accounted for, how it is taxed for the lender and for the borrower, what happens to it in an insolvency or a restructuring, what transfer pricing requires when it is intragroup and, above all, when it makes sense and when it does not.
What a participating loan is and why it is different
The participating loan is a financing contract governed by article 20 of Royal Decree-Law 7/1996, of 7 June. On the face of it, it is an ordinary loan —there is a lender who hands over money and a borrower who undertakes to repay it— but it incorporates four features that make it special and that are worth knowing before signing anything.
The first is the variable interest linked to the performance of the business. The lender is paid according to how the company evolves: it can be referenced to net profit, turnover, total equity or any other metric the parties freely agree. This variable interest is mandatory; without it, there is no participating loan. In addition, the parties may add a fixed interest. The logic is elegant: if the company does well, the lender shares in that success; if it does badly, the financial cost eases on its own. The loan breathes to the rhythm of the business’s cash.
The second feature is the restriction on early repayment. The borrower can only repay the loan ahead of schedule if it offsets that outflow with an increase in equity of an equal amount (and one that does not come from revaluing assets). This prevents the company from decapitalising itself by repaying the money at the first opportunity. The parties may also agree a penalty clause.
The third, and the most delicate, is subordination: in the order of payment, participating loans rank behind all ordinary creditors. Whoever lends in this way accepts that, if things go wrong, they will be paid almost last, just ahead of the shareholders. It is the price of an instrument that comes close to equity.
And the fourth, the one that makes it truly singular, is that it is treated as equity (net worth) for the purposes of capital reduction and dissolution. This point deserves its own section, because it is the main reason companies turn to it.
One idea is worth keeping in mind from the outset: despite counting as equity in certain cases, the Supreme Court (Judgment 566/2011) made it clear that the participating loan remains a loan. There is an obligation to repay principal and interest, and the lender does not become a shareholder or acquire voting rights. Within the range of alternative financing, it is one of the few instruments that strengthen the balance sheet without diluting ownership.
The participating loan as equity: the shield against dissolution
Here lies the jewel of the instrument. Picture a company carrying losses that sees its equity fall below half of its share capital. The Spanish Companies Act, in its article 363.1.e), deems that situation a cause for dissolution: the company is legally obliged to rebalance its equity, reduce capital or dissolve. And if the directors do not react in time, they may become personally liable for the company debts arising thereafter (article 367). It is one of the greatest sources of directors’ liability.
The participating loan offers a way out. Because the law treats it as equity for these specific purposes, its amount is added to accounting equity when checking whether the dissolution threshold has been crossed. A participating loan from the shareholder to the company can, on its own, pull the company out of the danger zone without a capital increase and without new shareholders coming in. The founder keeps 100% of their stake and, even so, the balance sheet is restored in the eyes of company law.
This rule rests on article 36.1.c) of the Commercial Code, which contains the “reconciliation rule”: the participating loan is presented as a liability on the balance sheet, but it is treated as equity solely for the purposes of mandatory capital reduction and dissolution due to losses. The courts have confirmed this (the Barcelona Court of Appeal, in a judgment of 15 February 2021, held that its amount must always be added to equity for this test).
That said, beware of haste. Converting a pre-existing ordinary loan into a participating one in extremis, the day before the year-end close and solely to dodge the cause for dissolution, is a fragile move that can be challenged. The tool works when it responds to a genuine financing purpose and is documented transparently vis-à-vis third parties.
The accounting paradox: equity for the judge, a liability for the accountant
We come to one of the points that most bewilders people. If the participating loan “is” equity, why does it appear as debt on the balance sheet? The answer is that two different planes coexist.
On the accounting plane, under the Spanish General Accounting Plan, the participating loan is a financial liability, both for the party that receives it (a debt) and for the party that grants it (a receivable). So confirmed the ICAC in its ruling in BOICAC 78/2009: it is recorded as “payables” in the borrower and as “loans and receivables” in the lender, measured at amortised cost. The ICAC also clarified that the variable interest linked to sales or profit is not an embedded financial derivative that needs to be separated, which greatly simplifies the accounting.
On the company-law plane, by contrast, that same liability is treated as equity for the two specific cases we have already seen: capital reduction and dissolution due to losses. There is no contradiction, but two rules for two purposes: the balance sheet reflects economic reality (there is an obligation to repay, so it is debt), while company law protects creditors by allowing that quasi-equity to count as a patrimonial cushion.
The practical takeaway is easy to remember: in the annual accounts, the participating loan appears as debt and does not by itself rebalance the accounting balance sheet; its “magic” effect occurs only in the calculation of the equity used to determine whether a cause for dissolution exists. The notes to the accounts must explain this circumstance. It is a nuance that a fractional CFO or a good advisor must always bear in mind when analysing the company’s patrimonial situation.
Accounting treatment: rules of recognition, measurement and the ICAC doctrine
The conceptual duality of the participating loan —company-law quasi-equity versus a financial liability in accounting terms— is one of the most delicate technical questions in corporate finance. This apparent contradiction was settled by the Institute of Accounting and Auditing (ICAC), whose doctrine leaves no room for interpretation.
The ICAC determined that the participating loan lacks the substantive characteristics of an equity instrument, since its economic substance corresponds to that of an enforceable liability. Consequently, under the General Accounting Plan, it is recorded as Non-current Liabilities (or Current Liabilities, depending on its repayment maturity schedule), it being strictly prohibited to record it within net equity accounts. The company-law assimilation to equity for the purposes of capital reduction and dissolution must be disclosed in detail in the Notes to the Annual Accounts, providing the reconciliation between the accounting figure and the company-law figure.
Subsequent measurement and recognition are governed by the amortised cost method. To illustrate the technique precisely, the accounting works as follows across the three key moments in the life of the loan.
Recognition of the initial drawdown of the loan
At the moment of drawdown, the financial liability is recognised net of the transaction costs directly attributable to the operation (structuring fees, notarial brokerage), which are charged to the profit and loss account over the life of the loan using the effective interest rate method. The entry, in simplified form, debits cash and credits the debt:
Debit: (572) Banks and credit institutions — net amount drawn | Credit: (171) Long-term debt / (16xx) Debt with related parties — nominal value of the loan.
Accrual and allocation of the fixed finance cost
The fixed interest contractually agreed accrues over time, regardless of the moment of its actual payment, and is recognised as a finance cost of the period:
Debit: (662) Interest on debt — fixed finance cost accrued | Credit: (527) Short-term interest on debt (or cash, if paid).
Accrual of the contingent remuneration (variable interest)
In accordance with recognition and measurement standard 9 of the General Accounting Plan, the variable interest component —linked to the borrower’s results— is treated as contingent remuneration. This finance cost is not estimated in advance; it is recognised only in the period in which the reference magnitude (profit, turnover) actually crystallises, being charged at that point to the profit and loss account:
Debit: (662) Interest on debt — finance cost for the variable tranche accrued | Credit: (527) Short-term interest on debt / (410) Sundry creditors.
This accounting discipline ensures that the financial statements faithfully reflect the company’s real leverage, preventing the company-law fiction of solvency from distorting the reading of the entity’s actual liabilities.
Taxation for the borrower: when the interest is deductible (and when it is not)
This is where many transactions go wrong for failing to analyse the detail. The rule depends entirely on who grants the loan.
If the lender is an unrelated third party (a bank, ENISA, a fund, an investor outside the group), the interest —both fixed and variable— is a deductible finance expense for Corporate Income Tax. That said, it is subject to the general limit of article 16 of the Corporate Income Tax Act: net finance expenses are only deductible up to 30% of the operating profit for the year, with a minimum of one million euros always deductible per year. Any excess over that limit is not lost; it is deducted in future years.
But if the participating loan is granted by an entity within the same commercial group (the group defined in article 42 of the Commercial Code), the picture changes radically. Article 15.a) of the Corporate Income Tax Act provides that the interest on an intragroup participating loan is not deductible, because it is treated as a distribution of equity; that is, it is treated like a dividend. The company that pays it must make a permanent positive adjustment in its return: it books the expense but cannot subtract it from the taxable base.
The Directorate-General for Taxation (DGT) has reiterated this criterion (for example, in ruling V2176-24) and has clarified a highly relevant point: for this non-deductibility to apply, there must be a controlling commercial group. In a ruling of January 2026, the DGT confirmed that a participating loan between two companies with a stake of only 10% and no article 42 group does not fall under article 15.a): its interest is deductible like that of any third party. The dividing line, therefore, is not “having some stake”, but “forming a controlling group”.
There is a nuance well worth keeping in mind, because it catches more than one company off guard: non-deductibility can be triggered on a supervening basis. In ruling V0048-25, of 22 January 2025, the DGT analysed the case of two companies that entered into a participating loan when they did not form a group —so the interest was deductible— and which, in a later year, came to belong to the same commercial group.
The conclusion was that, from the moment the group relationship arises, the interest ceases to be deductible. In other words, a transaction that started out “clean” can be “contaminated” if the corporate structure later changes (for example, after an acquisition or a reorganisation). It should be monitored in any M&A transaction.
There is also a relevant transitional window: under the seventeenth transitional provision of the Corporate Income Tax Act, participating loans granted before 20 June 2014 retain the deductibility of their interest even if they are intragroup today. The DGT has further clarified that merely modifying novations, extensions or tacit renewals of those old loans do not cause them to lose that favourable regime.
Taxation for the lender: the other side of the coin
The lender’s treatment mirrors the previous one, and here there is an elegant symmetry worth exploiting.
When the lender is a group entity, since the interest has been characterised as a dividend (not deductible for the payer), at the lender’s level it may benefit from the exemption under article 21 of the Corporate Income Tax Act designed to avoid double taxation, provided its requirements are met (a stake of at least 5%). The result is coherent: what is not deducted in one company is, to a large extent, exempt in the other. The effective exemption is 95%, owing to the management-expenses rule.
When the lender is an individual —the typical case of the shareholder who lends to their own company— the interest is investment income and is taxed in the savings base of personal income tax, at rates that in 2026 range from 19% to 30% depending on the bracket. There is an important caveat in related-party transactions: the portion of interest corresponding to the excess over three times the entity’s equity (in proportion to the shareholder’s stake) is taxed in the general base, which is more burdensome. And, in general, interest paid to an individual is subject to a 19% withholding.
The participating loan in insolvency: the great unknown of 2026
This is, today, the hottest point and the one that generates the most uncertainty. The question is seemingly simple: in an insolvency or a restructuring plan, does the participating loan get paid as an ordinary creditor or as a subordinated creditor? The answer determines who holds the power in the negotiation, what majorities are needed and who can suffer write-downs.
There is one clear case: if the loan has been granted by a party specially related to the debtor —a significant shareholder or a group company— the claim is subordinated by application of article 281 of the Consolidated Insolvency Act (TRLC). On this there is no debate.
The problem arises with the participating loan granted by a third party (a fund, ENISA, COFIDES). And here the Spanish courts are split into two camps:
- The Madrid thesis (ordinary claim). The Madrid Court of Appeal, in its Judgment 265/2025, of 9 September (Asistencias Carter case), holds that the participating loan is only subordinated if there is an express contractual subordination agreement. A mere reference to Royal Decree-Law 7/1996 is not enough. Failing that, it is an ordinary claim, and treating it worse than the other ordinary creditors breaches the law.
- The Barcelona and A Coruña thesis (subordinated by nature). The Barcelona Court of Appeal and Commercial Court No. 1 of A Coruña (Order 474/2025, of 29 December, Serviocio case, concerning a COFIDES loan) hold the opposite: subordination is inherent to the instrument, because article 20 of RDL 7/1996 is a mandatory provision. Entering into a participating loan is, in itself, accepting its postponement, and the contrary cannot be agreed.
By mid-2026, the Supreme Court has not yet unified doctrine, and the particular nature of restructuring plans —which hampers access to cassation— means the unknown may drag on. The consequence for the business owner is tangible: the same loan may be classified differently depending on the court that hears the case.
And why does this label matter so much? Because the real power at the negotiating table depends on it. If the loan is treated as ordinary, its holder is integrated into the class of ordinary creditors or forms its own class with enormous influence over the vote on the plan, where qualified majorities of two-thirds of the class’s liabilities are required.
Moreover, the plan cannot impose a disproportionate sacrifice on it: applying a 70% write-down to it while other ordinary creditors only have their interest trimmed breaches the principle of equal treatment within the same rank (art. 655.1.3º TRLC) and allows the court to annul the extension of the plan over that creditor —which is exactly what happened in the Asistencias Carter case.
If, on the contrary, the loan is treated as subordinated, it is relegated to the lower classes of the plan and fully exposed to the cross-class cramdown and to the absolute priority rule of article 655.2.4º TRLC: if the senior classes are not paid 100% of their claim, the lower classes —where the subordinated participating loan would sit— cannot receive anything or retain any economic right. In practice, subordination can mean the complete evaporation of the claim.
That rigidity has been softened by the gifting doctrine, consolidated in Spain by the judgment in the Naviera Armas case (Las Palmas Court of Appeal, 14 March 2025). In that restructuring, the senior bondholders —the only class “in the money” after valuing the company as a going concern— voluntarily ceded 6% of the company’s capital to the historical shareholders. The intermediate creditors, who were “out of the money”, challenged it, arguing that this transfer leapfrogged them and breached absolute priority.
The court validated the transaction with reasoning that is key to understanding today’s restructurings: there is no breach of absolute priority where it is established, through a rigorous valuation by the expert, that the challengers were effectively “out of the money” (their recovery in a liquidation would be zero) and where the transfer is an act of largesse by the senior class over value that legitimately belonged to it. It is the legal translation of a simple idea: those who have nothing to lose cannot block those who are risking their money.
All of this architecture rests on one pillar: the valuation of the company as a going concern, which is what determines which classes are “in” and which are “out of the money”. That is why a rigorous valuation is the real battleground of any restructuring.
The practical recommendation, in short, is clear: agree the ranking of the claim in writing and expressly in the contract, and assess the likely judicial forum. It is a factor to anticipate in any debt restructuring or refinancing process and, very particularly, in a refinancing of companies in distress.
Advantages of the participating loan
To sum up, the participating loan shines on several fronts:
- It strengthens equity without diluting the shareholders. No new shareholders come in and no power is shared. For a family business that wants to restore its balance sheet without ceding control, it is almost irreplaceable.
- It neutralises the cause for dissolution due to losses (art. 363.1.e of the Companies Act) and dispels the spectre of the directors’ personal liability.
- It aligns the cost with the ability to pay. If there are no profits, the variable tranche does not accrue. It is financing that adapts to the business cycle, which fits very well with management focused on free cash flow.
- It improves access to other financing. Because the participating lender sits almost at the level of the shareholders, banks perceive it almost as own funds, which improves the ratios and the borrowing capacity for other financing options.
- It is the public route par excellence for start-ups and SMEs. ENISA, the state-owned company under the Ministry of Industry, is the great grantor of participating loans in Spain: in 2025 alone it supported 514 companies with 86.2 million euros, and it has cumulatively financed more than 7,600 companies. Its lines offer amounts of up to 1.5 million with no guarantees or personal collateral, with a grace period and interest combining a moderate fixed tranche and a variable tranche linked to profitability. They are also used by COFIDES and SEPI, and are common in private equity and M&A transactions.
Risks and drawbacks of the participating loan
No instrument is free, and the participating loan has trade-offs that are worth facing head-on.
For the borrower, the main drawback is that it can prove expensive if the business does well: the variable interest grows with profits, so success is shared. In addition, early repayment is restricted (it must be offset with equity), and if the loan is intragroup, the interest is not deductible, which raises its real after-tax cost.
For the lender, the great risk is subordination: in an insolvency it is paid almost last. To this are added the illiquidity of the instrument, the absence of typical guarantees, the risk of tax recharacterisation and —if it is intragroup— the non-deductibility of any impairment of the claim.
And hanging over everything, the cross-cutting risk of legal uncertainty already discussed: as long as the Supreme Court does not unify the criterion on the subordination of third-party participating loans, the outcome of a restructuring may depend on the court that hears it. It is not a minor detail; it is a factor that must weigh in the decision and in the drafting of the contract.
Summary: the participating loan at a glance
|
Angle |
Treatment of the participating loan |
| Company law |
Equity for the purposes of capital reduction and dissolution due to losses (art. 20 RDL 7/1996 and art. 36.1.c Commercial Code). Avoids the cause for dissolution of art. 363.1.e of the Companies Act. |
|
Accounting |
Financial liability, at amortised cost, for both borrower and lender (BOICAC 78/2009). Appears as debt on the balance sheet. |
| Tax — borrower |
Interest deductible if the lender is a third party (subject to the 30%-of-operating-profit limit, art. 16 CITA). NOT deductible if intragroup (art. 15.a CITA): treated as a dividend. |
|
Tax — lender |
If intragroup, the interest may be exempt (art. 21 CITA, stake ≥ 5%). If an individual, personal income tax savings base (19%–30%) and 19% withholding. |
| Insolvency |
Subordinated if granted by a specially related party. If granted by a third party: open controversy (Madrid: ordinary; Barcelona/A Coruña: subordinated by nature). |
|
Transfer pricing |
If related, market-value measurement (art. 18 CITA) and documentation. Risk of recharacterisation as equity (OECD Guidance 2020). |
How Maraz Corporate Finance helps you
The participating loan is a powerful instrument, but its effectiveness depends entirely on the design. The same transaction can strengthen the balance sheet and save tax, or turn into a tax and insolvency problem, depending on how the ranking clause is structured, who the lender is and how it is documented. At Maraz Corporate Finance we help middle-market companies and their shareholders decide whether the participating loan is the right tool, structure it with legal and tax rigour, and integrate it into a financing or restructuring strategy consistent with the business plan.
If your company is considering strengthening its own funds, restoring its balance sheet to fend off a cause for dissolution, or bringing in financing that does not dilute the shareholders, let’s talk. A timely analysis prevents costly surprises.
Javier de Rojas Roca de Togores
Partner – Maraz Corporate Finance
Frequently asked questions about the participating loan
Is a participating loan debt or equity?
It is a hybrid instrument. Legally it is a loan (there is an obligation to repay it) and in accounting terms it is recorded as a financial liability. But the law treats it as equity for the specific purposes of capital reduction and dissolution due to losses. That is why it is called “quasi-equity”: it works as a patrimonial cushion without ceasing to be a debt.
How does a participating loan help avoid the dissolution of the company?
When losses push equity below half of the share capital, the cause for dissolution under article 363.1.e) of the Companies Act is triggered. The amount of the participating loan is added to equity for the purposes of that calculation, which can pull the company out of the danger zone without a capital increase or new shareholders, and protects the directors from liability for company debts.
Is the interest on a participating loan deductible?
It depends on who grants it. If it is granted by an unrelated third party, the interest is deductible subject to the general limit of 30% of operating profit (article 16 of the Corporate Income Tax Act). If it is granted by an entity within the same commercial group, the interest is NOT deductible: article 15.a) treats it as a distribution of equity, that is, as a dividend.
Is the participating loan subordinated in an insolvency?
If it has been granted by a significant shareholder or a group company, yes: it is subordinated without discussion. If it has been granted by a third party, the question is disputed in 2026: the Madrid Court of Appeal treats it as ordinary unless there is an express subordination agreement, while Barcelona and A Coruña treat it as subordinated by nature. The Supreme Court has not yet unified the criterion, so it is advisable to agree the ranking expressly in the contract.
Who grants participating loans in Spain?
The main public grantor is ENISA, which in 2025 financed 514 companies with 86.2 million euros, with amounts of up to 1.5 million and no personal guarantees. They are also granted by COFIDES and SEPI, private equity firms and funds, family offices and, very commonly, the shareholders themselves to their own company to strengthen its equity.
