{"id":6607,"date":"2026-07-17T10:54:17","date_gmt":"2026-07-17T08:54:17","guid":{"rendered":"https:\/\/maraz.es\/?p=6607"},"modified":"2026-07-19T11:53:03","modified_gmt":"2026-07-19T09:53:03","slug":"participating-loans-the-complete-guide","status":"publish","type":"post","link":"https:\/\/maraz.es\/en\/participating-loans-the-complete-guide\/","title":{"rendered":"Participating Loans: The Complete Guide for Directors, Shareholders and Board Members"},"content":{"rendered":"

Participating Loan: Few financial instruments generate as much confusion \u2014and as much potential\u2014 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.<\/strong> And it is precisely that amphibious nature that makes it one of the most useful \u2014and most misunderstood\u2014 tools for strengthening a company\u2019s balance sheet without its owners losing control.<\/p>\n

This guide reviews the participating loan from every angle that truly matters to anyone who runs or holds a stake in a company:<\/strong> 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.<\/p>\n

What a participating loan is and why it is different<\/strong><\/h2>\n

The participating loan is a financing contract governed by article 20 of Royal Decree-Law 7\/1996<\/strong>, of 7 June. On the face of it, it is an ordinary loan \u2014there is a lender who hands over money and a borrower who undertakes to repay it\u2014 but it incorporates four features that make it special and that are worth knowing before signing anything.<\/p>\n

The first is the variable interest linked to the performance of the business<\/strong>. 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\u2019s cash.<\/p>\n

The second feature is the restriction on early repayment<\/strong>. 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.<\/p>\n

The third, and the most delicate, is subordination<\/strong>: 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.<\/p>\n

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<\/strong>. This point deserves its own section, because it is the main reason companies turn to it.<\/p>\n

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<\/a>, it is one of the few instruments that strengthen the balance sheet without diluting ownership.<\/p>\n

The participating loan as equity: the shield against dissolution<\/strong><\/h2>\n

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\u2019 liability<\/a>.<\/strong><\/p>\n

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.<\/p>\n

This rule rests on article 36.1.c) of the Commercial Code<\/strong>, which contains the \u201creconciliation rule\u201d: 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).<\/p>\n

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-\u00e0-vis third parties.<\/p>\n

The accounting paradox: equity for the judge, a liability for the accountant<\/strong><\/h2>\n

We come to one of the points that most bewilders people. If the participating loan \u201cis\u201d equity, why does it appear as debt on the balance sheet? The answer is that two different planes coexist.<\/p>\n

On the accounting plane<\/strong>, under the Spanish General Accounting Plan, the participating loan is a financial liability<\/strong>, 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 \u201cpayables\u201d in the borrower and as \u201cloans and receivables\u201d 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.<\/p>\n

On the company-law plane<\/strong>, 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.<\/p>\n

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 \u201cmagic\u201d 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<\/a> or a good advisor must always bear in mind when analysing the company\u2019s patrimonial situation<\/a>.<\/p>\n

Accounting treatment: rules of recognition, measurement and the ICAC doctrine<\/strong><\/h2>\n

The conceptual duality of the participating loan \u2014company-law quasi-equity versus a financial liability in accounting terms\u2014 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.<\/p>\n

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<\/strong> (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.<\/p>\n

Subsequent measurement and recognition are governed by the amortised cost<\/strong> method. To illustrate the technique precisely, the accounting works as follows across the three key moments in the life of the loan.<\/p>\n

Recognition of the initial drawdown of the loan<\/strong><\/h3>\n

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:<\/p>\n

Debit: (572) Banks and credit institutions \u2014 net amount drawn\u00a0 |\u00a0 Credit: (171) Long-term debt \/ (16xx) Debt with related parties \u2014 nominal value of the loan.<\/em><\/p>\n

Accrual and allocation of the fixed finance cost<\/strong><\/h3>\n

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:<\/p>\n

Debit: (662) Interest on debt \u2014 fixed finance cost accrued\u00a0 |\u00a0 Credit: (527) Short-term interest on debt (or cash, if paid).<\/em><\/p>\n

Accrual of the contingent remuneration (variable interest)<\/strong><\/h3>\n

In accordance with recognition and measurement standard 9 of the General Accounting Plan, the variable interest component \u2014linked to the borrower\u2019s results\u2014 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:<\/p>\n

Debit: (662) Interest on debt \u2014 finance cost for the variable tranche accrued\u00a0 |\u00a0 Credit: (527) Short-term interest on debt \/ (410) Sundry creditors.<\/em><\/p>\n

This accounting discipline ensures that the financial statements faithfully reflect the company\u2019s real leverage, preventing the company-law fiction of solvency from distorting the reading of the entity\u2019s actual liabilities.<\/p>\n

Taxation for the borrower: when the interest is deductible (and when it is not)<\/strong><\/h2>\n

This is where many transactions go wrong for failing to analyse the detail. The rule depends entirely on who grants the loan.<\/p>\n

If the lender is an unrelated third party<\/strong> (a bank, ENISA, a fund, an investor outside the group), the interest \u2014both fixed and variable\u2014 is a deductible finance expense<\/strong> 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.<\/p>\n

But if the participating loan is granted by an entity within the same commercial group<\/strong> (the group defined in article 42 of the Commercial Code), the picture changes radically. Article 15.a) of the Corporate Income Tax Act<\/strong> provides that the interest on an intragroup participating loan is not deductible<\/strong>, 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.<\/p>\n

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 \u201chaving some stake\u201d, but \u201cforming a controlling group\u201d.<\/p>\n

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 \u2014so the interest was deductible\u2014 and which, in a later year, came to belong to the same commercial group.<\/p>\n

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 \u201cclean\u201d can be \u201ccontaminated\u201d if the corporate structure later changes (for example, after an acquisition or a reorganisation). It should be monitored in any M&A transaction.<\/p>\n

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<\/strong> 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.<\/p>\n

Taxation for the lender: the other side of the coin<\/strong><\/h2>\n

The lender\u2019s treatment mirrors the previous one, and here there is an elegant symmetry worth exploiting.<\/p>\n

When the lender is a group entity<\/strong>, since the interest has been characterised as a dividend (not deductible for the payer), at the lender\u2019s level it may benefit from the exemption under article 21 of the Corporate Income Tax Act<\/strong> 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.<\/p>\n

When the lender is an individual<\/strong> \u2014the typical case of the shareholder who lends to their own company\u2014 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\u2019s equity (in proportion to the shareholder\u2019s 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<\/strong>.<\/p>\n

The participating loan in insolvency: the great unknown of 2026<\/strong><\/h2>\n

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.<\/p>\n

There is one clear case: if the loan has been granted by a party specially related to the debtor<\/strong> \u2014a significant shareholder or a group company\u2014 the claim is subordinated by application of article 281 of the Consolidated Insolvency Act (TRLC). On this there is no debate.<\/p>\n

The problem arises with the participating loan granted by a third party<\/strong> (a fund, ENISA, COFIDES). And here the Spanish courts are split into two camps:<\/p>\n