Private loans: documenting a family loan

Why must a private loan be documented?

Lending money to family or friends is very common in Denmark. But without correct documentation, a private loan can create serious problems, both for tax and in personal relationships.

The Danish Tax Agency (Skattestyrelsen) looks closely at money transfers between family members. Without written documentation, an amount can be treated as a taxable gift, and both the giver and the recipient can end up with a tax bill.

The tax rules on family loans

For tax purposes, there is a distinction between two scenarios:

Loan (not taxable)

A loan is a transfer of money that must be repaid. A family loan does not trigger gift tax if it is genuinely a loan. The documentation is strengthened if:

• There is a written promissory note or loan agreement
• The loan is made on real terms (typically on-demand terms, see below)
• Any repayment is made and can be documented
• The agreement is made on arm's-length terms

Gift (may be subject to duty)

A gift is a transfer that need not be repaid. Gifts above the annual duty-free allowances trigger gift duty:

• To children, grandchildren and other direct descendants, and to parents: Duty-free up to DKK 80,600 per giver per year (2026)
• To children-in-law: Duty-free up to DKK 28,200 per giver per year (2026)
• Gifts above the allowance to close family: 15% gift duty
• To people outside the duty-liable circle of persons: The gift is generally subject to income tax for the recipient

Note that both parents and grandparents can make duty-free gifts to their children and grandchildren within the DKK 80,600 allowance. The reduced allowance of DKK 28,200 applies only to gifts to children-in-law. As each giver has their own allowance, a couple can together give double the amount to each child.

The interest-free family loan: the most used model

A common misunderstanding is that a family loan must always bear market interest to avoid tax. That is not the case.

If you make the loan as an interest-free on-demand loan to close family (the circle of persons in section 22 of the Estate and Gift Tax Act, which includes children, grandchildren, stepchildren, parents and a spouse), the missing interest (the interest benefit) is not taxable. This is the classic and tax-safe way to make a family loan.

An on-demand loan means that:

• The loan does not bear interest
• The lender can at any time demand the whole loan be repaid
• The loan forms part of the lender's estate if it has not been repaid by then

If, on the other hand, you make a loan with a fixed term and interest below the market rate (and not on on-demand terms), the interest benefit may, depending on the circumstances, be treated as a taxable gift. To avoid any discussion, you can either use the on-demand model or charge interest at the market rate. The relevant market rate can be based on the Danish central bank's current lending rate, which you can find at nationalbanken.dk.

Repayment via annual duty-free gifts

Interest-free family loans are in practice often repaid by the lender each year giving the borrower a monetary gift within the duty-free allowance, which the borrower uses to reduce the debt. An important pitfall: the promissory note must not state in advance that the debt is to be repaid through annual forgiveness. If it does, the whole loan amount can be regarded as a gift and thereby become subject to duty. The gifts must be given and documented independently from year to year.

Which documents do you need?

For a correctly documented private loan, we recommend two documents:

1. Loan agreement

The loan agreement is the overall contract that governs the whole loan relationship:

• The loan amount and disbursement
• The interest terms (or a statement that the loan is interest-free on demand)
• A repayment plan or repayment terms
• The consequences of default
• Any security (a charge)

2. Promissory note

A promissory note is the debtor's written acknowledgement of the debt. It supplements the loan agreement by constituting independent evidence of the debt and is easy to use as documentation towards the Tax Agency and any creditors. For an interest-free family loan, a promissory note for an interest-free loan on on-demand terms is typically used.

Documenting ongoing instalments

The Tax Agency can ask for documentation that a loan actually exists and is repaid as agreed. Make sure you have:

• Bank transfers, both when the loan is disbursed and for any instalments, ideally with a clear text such as "Loan" or "Loan instalment" and the date
• Receipts for any cash payments. It is better to use a bank transfer, so the flow of money can be documented
• Annual tax statements, where the interest income (lender) and interest deduction (borrower) are stated, if the loan bears interest

Tax deduction for interest

If the loan bears interest and the borrower pays it, the interest is generally deductible as an interest expense, but only if:

• There is a written agreement
• The interest has actually been paid
• The agreement is made on arm's-length terms

Interest expenses form part of capital income, and the deduction value for private individuals is typically around 25 to 33% depending on the total net capital income. Correspondingly, the lender must include the interest income as capital income. If the loan is interest-free, there is neither a deduction nor taxable interest income.

Special rules for loans to and from your own company

If you lend money to your own company (ApS/A/S), it is important to document it correctly to avoid mixing the company's and your private finances:

• A loan from the owner to the company must appear in the company's accounts
• The interest must correspond to the market rate
• A loan the other way, from the company to the shareholder, is governed by the Companies Act (section 210 ff.). Such shareholder loans are only lawful under strict conditions, and regardless of company law, the loan is generally taxed at the recipient as salary or dividend under section 16 E of the Assessment Act. Always seek advice from an accountant before taking a loan from your own company

Frequently asked questions

Can you make an oral loan agreement with the family?

An oral agreement is legally binding but almost impossible to prove. The Tax Agency will typically not accept an undocumented oral family loan, and in a dispute with heirs or creditors a written promissory note will be decisive.

What happens to a family loan on inheritance?

An outstanding loan forms part of the estate. The heirs take over the claim, but it is typically set off against the inheritance share. To avoid misunderstandings, a will should state how family loans are to be treated.

Can I forgive a loan tax-free?

Forgiving a loan is in principle a gift. If the forgiveness is within the duty-free allowances (see above), it is duty-free. If the amount is above the limit, it triggers gift duty. Contact an accountant or lawyer before you forgive a loan.

Conclusion

A private loan should always be documented in writing with a promissory note, both for the Tax Agency's sake and to avoid conflicts. The most used and tax-safe model within the family is an interest-free loan on on-demand terms, possibly repaid via annual duty-free gifts. If you are in doubt about the tax consequences, have it checked by an accountant or lawyer before the money is transferred.

---

The content of this article is for guidance only and does not constitute legal or tax advice. Consult a lawyer or accountant for advice on your specific situation.