I posted a question recently regarding converting director's loan credit balances to share capital to improve a company's balance sheet position. There were some extremely helpful replies.
The matter has now progressed somewhat, and I am posting a new question now to try to keep things simple, as this question relates to a slightly different issue, albeit in the same scenario.
Background: Company A is a UK company, owned 80% by Director A and 20% by Director B. There are directors' loan credit balances of £80k owing to Director A and £50k owing to Director B.
Company B is a French company, previously 100% owned by Director A, but was recently purchased for 1 euro by Company A. Company B has a director's loan credit balance of £500k owing to Director A.
The directors wish to improve the balance sheet position of Company A by converting the directors' loans to equity. They wish to keep their 80:20 proportional shareholdings. To achieve this, they wish to transfer £120k of the Director A's loan balance in Company B to Company A (giving Director A a £200k loan balance in Company A). They will then convert £200k of loan to equity for Director A and £50k of loan to equity for Director B, keeping the 80:20 ownership proportions.
I am hesitant to say "go ahead" as I am concerned as to whether the transfer of debt between Company A and Company B will create any tax implications given that they are connected companies and this is an intercompany loan. If the loan is written off (as Company A presumably won't be paying back Company B), I believe that the tax effects will offset each other, but I am not certain of this or whether there are any reporting obligations. The situation is further complicated by the fact that Company B is French, and I know nothing of French tax law.
I would expect the accounting entries to be as follows:
Company B: DR £120k DLA of Director A / CR £120k intercompany loan balance with Company A
Company A: DR £120k intercompany loan balance with Company B / CR £120k DLA of Director A
DR £200k DLA of Director A / CR £200k Share Capital
DR £50k DLA of Director B / CR £50k Share Capital
Any advice would be much appreciated.