Employee Loans From the Company

November 6, 20230

Companies often in practice give short-term loans to their employees. This possibility is not mentioned anywhere under this term in the Labor Law, although in Article 120 paragraph 1 point 4, the Law says that a general act or labor contract can assign more favorable labor conditions. As applicably, the employer can prescribe the manner and conditions of loan approval and repayment through a general act, a collective agreement or any other act.

Among other things, and for the sake of the team itself and the working atmosphere, it is important to establish clear criteria under which an employee can get a loan and that these criteria apply equally to all employees.

The main prerequisite for this type of loan is that the company is liquid and has a surplus of free funds, as well as the will of the company’s management.


Loans are usually short-term up to one year, they are approved for the purpose of buying preserves for the winter, firewood, school fees for children, summer vacations, although they can also be long-term for solving the housing issue. These are approved with little or no interest and according to a pre-deferred procedure, in large companies this is usually done by the HR department.

Both parties benefit from such loans; the company has a satisfied employee who will remain employed for a long time, which is very important for achieving a positive working atmosphere in the company because we live and work in an era when we are witnessing a large turnover of the workforce.


On the other hand, the employee will fulfill some of his needs that he cannot normally achieve from his regular income, much more favorably, and without the additional complications that he would have had to contact the bank.

From the aspect of taxation, loans to employees are not taxed, except in the case when the company decides that the employee doesn’t have to pay back the loan. In that case, the provisions of Article 14 of the Individual Income Tax Law apply. Paragraph 1, which states that in addition to income in the form of money, the treatment of wages includes receipts based on cash receipts, vouchers, goods, acquisition of income made by doing or not doing, debt forgiveness, as well as covering the taxpayer’s expenses. In this case, this type of loan is treated as earnings, so taxes and contributions must be calculated and paid.


It is recommended to sign a contract between the company and the employee, which will clearly specify the conditions, the repayment period, the conditions under which the loan is approved, and the method of repayment. It is recommended to define the case where the employee leaves the company, in which case the employee must repay the loan immediately.


This type of loan is usually repaid by deducting the monthly installment from the salary, therefore a written statement must be made by the employee in which he agreed to this type of repayment.

The payment code used when transferring funds after the loan is approved is 270.



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