Shareholders’ Current Account is an important term in the UAE, typically found on the liability side of the balance sheet. While it’s often grouped with shareholder-related items like share capital and statutory reserves, the Shareholders’ Current Account serves a more dynamic purpose. It records the ongoing financial interactions between the company and its shareholders, reflecting contributions, withdrawals, and various other transactions that don’t always align neatly with traditional classifications like equity or loans. This blend of transactions makes it a crucial tool for managing the financial
relationship between the company and its shareholders.

To understand the implications of this account, it’s essential to look at the specific transactions it captures. On the credit side, the account often includes retained profits that are kept within the company instead of being distributed as dividends, along with additional funds introduced by shareholders to support the business without formally increasing share capital. On the debit side, typical entries include losses incurred by the company, dividend payments, personal expenses covered by the company, and shareholder withdrawals. Given these varied entries, the Shareholders’ Current Account can sometimes take on the characteristics of a loan account, particularly when shareholders withdraw funds for personal use or when personal expenses are involved. In such cases, the idea of charging interest may arise, as it helps ensure fairness and prevents shareholders from drawing on company funds without any form of compensation. However, not all transactions fit this model. For example, retained
earnings are part of shareholders’ equity and should not be treated like a loan, meaning they should not attract interest.

The question of whether interest should be charged on the Shareholders’ Current Account is not straightforward. It depends on the nature of the transactions within the account. For withdrawals and
personal expenses, charging interest may help maintain financial discipline and fairness, especially when multiple shareholders are involved. On the other hand, retained earnings and equity contributions represent ownership, not debt, and treating them as such would blur the lines between equity and loan obligations. Additionally, companies must consider practical factors such as tax implications and compliance with the Arm’s Length Principle, ensuring that interest, if charged, is at a fair market rate.

In the end, figuring out whether to charge interest on the Shareholders’ Current Account—a system that’s worked well for years without it, has become a tough call. Corporate Tax rules now make us wonder if adding interest is truly necessary for compliance, or if it just adds complexity without real benefit. Should we start treating this account like a formal loan, or stick with the simple, interest-free approach that’s served us so far? Each company has to consider the possible benefits against the increased burden and ask: is this change genuinely needed, or is it just an extra layer in our financial setup?

Article By

Riddhesh Shah And Shiny Mascarenhas