What are the Legal Differences Between Loans and Investments, and Why Do They Matter?

Loans and investments are both forms of financing, but they are relations with different legal consequences and structures. Correctly distinguishing between them directly affects tax regulation, the rights and obligations of the parties, and the control of financial risks.

According to the Civil Code, a “loan agreement” means that the lender undertakes to transfer money or other property defined by generic characteristics into the ownership of the borrower, and the borrower undertakes the obligation to return property or money of the same type, quantity, quality, and amount within the agreed period.[1] The parties may agree to pay interest in exchange for granting the loan, and if the loan agreement does not specify a duration, the borrower is obligated to repay it upon the lender's demand. [2]

On the other hand, according to the Law on Investment, “investment” means tangible and intangible assets contributed to the equity of a profit-seeking entity and reflected in the financial statements.[3] For instance, if an investment is made in a company, the investor owns a share in that company's equity and bears liability to the extent of the shares held.[4] In other words, an investor does not have the right to demand the immediate return of their investment like in a loan agreement; they bear the risks of that business as an investor. However, if the company operates profitably and decides to distribute dividends, the investor has the right to receive dividends according to their ownership share. [5]

Sources:

[1] Article 281, Section 281.1 of the Civil Code

[2] Article 282, Section 282.1 and Article 283, Section 283.1 of the Civil Code

[3] Article 3, Section 3.1.1 of the Law on Investment

[4] Section 9.3 of the Company Law

[5] Section 3.3 of the Company Law 

Disclaimer: This article is intended for general informational purposes only and have been prepared in accordance with the laws in effect at the time of writing. For legal advice, please consult a professional attorney.