Claims within joint venture

A married couple and their son jointly carried on a business under partnership format. The three partners in the partnership as at 31 December 2006 all had negative equity, in the amount of € 334,152 for one of them compared with € 107,192 for the other two. Having been in evidence since the partnership was first formed, the negative equity over the years had been pushed further into the red due to operating losses and private withdrawals. The partners were in a position to withdraw more than their profit share owing to the way the partnership covenant had been phrased. The parents decided to remit part of the partnership’s claim on their son and went on to charge the remittance and a downward adjustment of the loan to their (operating) result. The Tax and Customs Administration balked at this, arguing on reference to Supreme Court jurisprudence on the theme of non-arm’s length loans that the parents, by exposing themselves to the kind of credit risk which no independent third party would have settled for – by failing to impose repayment terms on their son and/or insist on security being put up by him – had acted in a non-arm’s length way where it concerned the partnership’s claim against their son.

The District Court was less than impressed with the Tax and Customs Administration’s comparison with a monetary loan agreement, and with the comparison with a shareholder scenario. The matter at issue after all involved a joint venture, which in the Court’s opinion called for an assessment to be made as to whether it would be plausible for entrepreneurs operating on an arm’s length basis within a partnership to make a partner who had withdrawn too much money return the excess or impose other conditions on him. This was something the Tax and Customs Administration had failed to render plausible, and so the Court decided to allow the downward adjustment.