When the director-cum-controlling shareholder of a private limited-liability company arranges for the company to grant him or her as loan the repayment of which is doubtful, this will cause the loan to come under the heading of “profit distribution”, as the amount in question will be deemed to have been withdrawn for good from the company’s assets. The loan’s treatment as a distribution of profits is contingent upon the company as well as the latter’s shareholder appreciating that the shareholder has benefited from the asset shift in question. It is up to the Tax and Customs Administration to come up with facts and circumstances that lend credence to the assumption that the situation having come about has been one in which the shareholder’s debt to his or her company would remain outstanding while the shareholder and the company had been aware that the arrangement had been to the shareholder’s benefit. Profit distributions are liable for “Box 2” income tax.
The Tax and Customs Administration raised an additional income tax assessment for 2010 with a director-cum-controlling shareholder, whose current-account and long-term debts with the company, in the respective amounts of 578,414 euros and 225,000 euros, were both treated as distribution of profits in said assessment.
The District Court confirmed that the Tax Office had rightly raised the additional assessment. By the time the director’s income tax return for 2010 was filed, his current-account debt with his company had come to top 800,000 euros. The shareholder was unable to present his company with genuine security or make annual interest and redemption payments, which was tantamount to it having been established that the shareholder would not (be able to) redeem the loan. However, the company continued to allow the debt to mount, among other things by compounding the interest on the loans, so that the shareholder’s total indebtedness to his company had risen to a staggering 3.5 million euros by mid-2015.
According to the District Court both parties must have appreciated that the amounts in question had been lastingly withdrawn from the company and that the shareholder had benefited from this.
Dutch version: Oplopende schuld DGA