The current account held by the DGA (director and major shareholder) with his “own” private limited company has been identified by the Tax and Customs Administration as one of the key areas of focus in the assessment of tax returns for 2016. According to the Tax and Customs Administration, excessive (interest-free) borrowing by the DGA must be tackled. This announcement was made during the information sessions that the Tax and Customs Administration holds annually at the end of the year for advisers; the so-called ‘intermediary days’. The Tax and Customs Administration has now configured its computer system so that alarm bells ring when an excessively high current account balance is detected in electronically submitted income tax and/or corporation tax returns.
Current account
A current account is an agreement between the director and major shareholder (DGA) and the private limited company (B.V.) under which amounts payable to and receivable from the B.V. on an ongoing basis are recorded and offset against one another. The balance of these entries results, on each balance sheet date, in a claim against or a liability to the private limited company. As with all other legal relationships between the director and major shareholder and the private limited company, it is essential to set out the current account arrangement in a written agreement.
Dividend
In response to these red flags, the Tax and Customs Administration will send the interested party a letter of enquiry. If, on the basis of the answers provided to these questions, it is concluded that the current account balance is indeed excessively high, it may be concluded that the director and major shareholder (DGA) has had access to the private limited company’s funds for private purposes. Those funds will then have been distributed to the DGA. Furthermore, distributions from the private limited company’s profits (reserves) (dividends) are subject to dividend tax (15%) and, for shareholders holding a stake of 5% or more, to income tax. The dividend payment is then taxed as ordinary income from a substantial interest, at a proportional rate of 25% (the dividend tax withheld is set off against the income tax). Furthermore, if it is subsequently established that taxable profit distributions have taken place, fines may be imposed.
Arguments
Of course, subject, naturally, to the specific circumstances of his or her case, the director and major shareholder need not simply accept without a fight the Tax and Customs Administration’s intention to tax the excessively high portion of the current account. Where possible, it may be advisable to anticipate the action announced by the tax authorities.