The Zeeland-West-Brabant District Court has ruled that a business owner who sublets lorries at a lower price is acting in breach of the principle of commercial reasonableness.
The case
The case already heard This concerns an entrepreneur who runs a business in the Netherlands as a sole trader. He leases lorries from a third party for €2,250 per lorry per month. He sublets these lorries to a foreign company, in which he is a shareholder alongside his brother and son. The subletting takes place at the same rate at which the entrepreneur leases the lorries. Except in 2014. In that year, the lorries were sublet for €1,250 per month.
Loss
The logical consequence is that the business owner incurred a loss in 2014, whilst profits were recorded in all other years. This one-off loss has prompted the tax authorities to launch an audit. In this context, the tax authorities argue that subletting at a lower price contravenes the arm’s length principle. On the basis of the principle of prudent business practice, the loss is therefore adjusted to a profit.
Business practice
The court considers that the general rule is that only income that has actually been received is included for tax purposes. Even where an entrepreneur, for personal reasons, leaves a benefit within his business unused, this benefit cannot generally be included in the profit. However, there may be exceptional circumstances on the basis of which the profit must be adjusted.
The court finds that the subletting involved an uncommercial rent. To this end, the court compares the rent with the amount paid by the business owner to the third party. Furthermore, in all years other than 2014, the business owner charged a rent that was €1,000 higher. Furthermore, the unduly low rent was charged to a company in which the entrepreneur, his brother and his son hold all the shares. These are such exceptional circumstances that a profit adjustment is justified.
The business owner did put forward a number of counter-arguments, but failed to substantiate them. This means he stands no chance in the proceedings from the outset. Any commercial justification for the temporarily lower rent might well have been sufficient to avoid the profit adjustment.