Our article VAT on consultancy feessnor are they deductible Earlier this week, we ended with the question of whether the trilogy would be completed. That has now been confirmed. The Zeeland-West Brabant District Court has ruled that the expenses paid by the private limited company for advice on business succession, which do not qualify as deductible costs for the purposes of corporation tax (see our article Consultancy fees are not tax-deductible) and on which VAT is not deductible are treated, for income tax purposes, as a (disguised) dividend payment.
Dual awareness
The criteria to be applied when determining whether a (disguised) dividend payment has taken place are slightly different from those applied in relation to the deductibility of expenses for corporation tax purposes and in relation to the deductibility of VAT:
- there must be a transfer of assets from the private limited company to the shareholder, as a result of which a sum of money or value is withdrawn from the company’s assets;
- the withdrawal must be covered by profits held within the private limited company;
- and both the private limited company and the shareholder must have been aware of the transfer of assets (dual awareness).
The first two criteria are not in dispute in these proceedings. The shareholder maintains that he was not aware of the transfer of assets. In this regard, he argues that he sought detailed advice from tax advisers, who were of the opinion that the consultancy fees constituted business expenses.
The Court considers that the shareholder, who was also a director of the private limited company, must reasonably have been aware that, by charging private expenses to the company’s profits, he was benefiting in his capacity as a shareholder. The tax adviser, too, should reasonably have been aware of this, and the Court attributes the adviser’s knowledge to the shareholder.
The Court concludes that the Tax and Customs Administration was correct to levy income tax on the consultancy fees that had been wrongly charged to the private limited company’s profits (substantial interest tax; Box 2).