A director and major shareholder enters into an agreement to purchase crypto tokens. The private limited company transfers the purchase price of €250,000. The tokens turn out to be worthless. The private limited company wishes to charge the loss to its profit and loss account. The tax inspector refuses to allow the write-down. After all, the contract is in the name of the director and major shareholder, not in the name of the private limited company.
Investment in cryptocurrency mining
In 2018, the director and major shareholder was approached by a company from the United Arab Emirates. The company wanted to raise funds for a cryptocurrency mining venture. The director-major shareholder was given a brochure setting out attractive return prospects. He entered into an agreement to purchase over 422 million tokens for €250,000. The tokens entitle the holder to a monthly share of the mining proceeds. The private limited company transfers the amount. In the company’s 2018 annual accounts, the tokens are recognised under financial fixed assets.
Investment turns out to be worthless
It turns out, however, that nothing is being done with the money. The crypto mining project never gets off the ground. In May 2020, one of the parties involved confirms by email that the project has failed and the investment is worthless. An investigation agency, commissioned by the director and major shareholder, concludes that there are sufficient grounds to report the matter as fraud. In its 2019 corporation tax return, the private limited company claims the full €250,000 as a write-down on the tokens.
The contract is in the name of the director and major shareholder
The tax inspector refuses to allow the deduction. After all, the agreement was entered into by the director and major shareholder in a private capacity, not by the private limited company. The receipt for the tokens is also in the director and major shareholder’s name. The fact that the private limited company transferred the amount does not alter this. The payment qualifies as a disguised profit distribution to the director and major shareholder. The tax inspector has issued an assessment based on a taxable amount of €3,556,548 instead of the declared €3,306,548.
Court sides with inspector
The liquidator of the now-bankrupt private limited company is lodging an appeal. He argues that the company invested in the tokens for business reasons, namely to facilitate trading in cryptocurrency. The Court of Appeal ruled that the burden of proof lies with the liquidator. Nowhere in the agreement is it stated that the director and major shareholder acted on behalf of the private limited company. Nor has the liquidator produced any emails or other documents from 2018 that might demonstrate this. The tax inspector had already requested these documents prior to the bankruptcy. The fact that the documents are no longer available is the responsibility of the private limited company. Furthermore, the accountant had refrained from expressing an opinion on the annual accounts. The write-down was rightly refused.