At the end of 2015, the Tax and Customs Administration identified the current account held by the director and majority shareholder (DGA) with their own private limited company as a key focus area in the assessment of income tax returns for 2016. However, that announcement was swiftly withdrawn by the Ministry of Finance. It is clear, though, that current accounts remain a subject of keen interest to the Tax and Customs Administration.
Withdrawal
The fact that the director-major shareholder’s current account is under scrutiny by the tax authorities is evident, amongst other things, from case law. One example is a recent ruling by the North Holland District Court. It was decided there that the annual increase in the current account should be treated as a withdrawal. The annual increase naturally represented a growing debt owed by the director and major shareholder to the private limited company.
A withdrawal of profits from a private limited company (BV) constitutes a dividend payment. This is subject to income tax in Box 2, at the substantial interest rate of 25%. Dividends are not deductible from the profits on which corporation tax is calculated.
The case heard by the District Court of North Holland concerned an overdraft debt, which increased by:
- €100,716 in 2009
- €189,859 in 2010
- €167,724 in 2011
The Tax and Customs Administration subsequently levied a substantial interest charge under section 25% on the director and major shareholder in respect of these amounts.
Current account
What exactly is a current account? A current account is used to transfer small sums back and forth. These sums are settled on an ongoing basis. The current account agreement with the private limited company must be of a commercial nature, and the parties must adhere to these terms and conditions.
A current account balance that is rising on a structural basis should rather be regarded as a loan be eligible. Naturally, the terms and conditions attached to a loan agreement entered into with one’s own private limited company must also be commercial in nature, and, in principle, these terms and conditions must be complied with.
Fine
In the aforementioned case, not only was the tax on a substantial interest claimed retrospectively, but substantial penalties for failure to comply were also imposed. The court confirmed that there had been gross negligence. The penalties imposed by the Tax and Customs Administration amounted to no less than 50% (based on intent or conditional intent) of the additional tax were, however, reduced by the court to 25%.
In this case, therefore, there were quite a few shortcomings in the current account arrangement. In addition to the substantial sums by which the director-major shareholder’s debt was increasing each year (see above), there was no written current account agreement. The private limited company had not stipulated any security, there was no interest and no repayment schedule, and the company had not taken any debt collection measures either.
Pension lump-sum payment and/or annuity
In the case before the District Court of North Holland, the withdrawals were treated as dividends. Where the private limited company’s assets also include pension and/or annuity liabilities, the financial loss may be even greater. Withdrawing funds from the private limited company’s assets may then lead to the (notional) surrender of these entitlements. In that case, the total value of the entitlements is included in the payroll or income tax assessment in a single instalment. In addition, 20% revision interest will then be payable.