A man provides a loan through a fund with which shares are bought. All proceeds from those shares accrue to him. Part of the claim is subject to an option. The man believes he no longer has a substantial interest. The court ruled otherwise: whoever is entitled to all benefits from shares is a shareholder for the purposes of the substantial interest scheme.
Loan with a golden edge
A man jointly provides a €550,000 loan to a fund in 2011. His share is €150,000. With that money, the fund buys shares in a promising company. So far, nothing out of the ordinary. But note the fine print: all proceeds from those shares - dividends, sales profits, you name it - accrue entirely to the lenders. So the ‘interest’ on the loan is not interest, but pure profit sharing. If the company is sold, the loan disappears and the man cashes in. A loan with a golden edge, you might say.
The trick with the
Along with the loan, the man grants a call option to another party on 20% of his claim. His reasoning is that the call option means he does not have the full economic interest. In 2014, the fund sells half the shares and the option is exercised. His remaining interest is 5.3%. If you subtract 20% from that for the option, you arrive at 4.24%. And that is just under the magic 5% limit for a substantial interest. Not Box 2, but Box 3. Makes a big difference: 25% versus a fraction of that.
Beyond the packaging
In 2018, the remaining shares are sold. The man receives over €900,000 and declares this neatly in box 3. The inspector thinks otherwise and taxes the amount in box 2. The court still agrees with the man, but the court turns it around. The reasoning is clear. Until the moment the option is exercised, all benefits from the shares accrue to the man. That is stated in black and white in the loan agreement. And whoever is entitled to all the benefits has a so-called right of enjoyment. The law is clear about this. A beneficiary of enjoyment is equated with a shareholder. So his interest is 5.3%. Well above the ab limit.
Creative, but not creative enough
The construction was creative, but not creative enough. The Inland Revenue does not look at the label, but at the substance. A loan that smells like shares, tastes like shares and pays off like shares is treated as shares. The man has to pay Box 2 tax on over €830,000.