A director and major shareholder borrows over seven tonnes from his own private limited company. The amount exceeding the statutory threshold of €700,000 is taxed as a notional regular benefit. The director and major shareholder considers this to be contrary to European property law and the prohibition of discrimination. Why is a business loan treated in the same way as a non-business loan? The District Court of The Hague dismissed all objections. The legislature was entitled to opt for a simple scheme that treats all loans equally.
Debt is rising rapidly
The director and major shareholder holds all the shares in a private limited company. His current account debt to the company has risen from just over €5,000 in 2017 to nearly €600,000 by the end of 2022. In 2023, the debt rises further to €786,278. The Excessive Borrowing Act came into force on 1 January 2023. This Act stipulates that debts to one’s own private limited company exceeding the threshold of €700,000 are taxed as a notional regular benefit in box 2. The excess amount is €86,278. After allocation with his tax partner, €75,127 is taxed at the substantial interest rate for the director and major shareholder.
Invocation of fundamental rights
The director and major shareholder argues that the levy contravenes European property law. He contends that the legislator is wrong to make no distinction between commercial and non-commercial loans. A loan with commercial terms and security should be treated differently from an informal debt without a repayment schedule. Furthermore, the director-major shareholder considers the levy to be disproportionate, as it constitutes a radical change that was introduced without transitional provisions. Finally, he invokes the prohibition of discrimination and argues that the levy violates the principle of ability to pay.
Having funds available is crucial
The court rejects all the arguments. The levy has a legal basis, serves a legitimate purpose and respects the required balance between individual and public interest. The purpose of the Act is to prevent directors and major shareholders from deferring or avoiding taxation. The decisive factor in this regard is that the director and major shareholder had, at some point, had the borrowed sum at their disposal. Whether the loan is commercial or non-commercial is irrelevant. The legislator has deliberately opted for a simple scheme in which all loans, with the exception of mortgage debt, are treated equally. That choice is not unreasonable.
Five years’ lead time
The court further ruled that the levy is not disproportionate. The legislature had already announced the measure in September 2018, meaning that directors and major shareholders had well over five years to reduce their debt positions. Furthermore, a director and major shareholder who repays the debt at a later date may offset the amount previously taxed as a negative ordinary benefit, and the threshold has been set at €200,000 higher than originally intended. Furthermore, retroactive effect does not apply to this director and major shareholder. His debt only rose above the threshold in 2023. The appeal is unfounded.