Significant interest holders will pay income tax from 2022 on the amount of their debts to the BV above €500,000. This substantial interest tax (box 2) in 2021 amounts to: 26.9%. What is going on?
AB levy
If you run your business in the legal form of a BV, that BV pays corporate income tax (Vpb) on the profits made. On the first €200,000 of profits, the BV pays 20% of Vpb. Profits above €200,000 are taxed with 25% of AB tax (these are the rates for 2018; in the Tax plans for 2019 a reduction is proposed).
If you then want to buy something for yourself from your dearly earned pennies in your company, you have to take profits from your limited company. Your private limited company then pays out a dividend. And on that dividend, you pay substantial interest tax (income tax in box 2). The AB rate is currently 25%, but the 2019 tax plans raise it to 26.9%.
The solution
That one is obvious: don't take the profits out of your limited company. But how can you still buy something in private with your company's profits?
A higher salary is not an interesting solution. You pay income tax on that in Box 1. Then soon (with an income above €68,500) almost 52% goes to the taxman.
So then you borrow the funds needed for your private expenses from your BV. The essence of a loan is that you have an obligation to repay the funds withdrawn from the BV back to the BV at some point. As a result, you do not yet pay AB tax on the withdrawal.
Obviously, many DGAs have taken advantage of this opportunity. The ministers write that research shows that over 225,000 DGAs together borrow over €51 billion from their private limited companies (the research relates to 2015). And around 23,000 of these DGAs borrow more than €500,000 on an individual level (these DGAs together borrow more than €30 billion).
Fight
Of course, excessive borrowing from one's own private limited company is a thorn in the side of the tax authorities. The latter is therefore very busy fighting this phenomenon. To do so, the Inland Revenue has a number of “weapons”, such as:
- The proposition that the loan is actually a profit-sharing scheme;
- arrive at a higher salary under the customary pay scheme;
- where the BV has pension or annuity obligations to the DGA argue that these entitlements have been (fictitiously) redeemed by the withdrawals from the BV.
The drop
Whether these contentions are effective depends on the concrete facts and circumstances of each individual case. Consequently, combating excessive borrowing from one's own private limited company results in the Tax Administration having very time-consuming discussions with DMSs and their advisers. This drain on the Tax Administration's resources is a likely reason for the proposed measure.
The straw that may have finally made this proverbial bucket overflow is the possibility, mooted in 2015, of “tax-free loan stripping”. This refers to loans from years on which the Tax Administration has imposed final assessments and those assessments are no longer allowed to be revised under the law. Fighting this novelty is also costing the Tax Administration seas of time.
The proposal
There is no concrete (legislative) proposal yet. The measure is announced by the finance ministers in the offer letter accompanying the 2019 Tax Plan package. That letter only outlines the contours of the intended measure. The intention is to present the bill to the House of Representatives in spring 2019.
The contours of the measure are relatively simple:
- if the total debts to the own private limited company(ies) exceed €500,000, the excess is regarded as income from substantial interest;
- the measure will enter into force on 1 January 2022;
- For existing owner-occupied housing debts, a transitional measure will be introduced (the outlines of which have not yet been announced).
The impact of the measure is very substantial for some DMSs. Therefore, Finance offers 3 years to anticipate the measure. In those 3 years, the DMS can reduce the total of his debts to €500,000. In most cases, this will be (partly) accompanied by dividend payments. Finance points out in the offer letter that the current AB rate of 25% can still be used for this purpose in 2019. In 2020, if the 2019 Tax Plans pass through Parliament unscathed, this rate will be 26.25% and from 2021: 26.9%.
To be clear, the planned abolition of dividend tax makes little difference to all this. See our article Dividend tax abolished, but AB tax raised.