A PLC lends a million to its dga at 2% interest. The dga on-lends the same amount to third parties at 7% interest. He puts the difference of 5% in his own pocket. The inspector sees this as a disguised profit distribution. The court agrees. Anyone who pays less interest to his own PLC than he demands from a third party favours himself as a shareholder.
Two loans, one cash flow
The dga lends money to a business relation and his bv, which he borrows from his own bv at a lower interest rate. The money goes directly from the bv to the business relation. The director acts as a conduit and annually keeps the interest difference (of over €45,000).
Inspector pokes through
The inspector notes that the two loans are almost identical. The same principal amount, the same time of origination, the same absence of collateral and interim repayment obligations. Even the repayment dates coincide. The only difference is the interest rate. The inspector argues that the bv negotiated an impractically low interest rate from its shareholder. That interest difference is a disguised profit distribution that should be included in the bv's profit.
Asset position makes no difference
The court still agrees with the bv. The capital position of the dga would be more favourable than that of the business partner, justifying a lower interest rate. The court thinks otherwise. The business relation owns 42 immovable properties and has a substantial yield basis in box 3. In addition to his box 3 assets, the managing director also owns all the shares in the PLC, with a value of over €3 million. Both parties can easily repay the €1 million loan. Thus, the difference in equity position does not explain the interest rate difference.
Conscious or unconscious? It does not matter
The court held that there was an intentional loss of profit. Given the substantial interest rate differential, it should have been clear to the bv and the dga, who are identifiable with each other as sole shareholder and director, that 2% was an unseemly low interest rate. Whether they were aware of the exact extent of the favouring does not matter. The difference of more than €45,000 is a profit distribution and is added to the bv's profit. The inspector is vindicated.