In 2019, a director and major shareholder had €116,324 transferred from the share premium reserve of his operating company into his private account. The tax inspector regarded this as a disguised distribution by the intermediate holding company and issued a supplementary assessment based on an aggregate income of €198,153. The shareholder argues that he intended this to be a tax-free repayment of capital and has the decision-making process rectified in 2023. The Court of Appeal rules that the statutory conditions must be met prior to the payment. The additional assessment stands.
Funds from the share premium reserve
The shareholder holds all the shares in a holding company, which in turn holds all the shares in the operating company. On 14 October 2019, the holding company’s shareholders’ meeting resolves to make a distribution from the operating company’s share premium reserve. On the same day, the operating company submits a dividend tax return and ticks the box indicating that no withholding tax is required. The amount is paid directly into the shareholder’s personal account. He does not include it in his 2019 tax return, but subsequently declares it in May 2022 as a regular benefit from a substantial interest, following which the tax inspector issues a supplementary assessment.
Repair in 2023
In their objection, the shareholder refers to this as a repayment of capital. In June 2023, a series of corrective measures takes place. The operating company converts the share premium reserve into nominal share capital, reduces that capital again and transfers its claim against the shareholder to the holding company. The holding company will set off that claim against a dividend payment. In August 2023, the shareholder will transfer €116,324 to the operating company, thereby considering the distribution to have been reversed. He also invokes a mistake.
When is it a distribution?
A regular benefit arises as soon as assets are transferred to the shareholder with the intention of favouring him as such, whilst both parties are, or ought to have been, aware of this. The shareholder himself chairs the meeting, takes the minutes and signs the dividend tax return. Furthermore, he will declare the amount himself in 2022.
Wrong year, wrong level
Under the Income Tax Act, for a tax-free repayment to take place, the general meeting must pass a resolution to that effect and the nominal value of the shares must be reduced by the same amount through an amendment to the articles of association, both of which must take place before the distribution. Neither of these occurred in 2019. What does eventually happen in 2023 takes place in the wrong year and at the wrong level: at the operating company rather than the distributing holding company. Nor does invoking a mistake help. The retroactive effect of a nullification does not apply for tax purposes.