Expenditure incurred by a private limited company (BV) solely for the private needs of its director and major shareholder (DGA) is not deductible from profits.
Decision tree
We have outlined the decision tree for the deductibility of business expenses on several previous occasions.
- Were the expenses incurred in the interests of the business? (No: expenses are not deductible / Yes: proceed to 2).
- Were the expenses incurred (in part) to satisfy the director-shareholder’s personal needs? (Yes: those expenses are not deductible / No: for that part of the expenses, proceed to 3).
- Would a reasonable entrepreneur incur expenditure of the same amount in the interests of the business? (No: expenditure for that part is not deductible / Yes: expenditure (for that part) is deductible).
Buying and renovating a property
The Court of Appeal in ‘s-Hertogenbosch recently handed down a judgement in a case concerning the question of whether the expenses paid by the private limited company in connection with the purchase and renovation of a property for the director and sole shareholder may be charged to the profits. The director and major shareholder is the sole shareholder of the private limited company. In addition to the director and major shareholder, the company’s director are his son and daughter. The private limited company operates an agricultural business.
Once the renovation is complete, the director and major shareholder leaves the house on the farm (the farmhouse) and moves into the new house. He rents this house from the private limited company. His daughter, who oversees the business, moves into the farmhouse. A few years later, the director and major shareholder transfers the shares in the private limited company to his daughter.
After a few years, the director and major shareholder purchases the private limited company’s new property at its appraised value. The private limited company deducts a (substantial) book loss from its profit. The tax authorities do not accept the deduction of this book loss and, furthermore, adjust the depreciation costs charged against the profit in previous years in respect of the property.
Business?
The director and major shareholder (DGA) takes the view that the expenditure incurred by the private limited company (BV) for the purchase and renovation of the property is business-related. The Court of Appeal agrees with the reasoning that, in view of the need to supervise the agricultural business (intensive rearing of young cattle), a property located in the vicinity of the business is necessary. Supervision of the business was no longer carried out by the director and major shareholder, but by his daughter. However, the fact that the daughter is to live in the business residence does not mean that the purchase and renovation of the new property acquired by the director and major shareholder primarily serve his private needs.
The Court also considers that the costs of the new property are so disproportionate to the benefit it may yield for the company that no reasonable entrepreneur could maintain that the action was taken with the company’s commercial interests in mind. And even if it were conceivable that the private limited company might purchase and renovate a property at its own expense for the benefit of a future buyer, it is difficult to see how the risk of this investment being partially lost would remain at the company’s own expense and risk.