The case in which The Hague District Court recently ruled concerns a director-major shareholder (dga) who holds all shares in two private limited companies: a holding company from which he receives a management fee (taxed as salary) for work performed and a standing right company.
Stamp duty entry forgotten
In 2022, the corporate tax inspector finds out that the distributions from the standing right should have started in 2017. The Inland Revenue gives the dga the following (extremely lenient) choice:
- levy of lump-sum income tax on the economic value of the standing right + 20% revision interest on the same value;
- post-tax the tax on the distribution in 2017, then tax the annual standing right distribution for life and a corporate tax release gain in 2017.
The shareholder naturally opts for the second option, as the direct tax payable is then a lot lower and - most importantly - it avoids calculating revision interest.
Retroactivity
However, the dga believes that the annual standing right distribution will not be taxed in 2017, 2018 and 2019. This is because he wants to retroactively reduce his management allowance (salary) from Holding-BV (and repay the amount of the reduction to Holding-BV) by the amount of the standing right distribution. On balance, his income would then remain the same and corporate tax would only be payable by Stamrecht-BV on the release profit.
We are not surprised that the dga finds its way to the Court in this regard. What the director advocates finds no support in the facts or the law. The Court considers that the management fee and the standing right payment originate from two different private limited companies. Rights and obligations of different legal entities cannot be exchanged arbitrarily. Moreover, the payments are based on different legal grounds: the management fee is paid in response to work performed vis-à-vis the Holding BV, while the standing right payment arises from the standing right agreement with Stamrecht-BV.
Again, the motto is “to govern is to foresee”. If the shareholder had foreseen in 2017 that the standing right payment would be made, there might have been room to set the remuneration for the work towards the Holding-BV lower. However, it should be noted that this remuneration must comply with the customary wage scheme. Reducing a compensation already paid afterwards is generally not possible.