In the tax plans for 2019 became the “current account measure” it was announced. The relevant bill has now been submitted by the Ministry of Finance for internet consultation released, under the name Excessive borrowing from own company law.
Fictitious regular benefit
The basis of the proposal is that the total amount of debts owed to one’s own private limited company, insofar as this exceeds €500,000, is subject to income tax for the director-major shareholder (DGA) as a notional regular benefit arising from a substantial interest (box 2). A “own private limited company” is defined as one in which you hold a substantial interest (5% or more of the outstanding share capital of a private limited company or of a separate class of shares).
Example
Suppose, as a director and major shareholder, you owe your private limited company €750,000 on 31 December 2022. In that case, the amount taxed under Box 2 is: €750,000 - €500,000 = €250,000. You will pay 26.9% income tax on this notional benefit. This amounts to €67,250.
The intention is for the Act to come into force on 1 January 2022. The reference date for the levy is the last day of each calendar year. This means that, for the first time on 31 December 2022, an assessment will be made as to whether the total amount of debts owed to the private limited company gives rise to a tax liability.
Naturally, you only pay tax once on the excess portion of your debts to your private limited company. This is achieved by increasing the €500,000 threshold by the amount on which you have already paid tax.
Example
The director and major shareholder in the previous example has a threshold of €500,000 + €250,000 = €750,000 in 2023.
The private limited company does not pay any dividend tax on the notional ordinary benefit. The director and major shareholder must declare this benefit himself in his income tax return.
Housing debt
The €500,000 threshold mentioned above does not apply per tax partner, but to both partners combined. The debts of both partners are also added together, regardless of whether (and how) the partners are married and regardless of whether both partners hold a substantial interest. If you own several private limited companies (BVs), the debts of all those companies in which you hold a significant interest, either directly or indirectly, are treated as a single total.
Receivables from the private limited company(ies) are not offset against the debts.
You may also add any mortgage debt on your own home to the €500,000 threshold. This is subject to the condition that this home loan is actually secured by a mortgage registered in favour of the private limited company on your own home. This condition applies only to home loans taken out after 31 December 2021.
Example
In the previous example, there is a debt of €400,000 to finance the director-owner’s own home and an overdraft of €350,000. The threshold is therefore: €500,000 + €400,000 = €900,000. The total debt (€750,000) is lower than the threshold. Therefore, no notional regular benefit needs to be taken into account.
For Box 2 only
The measure applies exclusively in the context of income from a substantial interest (Box 2). All loans remain fully in force under civil law. Interest and repayments on the loans must continue to be paid as normal. For the private limited company (BV), the interest received constitutes income on which corporation tax is payable. And insofar as the debt owed by the director and major shareholder (DGA) in his private capacity forms part of income from savings and investments (box 3), it will continue to be deducted from the basis for determining that income.
The notional ordinary profit on which you have paid tax is deducted from your actual ordinary profit upon the actual disposal of your shares. However, this can never result in a loss.
Example
The director and major shareholder from the first example above will be taxed on €250,000 of notional ordinary benefit in 2022.
In 2023, he sells the shares for €400,000. The cost base is €1, resulting in a standard gain on a significant interest of: €400,000 – €1 = €399,999. The notional gain already settled may be deducted from this amount, meaning that the taxable amount in respect of the sale is: €399,999 – €250,000 = €149,999.
Anticipate
Naturally, as a director and major shareholder, it is important that you seek advice on whether you can prepare for this measure. There is still plenty of time to do so. After all, if the scheme comes into force on 1 January 2022, the first reference date will not be until 31 December 2022.
However, the increase in the substantial interest rate may make it attractive to take action as early as 2019. In 2019, you will still pay “only” 25% in income tax. In 2020, the rate is 26,5% and from 2021: 26,9%.
The online consultation closes on 1 April 2019. The final bill is usually published a few weeks later, after which it is debated in the House of Representatives and the Senate.