A common situation: parents lend their son money to set up his business. There are no written loan agreements, and there is no repayment schedule, interest or other loan terms.
The Tax and Customs Administration argues, partly on the grounds of the absence of written agreements, that these are not loans but gifts. However, the Court of Appeal in ‘s-Hertogenbosch ruled that, in this case, the Tax and Customs Administration had not sufficiently demonstrated that, at the time the funds were provided, the son was not under any obligation to repay them, meaning that the funds provided qualified as loans.
After a number of years, the parents gift part of the borrowed sums to their son, partly because the bank requires this as part of the company’s refinancing. Gift tax returns are duly filed and gift tax is paid on these gifts.
The parents wish to deduct write-downs on their claims from their income. As the loans qualify as an unusual provision of funds, the regime governing income from other activities applies. The Court of Appeal in ‘s-Hertogenbosch agrees with this, but rules that a third party would not have granted the loan. By entering into the loan, the parents took an uncommercial credit risk. Among other things, a third party would not have been satisfied with merely occasional repayments and would have required security. Consequently, the write-downs could not be charged to the profit from other activities.