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Written by:
Bas Hollenberg


Covert distribution of profit

Covert payments from the profit too form part of income derived from substantial interest. Any such covert payment from the profit unduly favours the recipient shareholder. Covert distribution of profit too by necessity entails a shift in capital from the company to the shareholder for which the company’s profit serves as cover. A further requisite is that the company should have had the intention of favouring its shareholder in this manner while the shareholder was aware of this, or could reasonably have appreciated that this should be so. The onus of proof in connection with such distribution of profit rests with the Tax and Customs Administration. Examples of covert distribution of profit include the sale of items of property for excessively low prices or the sourcing of same for excessive amounts of money.

The Bois-le-Duc Court of Appeal recently ruled that the Tax and Customs Administration had been right in branding a payment of € 150,000.00 in travel, accommodation and entertainment expenses made by a private limited-liability company on behalf of its director cum controlling shareholder a payment from the profit, as the expenses in question had been incurred for the director cum controlling shareholder’s own pleasure rather than for business reasons.

The company moreover on a number of occasions had engaged in property transactions involving the director cum controlling shareholder’s offspring, at prices whose level had not been that of fair market value where the properties in question were concerned. Given the director cum controlling shareholder’s real estate know-how and experience, the Court took the view that here too the company had deliberately favoured its director. All in all it was decided by the Court that each instance had involved covert distribution of profit to be accounted for at the level of the director cum controlling shareholder himself as regularly received benefits by virtue of substantial interest.

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