Enforced payment under suretyship vs debt relief income
The holder of a substantial interest in a private limited-liability company agreed to warrant for an amount up to € 150,000 vis-à-vis the company’s regular bankers for a line of credit the bank had made available to the business. The company was bankrupted in 2010. The bank in 2011 proceeded to call the former substantial interest holder cum surety to account with the aim of recovering the sponsored amount. As this was more than the surety could muster, he suggested that he make a € 30,000 lump sum payment to the bank on condition in exchange for being granted full and final discharge of liability. The bank ended up accepting his proposal. The former substantial interest holder’s tax return for 2010 had featured a provision against the result from operations in the amount of the suretyship. The subsequent tax assessment was in accordance with the tax return.
The Inspector of Taxes with respect to the year 2011 departed from the former substantial interest holder’s tax return by augmenting the latter’s income by the amount of the provision and by the payment made to the bank (i.e. € 120,000), a “Box 1” taxable income in the amount of minus € 6,991 having been filed in the original tax return for that year.
The Hague Court of Appeal defined the € 120,000 gain as tax-exempted debt relief income. The 2007 suretyship had committed the guarantor to making a particular payment to the bank. From the suretyship followed that the commitment had formed part of the guarantor´s operating assets ever since. The provision in question had transformed into a debt to the bank in 2011, when the bank had called the substantial interest holder to account. The € 30,000 payment to the bank had brought about a € 120,000 gain. As the bank had evidently taken it for granted that attempts on its part to collect or recover more than € 30,000 from the surety were bound to fail, the conditions governing application of the debt relief income exemption had been complied with.
The Supreme Court concurred with the Hague Court of Appeal except where a “Box 1” loss had been incurred, debt relief income exemption not being permissible for up to the amount of a loss incurred during the year or loss set-off for previous years.
Dutch version: Uitwinning borg en kwijtscheldingswinst