Just how “customary” is the income you earn as a lawyer, civil-law notary, IT specialist or other professional practitioner?
Professional practitioners in their capacity of tax payer face a number of choices where it concerns the organisational set-up of their business operations, such as;
- should I go it alone or join a collaborative venture?
- what is the opinion of my professional organisation?
- and, arguably most importantly, what set-up would enable me to pay the least taxes?
The tax aspect tends to be the deciding factor in opting for a particular business format. Where there is significant profit potential, the choice of organisation is an obvious topic for consideration: “Should I settle for just the one private limited-liability company or would it be better to establish multiple companies to structure the generation of income and assets?”
This tends to be the moment at which as a professional practitioner you come to the realisation that you are the wearer of many hats: not just that of the specialist in your chosen field, but also a variety of fiscal hats belonging to the employee, employer, shareholder and investor, the fiscal interests of whom are highly diverse. Which prompt the question as to how to deal with the issue of what kind of income the professional practitioner should earn in exchange for his efforts and whether the tax authorities would approve.
The legislator has assumed stewardship of the above dilemma by coining the comprehensive term of “customary wage” as a definition of what the executive director-cum-controlling shareholder’s income should be. Unfortunately the legislator’s introduction of a concept which was originally intended as objective has inadvertently created a seven-headed beast of sorts and a source of virtually never-ending debate between the Tax and Customs Administration and the community of directors-cum-controlling shareholders.
In an attempt to put an end to the above discussions, A pragmatic interpretation was developed in an attempt to put an end to the above discussions, in that the fiscal income earned by the director-cum-controlling shareholder was fixed at a percentage of the partner's retainer fee.As typical as this was in everyday fiscal life of the “coalition of opposites” approach which has become part and partial of Dutch society, it failed to do any justice whatsoever to the fact that the sole trader practising on his own was now being treated in exactly the same manner as, say, a partner in a prominent law firm, as two scenarios which could hardly be more different. All the more reason for the Amsterdam Court of Appeal and the Supreme Court of the Netherlands to take the matter under advisement. We previously reported on this prominent case in an article headed “Skimming method and sundry staff” and subsequently discussed the reference proceedings under the heading of “Salary of director-cum-controlling shareholder as owner of private limited-liability company within partnership set-up”.
Where to go from here
The confirmation in the reference proceedings appeared to have paved the way for charting a new path where it concerned the decision as to what constitutes a “customary wage”. Unfortunately the then State Secretary for Finance, Frans Weekers, begged to differ, taking it upon himself – as a farewell gesture of sorts – belatedly to take a leapfrog appeal to the Supreme Court.
The forthcoming Supreme Court ruling will not come soon enough for the practitioners, however, as they are keen to use the profundities which previous court proceedings have yielded to sort out the matter once and for all. It has become clear that it is not just the director-cum-controlling shareholders who would benefit from an unambiguous definition of income: the tax authorities too have been shown to be willing to come to reasonable agreements where it concerns the scope and substance of the professional practitioner’s income.
Introduction of “horizontal supervision” to produce constructive solution
A positive contribution is being made by virtue inter alia of the newly introduced system of horizontal supervision to the possibility of transforming what effectively looks like a stalemate into a constructive solution for directors-cum-controlling shareholders and the tax authorities alike, with the latter for now responding as a party that is committed to solving the problem rather than preserving the stalemate. Given the disparate interests of the two sides, it is not to be expected that they will immediately succeed in bringing the negotiations between them to a gratifying conclusion. Be this as it may, we intend to adhere to the Supreme Court’s wisdom in the matter, which incidentally and not surprisingly is the preferred way to go where directors-cum-controlling shareholders are concerned.