Profit distribution owing to business owner’s growing indebtedness to company
A shareholder’s withdrawal for personal purposes of cash from his or her company may be construed as a profit pay-out where the shareholder is unable to reimburse the company for the money the latter had “advanced” to him or her. It is then up to the Inspector of Taxes to render it plausible on the basis of the facts and circumstances in question that the loan cannot be repaid or is not to be repaid, and that both the company and the shareholder knew this to be the case. A profit pay-out scenario moreover calls for the company either to have retained earnings or to have justified future profit expectations.
Having earmarked the 2014 increase in a director-cum-controlling shareholder’s current-account debt with his company as a payment of profit to the director and the latter’s spouse, the Tax and Customs Administration duly imposed an additional tax assessment on the director. The director for his part denied that there had been any question of corporate asset withdrawal, arguing that he would be able almost instantly to reimburse the company for the increase in his current-account debt by entering into a refinancing arrangement with a professional lender, in addition to which he had in the past acquired from the company a parcel of land with a value of 45,000 euros title to which he could always transfer back to the company. The Inspector of Taxes by way of additional ammunition countered that the couple’s equity position – at just over 700,000 euros in the red by year-end 2014, not making allowances for the value of the director’s shares in the company’s capital – fell considerably short of the mark in terms of reimbursing the company for the increase in the company director’s current-account debt.
Stating that it would only be from future dividend payments that the company director would be able to reimburse the company, the District Court concluded that the scenario in hand had indeed been one of profit pay-out. The shareholders’ incomes, the Court stated, were not enough to enable the interest payments being made to the bank and the company. The company – in the person of its director-cum-controlling shareholder – had been au fait with the director’s existing (financial) commitments and the size of his private assets and income. No security had been put up and no repayment schedule had been agreed.
As the District Court was not convinced that the value of the parcel of land had been withdrawn once and for all from the company’s assets in 2014, it ended up reducing the amount of the profit pay-out correspondingly. It furthermore dismissed as irrelevant – as the director had not actually availed himself of this option – the director-cum-controlling shareholder’s argument to the effect that he could always take out a bank loan in order to repay the increase in his current-account debt.
Dutch version: Winstuitdeling door oplopen schuld aan bv