Set-off of interest receivable against current account debt
If the holder of a substantial interest in a (private) company has furnished said company with a loan, this will cause the loan in question for income tax purposes to come under the Box 1 “business use” scheme, with a graduated rate of interest being charged by the lender and involving impairment of the outstanding amount for reasons of irrecoverability essentially being taken to taxable income.
A director-cum-controlling shareholder – acting in a private capacity – concluded a loan agreement with a bank. The debt to the bank totalled just over 3.3 million euros as at year-end 2013 (inclusive of accrued interest for the year 2013). The director lent the money on to his company, which in 2013 he charged 190,923 euros in interest on the loan. A current-account facility was moreover in operation between the director and his company the agreement underpinning which contained a set-off clause according to which any exigible receivables and payables should be taken to the current account for ipso jure set-off. The director’s current-account debt to his company, which went on to fold in the spring of 2012, totalled 5.6 million euros as at the first of January 2013.
The above sequence of events prompted the question as to whether it had or had not been permissible for the director-cum-controlling shareholder to have taken the write-off of the receivable interest in the amount of 190,923 euros to his own taxable income. The Hague District Court followed by the Hague Court of Appeal sided with the Inspector of Taxes, ruling that the interest claim should not have been regarded as being irrecoverable as there had been scope for it being set off against the director-cum-controlling shareholder’s current-account debt to the company. Dutch bankruptcy legislation allows any combined debtor-creditor of any bankrupted party to set off what he owes the bankrupted party against what he is owed by said party on condition that both the debt and the claim should have come about before the now bankrupted party failed, or should have flowed on from activities involving said party at the pre-bankruptcy stage.
The director-cum-controlling shareholder moreover in addition to relying on prevailing bankruptcy legislation could likewise have availed himself of his set-off option by virtue of his current-account agreement with the company.
All of which led to the conclusion that the interest receivable may not be, and should not have been, written off against the result as per the “business use” scheme, as a conclusion which did away with any further need for the Court to go into the question as to whether the director-cum-controlling shareholder’s loan to his company had met the arm’s length criterion.
Dutch version: Rentevordering te verrekenen met rekening-courantschuld