Shareholder’s entire debt to company regarded as distribution of earnings
Any scenario involving assets shifting from a (public or private limited-liability) company to a shareholder in the company’s capital under cover of the company’s earnings will be regarded as distribution of earnings forming part of the relevant shareholder’s income from substantial interest and taxed – as a “Box 2” item – at a rate of 25 percent.
The Tax and Customs Administration imposed an additional income tax assessment on the sole shareholder in a public limited-liability company in response to the latter having collected a payment from the company’s profits. The shareholder, who owed the company € 11 million for a loan he had taken out augmented by another € 1.2 million in current-account indebtedness, possessed a country estate in France. The loan agreement he had concluded with the company stipulated inter alia that he should use the proceeds from the sale of his French estate to repay his debt to the company and that any breach of contract on his part was to render his loan from the company instantly exigible. When the estate was sold, in 2010, the shareholder lost no time in transferring the proceeds of the transaction, in the amount of € 4.4 million, to the company’s current account. However, the company transferred € 4.75 million back to him before the day was out, and subsequently did nothing to force him to repay the loan. The entire course of events made it less than plausible any longer to count on the shareholder honouring his repayment obligation. The upshot of the company’s failure – inspired by considerations of a shareholdership nature – to take the necessary debt collection action against the shareholder was that an asset shift against the company’s earnings had taken place (of which both the company and the shareholder must have been aware). The “distribution of earnings” criterion had thus been satisfied.
Given that the shareholder had made no effort at all to repay the loan and was not likely to do so in the future, the District Court – assuming that the current-account debt would be meeting the same fate – concluded that the Tax and Customs Administration had rightly levied additional income tax on the full amount of the shareholder’s indebtedness. The Amsterdam Court of Appeal subsequently endorsed the District Court’s decision.