The Dutch Revenue closely examines any transactions between a company and its shareholders, to assess whether these have arms length conditions.It is possible that the conditions are dictated by the shareholder relationship and are, therefore, not at arms length.In this context, the conditions are not at arms length, unless a third party with no interest in the company would have engaged in the relevant transaction under the same conditions.
Adjustments for transactions with ones own company that are not at arms length
Any transaction between a company and its shareholders that is not at arms length will be adjusted at the company level by a notional capital contribution or a disguised profit distribution.Thus, for example, if a DMS were to sell a car to his company for only a symbolic amount, this would not form a tax benefit for the company. Instead, it would be a notional capital contribution from the DMS.This also applies in reverse: If the company were to sell a car for a very low amount to the DMS, this would not be a loss item for tax purposes for the company but a disguised profit distribution to the DMS.
Exception when the adjustment results in a tax leak
In a 2003 case before the Supreme Court, an exception to this was made under the Personal Income Tax Act of 1964 (1964 PITA). In this case, a companys DMS transferred future rental income from a private property, which the company rented from the DMS, to a subsidiary of the company for nothing. Thus, the subsidiary benefitted.The DMS would have paid personal income tax on the rental income itself, but the transfer of the future rental income effectively meant that the DMS would not pay income tax on this income.In this case, the Supreme Court found that, in order to do justice to the relationship between corporate income tax and personal income tax, and to be in line with earlier costs rulings, a reasonable application of the law forced the company to accept the benefit of the acquisition, despite the fact that this arose from the given relationship with a shareholder; otherwise a tax leak would be created for personal income tax.In more tangible terms, the company was not permitted to depreciate the cash value of the future rental income, which meant that the rental payments due were, on balance, fully taxed.
Supreme Court: From 2001, no more tax leaks
The Supreme Court has recently considered a comparable case, but this time under the Personal Income Tax Act of 2001 (2001 PITA).The case concerned a DMS who gifted to his public limited company the future rental income from two private properties rented to third parties.According to the Supreme Court, the 2001 PITA differs from the 1964 PITA sufficiently to ensure no further tax leaks.The Supreme Court, contrary to its decision in the 2003 case, allowed the company to depreciate the cash value of the gifted rental incomes, for tax purposes.
Personal income tax facility for making assets available in Box 1 or taxation in Box 3
The Supreme Court first referred to the personal income tax facility for making assets available, which dictates that someone who has made an asset available to a company in which they, or an affiliated person, have a substantial interest be taxed in Box 1 under a profit tax regime.If this facility was applicable, the gift of rental income to the company would have led to consequences for income tax.In this case, however, the personal income tax facility for making assets available was not applicable because the properties were rented to third parties.From 2001 onwards, the properties came under the regime for taxable income from savings and investments in Box 3, which assumes a notional return on an average value.It is true that the base for Box 3 taxation is reduced by the cash value of the transferred rental payments. According to the Supreme Court, however, this is compensated because the company is subject to corporate income taxation on the interest accrual from the right to the remaining rental payments, and the tax claim on the shareholder's substantial interest increases with the subsequent increase in the value of the companys shares due to the interest accrual.