On November 28, 2014 the Supreme Court ruled that, for the purposes of the minimum rule in the customary salary rules, the employees of a partnership are not also to be regarded as employees of the private limited liability companies that are partners in the partnership. This is of importance for determining the normative salary of the director-major shareholders of those private limited liability companies.

The leveling off method does not apply

The case concerned a lawyer at a law firm who participated in the partnership by way of a private limited liability company (besloten vennootschap; “BV”). The lawyer paid himself a normative salary, which the tax inspector considered to be too low in 2000 and 2002. The tax inspector corrected this by applying the leveling off method (afroommethode). The Supreme Court had already concluded on November 9, 2012 that the leveling off method can only be applied if the result of the BV is almost entirely attributable to the work performed by the lawyer. It referred the case back to the Amsterdam Court of Appeals and requested the Court to investigate whether this was the case in the proceedings in question. On September 26, 2013 the Court of Appeals ruled that the leveling off method could not be applied, because the result of the BV was a percentage of the result realized by the partnership and therefore was heavily dependent on the contribution of the employees of the partnership and the other partners.

No adjustment based on the salary of the highest paid employee of the partnership

Under the minimum rule, the normative salary of a director-major shareholder may not, in principle, be less than the highest salary of the other employees of the director-major shareholder’s BV or entities related to the BV. The Court of Appeals ruled that the lawyer’s BV and the partnership were not related entities (a less than one-third interest) for the purposes of the customary salary rules. Furthermore, the Court ruled that there was no employment relationship between the lawyer’s BV and the employees of the partnership; the lawyer was the only employee of his BV. Consequently, the only benchmark that applied was that the normative salary must be at least 70% of the salary for similar employment that does not involve a substantial interest. The tax inspector had failed to demonstrate that this resulted in a salary that was too low, and the Court accordingly concluded that there were no grounds to further increase the normative salary. In the appeal before the Supreme Court, the Deputy Minister of Finance argued that the BV, in its capacity as a member of the partnership, must be regarded as the employer of the staff who work for the partnership, and consequently the salary of the highest paid employee of the partnership must be the benchmark for the normative salary of the lawyer. The Supreme Court rejected this argument. For the purposes of the customary salary rules, the staff employed by the partnership cannot also be regarded as employees of one or more of the partners in the partnership.

Practical consequences

For partnership structures where the director-major shareholders participate via their own BVs, without this involving related entities, this judgment considerably limits the circle of relevant employees to which the salary of director-major shareholders must be compared. In those cases where a director-major shareholder is the only employee of his/her BV or related entities, the only benchmark for determining the normative salary is, in effect, that it must be at least 70% of the salary for similar employment. As of 2015, this will be 75% of the salary for the most comparable employment or, if the salary for the most comparable employment is less than EUR 44,000, the lower amount.

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