An external loan as an “excessive debt” of your own BV? The tax authorities think so

The excessive borrowing from your own company Act has been introduced to prevent director and major shareholders (DGAs) from borrowing unlimited money from their own BV (private company). Previously, DGAs were able to borrow large amounts from their own BV without paying tax on this. This was seen as a way to avoid taxes. After all, the BV's assets were 'exchanged' for a claim against the shareholder and not paid out as a (higher taxed) dividend or salary. However, these loans were often used to live on and often could not be repaid.

‍

The law on excessive borrowing from your own company sets limits on the amount that a DGA can borrow from his or her own private limited company without paying tax. If the total amount that a DGA borrows exceeds this maximum amount (€700,000 in 2023 and €500,000 in 2024), the surplus is taxed as substantial income (BOX 2). This means that the DGA must pay tax on this amount, as if it were income from his or her shareholding in the BV. The reference date for determining whether there is an excessive debt to your own company is 31 December of the tax year in question (with the first year 2023 as the first year).

The question this article is about is: when exactly is there a debt to your own company?

In this context, the knowledge group of the tax authorities has discussed a scenario in which the DGA is the sole shareholder of the BV. In the year 2023, the DGA borrowed a total of €900,000 from the BV, which is €200,000 more than the maximum allowed amount of €700,000 under article 4.14a, paragraph 2 of the Income Tax Act 2001 (hereinafter: Act IB 2001) (legal text 2023).

The DGA plans to borrow €200,000 from a bank and use it to pay off its debts with the BV before December 31, 2023. The BV will use the funds obtained from this repayment to invest in real estate. However, the bank requires a mortgage on the property that the BV acquires as security for the loan that the DGA takes out. Without this mortgage, the DGA cannot take out the personal loan from the bank.

The main tax question

The crucial question is: is the debt that X takes out with the bank considered an (excessive) loan that the DGA legally or actually has directly or indirectly from the BV (article 4.13, paragraph 1, part f, Act IB 2001)?

In short: that is indeed the case, according to the knowledge group. The debt that the DGA takes out with the bank is considered to be a debt that he has, in law or in fact, directly or indirectly with the BV. In this case, it would be an indirect debt (after all, it is owned by the bank and not the BV anymore).

The connection between the two debts is partly explained because the DGA cannot obtain a loan from the bank without establishing a mortgage on the property that the BV acquires. In this situation, the DGA's debt to the bank falls under the Excessive Loan from Own Company Act, resulting in a fictitious regular benefit of €200,000 (€900,000 -/- €700,000).

Closer review

According to article 4.13, paragraph 1, section f, Act IB 2001, the excessive share of debts that the taxpayer, his partner or the taxpayer, together with his partner, has, in law or in fact, directly or indirectly with companies in which the taxpayer has a significant interest is considered a fictitious regular advantage (read here: dividend payment taxed at the rate in Box 2).

The terms “legal or, in fact, direct or indirect” are important in this case. This means that not only direct legal debts to your own BV are taken into account, but also situations where there is indirect involvement in debts. An example of this could be a guarantee in the form of establishing a mortgage right on a property owned by the BV. In our case, the loan with the bank falls under this law because the BV, a company in which the DGA has a significant interest, must provide mortgage security to make the loan possible. In my opinion, this is not a separate position to take. The legal acts are quite obviously interrelated and would make avoiding the new anti-abuse legislation very easy.

But like any open standard, the question is going to be: where is the limit? When is the connection between a newly raised debt so far away that it would no longer fall within the scope of the anti-abuse legislation? However, if external financing is easy to attract, it can often also be assumed that paying the box 2 tax on the excessive debt should not be a problem.

‍