Securing the debts of the BV, what should the DGA consider for tax purposes?

Securing the debts of the BV, what should the DGA consider for tax purposes?

If the BV wants to attract a loan, for example, from the bank, the bank may demand that the director-major shareholder (hereinafter: DGA) provides additional security by personally guaranteeing the loan. It may also be possible that the bank is willing to grant the loan at a lower interest rate if the DGA guarantees the loan. From a tax perspective, the DGA and the BV must conduct their transactions on an arm’s length basis. This applies even in the situation where the DGA guarantees the BV’s debts.

In this article, we describe when there is a tax-compliant guarantee and what the tax consequences are in the situation where the DGA’s guarantee for the BV’s debts is considered tax non-compliant. Furthermore, we explain some points to consider if the DGA guarantees the BV’s debts.

Business guarantee in brief

A guarantee is an agreement in which the guarantor (the DGA) commits to the creditor (the lender) to fulfill the debt that the principal debtor (the BV) owes to the creditor. In a completely businesslike situation, the guarantor will only guarantee the debts of the principal debtor if it does not pose too great a risk to the guarantor.

For the question of whether there is a tax-compliant guarantee by the DGA for the BV’s debts, it is decisive whether a non-profit-dependent remuneration can be determined at which an independent third party would have been willing to accept the same liability, under otherwise the same conditions and circumstances.

This means that there can only be a business guarantee if the DGA does not accept risks in the guarantee that an independent third party would not have accepted. If the DGA does so, it is deemed that the guarantee was entered into for shareholder motives and is therefore non-business. In addition, it is customary for an independent guarantor to receive a remuneration that reflects the risk and the amount for which he is guaranteeing.

Remuneration for the guarantee

As described above, it is customary for an independent guarantor to receive remuneration for the guarantee that reflects the risk and the amount for which he is guaranteeing.

Article 3.92, paragraph two, section c of the Dutch Income Tax Act 2001 stipulates that remuneration for the DGA’s guarantee for the BV’s debts is classified as income from the provision of a capital asset. This means that the business guarantee remuneration for the DGA is taxed as income from other activities in Box 1 of income tax. The business guarantee remuneration is also deductible in the corporate income tax for the BV.

In the situation where the DGA’s guarantee for the BV’s debts is non-business, this guarantee takes place entirely in the capital sphere. This means that the paid guarantee remuneration for the DGA is not taxed as income from other activities in Box 1 but is classified as income from substantial interest and therefore taxed in Box 2 of income tax. Furthermore, the remuneration for a non-business guarantee, like a regular dividend distribution, is not deductible in the corporate income tax for the BV.

Loss from the guarantee

If the BV cannot meet its payment obligations, the DGA, as a guarantor, will be called upon by the creditor. The DGA will then have to pay the amount to the creditor for which he is guaranteeing. In the situation where the DGA is called upon by a creditor of the BV, the DGA automatically acquires a claim against the BV. This is called a recourse claim.

At the time the recourse claim arises, in these situations, this claim will be worth nothing because the claim is effectively uncollectible. After all, the BV did not have the means to pay the debt to the creditor and will therefore also not have the means to pay the recourse claim to the DGA. This leads to a loss from the guarantee for the DGA. The question is whether the DGA can deduct this loss in income tax. If the DGA can deduct the loss, he can recover a portion of the paid guarantee as tax money. At a top rate in Box 1 of 49.5%, the refund can be almost half of the amount for which the DGA is guaranteeing!

If there is a business guarantee, the DGA can deduct a loss on the recourse claim due to uncollectibility in Box 1 of income tax. However, if the guarantee is tax non-compliant, the loss on the recourse claim is also not deductible. For example, see the judgment of the Supreme Court of September 26, 2014 (BNB 2015/12) for this. The Tax Authorities can reject the loss from the guarantee if the guarantee has been non-business. The question of whether a guarantee has been issued on business terms or not is frequently litigated. In case law, we see both rulings where the loss from the guarantee is rejected, as well as rulings where the DGA is allowed to take a loss from the guarantee. A recent ruling in which the DGA was allowed to take a loss because the guarantee was businesslike is the ruling of the Arnhem-Leeuwarden Court of Appeal (ECLI: NL: GHARL: 2021: 3831). The Court ruled that, although there were risky business activities, the loss from the guarantee was deductible. The tax inspector could not demonstrate that an independent third party would not have been willing to enter into the same guarantee. Regarding the debtor risk, the Court noted that the company in question had not had any problems with the handling of transactions for years and had often been profitable. Furthermore, this judgment indicates that the preparation of a risk analysis of the possible business and entrepreneurial risks of the BV by (possibly by the bank) at the time of entering into the loan can be of great importance.

Points of attention for a business guarantee

From a tax perspective, it is important that the conditions under which the DGA enters into the guarantee are businesslike. If there is a business guarantee, the DGA can deduct a loss on the recourse claim in income tax. It is advisable that the DGA, in addition to the loan agreement containing the guarantee, also enters into a guarantee agreement with the BV in which the terms of the guarantee are determined.

The important conditions of the guarantee are the maximum amount for which the DGA enters into the guarantee and the duration of the guarantee. An infinite guarantee entered into for an indefinite period is initially non-business. Furthermore, an independent third party will ask the BV for a remuneration for the guarantee, in addition to any security required. Therefore, a business guarantee remuneration must be determined in the guarantee agreement. Furthermore, it is advisable to prepare a risk analysis of the possible business and entrepreneurial risks of the BV at the time of entering into the guarantee.

If you intend to guarantee the debts of the BV or already do so, it is advisable to seek advice from a tax specialist. We can assist you in assessing the conditions under which the guarantee is entered into and in drawing up a guarantee agreement.

AsjesBisseling Tax Advisors,

December 2021.