Deduction of costs for requested deposit
February 2021 – If you act as guarantor for a bank loan to your company, you can, if the bank asks you to pay the loan, deduct this charge as a business expense. You must, however, have earned income from the company. The Court of Appeal is relatively flexible with regard to compliance with this condition.
The Facts
Mr A sets up a management company, SPRL(BVBA) X. The next day, he creates a limited liability company Y. SPRL (BVBA) X is appointed as Chairman of the Board of Directors of Y and is, in this capacity, represented by Mr A. X is certainly Chairman, but the mandate itself is exercised free of charge.
There is a kind of collaboration agreement between X and Y under which X provides certain services to Y. The services are materially provided by Mr. A. Y pays X a monthly fee for these services. Y is the only client of the management company.
Mr A, for his part, receives only a management fee from X. The services of A in his capacity as representative of X are not invoiced.
Six months after its establishment, Y takes out a loan from the bank, and A and his wife B act as guarantors for 75,000 euros. Unfortunately, business is not good and A is actually solicited by the bank.
A deducts the sum of 75,000 euros as business expenses.
The tax authorities refuse the deduction and even impose a 10% fine for incorrect declaration.
In the first instance, the fine is remitted, but the deduction of the deposit is refused. The taxpayer refers the matter to the Court of Appeal.
Security for the company behind the management company
Business expenses are deductible only to the extent that they were incurred to acquire or retain business income. This is the basic rule.
In this case, the main argument for denying the deduction is the fact that Mr. A never earned income from Y, the company that benefited from the guarantee.
In addition, the tax authorities draw attention to the fact that the management company exercised a mandate in Y free of charge and that the services provided by A were not re-invoiced to Y either. According to the tax authorities, the remuneration that A received from X could therefore not be linked to the guarantee.
The Court takes a different view, as it finds that there is nevertheless income indirectly. And all this has to do with the contract of collaboration between X and Y.
It appears from the VAT returns that A's management company only has a contract with Y. This contract in fact neutralises the fact that X's mandate to Y is free of charge.
It is precisely this collaboration contract that ultimately enables A to derive income from its management company.
The Court therefore confirms the professional nature of the surety bond.
Mr. and Mrs.
The taxman also brandishes another weapon: the bond provided by A and B actually benefits only A. B did not actually receive any professional income. As A and B were married under the legal regime (community of professional income), half of the bond may have been professional (the part that A had to bear), but not the part that B had to bear.
The Court is relatively brief on this point: A has sufficiently proved that it has borne the (total) amount of the bond in order to acquire or retain taxable income. The deduction is allowed up to the full amount.
Management companies
This taxpayer is saved by the Court of Appeal, but it is not said that all courts will follow the same reasoning.
It is especially surprising to note that the Court ruled that the expense was indeed an expense to maintain or acquire professional income, when from a formal point of view, the income does not accrue directly to the taxpayer. The Court sees sufficient reason to set aside the formalism, no doubt because the link between the income and the expenses, although indirect, was obvious. In the absence of this obvious link, another court would probably not come to the same positive conclusion.
