In practice, a director and major shareholder (hereafter: DGA) regularly drives a company car (read: the car has been purchased by his operating company and is made available to him. Over time, the question then regularly arises as to whether it is possible to transfer the car to private ownership and, if so, whether this is possible for a consideration that is less than the actual value of the car. A court recently ruled on this question.
Court ruling
The Zeeland-West Brabant District Court recently ruled on the following situation. A private limited company had purchased a Volvo for €93,400 including VAT on December 29, 2015. The purchase VAT had been fully deducted at the time. In the last VAT returns of the subsequent financial years, a VAT correction for private use was always included because the car was also available to the DGA of the company for private use. So far, so good.
After 60 months - on December 29, 2020 - the company sold the car to its DGA. This undeniably involved the fact that on January 1, 2021, the addition to income tax for this car would go from 7% to 25%. The DGA took over the car from the company for only € 2,624 including VAT and residual BPM. This while an appraiser had still determined the value of the car at € 29,750 on December 2, 2020. The company and the DMS took the difference of € 27,126 into account as a hidden dividend. This is advantageous for the DMS, as he is faced with a lower amount of non-deductible VAT.
The focus of the ensuing dispute with the Internal Revenue Service was, of course, the taxable amount for sales tax. This dispute was approached from three angles:
- Is there a delivery for consideration at all?
- Is there an abuse of rights?
- If the answer to question 1 is yes: does the disguised dividend also belong to the compensation?
The court answered the first question in the affirmative. Barring exceptional situations, the taxable amount for VAT is the agreed fee as stated on the invoice. This also applies in affiliated relationships. It only becomes different when the fee is zero, or is set so low that there is generosity (symbolic fee).
A misuse of law involves an artificial combination of transactions aimed at obtaining tax benefits. This may involve acting correctly in formal terms, but materially the economic reality is missing. However, this does not prevent a taxpayer from organizing his activities in such a way that he or she pays as little tax as possible. The court ruled that in this case there was a real transaction, not an abuse of rights.
Finally, the court found that dividends resulted from share ownership and that, partly for this reason, there was no direct connection between the hidden dividend and the delivery of the car to the DGA. According to the court, the disguised dividend was not part of the taxable base for VAT in this case. Note: in 2013, a court ruled differently in a similar situation where the dividend had been formally declared.
For Practice
The conclusion of the ruling discussed here is that in the given situation no VAT was due on the difference between the actual value of the car and the much lower amount on the invoice. The DGA was thus faced with a lower amount of non-deductible VAT and thus obtains an advantage.
If you are wondering whether it is possible / attractive in your situation to transfer the company car to private use, please contact us at 040 - 2 504 504. We will gladly map out the (im)possibilities and issues for you.