Tax: not all expenses in a company are professional

Income received by a company is for tax purposes always considered as professional income. You could expect that, from a tax perspective, expenses made by a company are also considered as professional expenses. But tax isn't always logical ...

Main rule

Expenses are deductible when they are made to obtain or maintain income. This apparent simple rule in article 49 ITC92 has led to numerous judgments. Sometimes they go one way, sometimes they go the other way. Even our Supreme Court, the Court of Cassation, has changed opinion during the last years.

Until 2015, this Court found that for tax deductibility of expenses in a company, next to the main rule that they should obtain or maintain income, these expenses should have a link with the corporate goal of the company.
There was case law rejecting the deductibility for an apartment at the seaside which was put at the disposal of the director, because the corporate goal of the company related to IT services, and not the management of immovable property.

In 2015, the Court of Cassation leaves the so-called causality doctrine. The link with the corporate goal seems to become less important and the Court again focuses on the question whether the expenses are made to obtain or maintain income (intentionality condition). The case at hand concerned tax payers making investments which didn't almost no profit, possibly even a loss. But by making the investment taxable income was transferred into an income for which a tax credit could be obtained.
The tribunals and court had rejected the construction by arguing that the investment was not in line with the corporate goal of the company. But the Court referred this reasoning to the waste basket and confirms that expenses related to the purchase of investments are deductible, even when the expenses exceed the income (interest) derived from them. The fact that a loss was generated should not lead to the conclusion that it was not the intention to obtain income.

2019

Apparently not every tribunal or court was convinced by the wave of innovation which swept through the Court of Cassation. Consequently, two new cases dealing with similar situations were brought before the Court.

The first case again concerns a company buying bonds shortly before their expiry date. As a consequence, the price for these bonds is very high (since the buyer should pay for the already expired interest). Short after the expiry date the bonds are sold. The investor has obtained the interest, but on balance this will not generate much income. The interest income is almost completely compensated by the expenses made for the transaction. But there is an important tax advantage: the interest qualifies for tax credit.
Again, the Court decides that the expenses were indeed made in order to obtain income and can therefore not be rejected when they are not in line with the corporate goal of the company.
Note: such constructions are no longer possible due to legal changes.

A second judgment is less favorable for the tax payer: a liberal professional establishes a management company. He builds a house: on the ground floor, he has his cabinet and above there are three apartments. Upon completion, he sells the usufruct on the building to his company for a period of 20 years. After 20 years, the holder of the bare ownership again obtains the full ownership without any compensation to the company. At the income side, there is rent income (approx. 30.000 euro per year), while the expenses are composed of the depreciation of the building and the interest on the loan of the company to buy the usufruct.
The tax advantage is simple: the company is a VAT payer and can deduct VAT. The income is considered fully professional in the company, but is compensated by the expenses. As private individual, the income is taxed as immovable income and the expenses are applied as a lump sum.
The tax authorities establish based on these figures that the company never has any forecast to a positive result. The depreciations compensate the said income, but additionally there are a number of other expenses (loan interest, local taxes, repair).

In its judgment, the Court of Cassation confirms that the corporate goal of the company should not be considered. But on the other hand, there is the condition that expenses should be made to obtain or maintain taxable income .. for the company. It cannot be the intention that expenses are deducted which are solely made in the interest of the director or shareholder.

This touches the essence of this case law. It is sufficient that the company has the intention to obtain or maintain income, but it should concern expenses made in its own interest.
Consequently, these judgments are still no letters of safe-conduct for an apartment at the seaside through a company.