Living at the company’s expenses … sometimes yes, sometimes no

Living at the company’s expenses … sometimes yes, sometimes no

Case law is not unambiguously: in case a company has a house, and this is used solely or primarily as housing by the director, are the expenses related to this house deductible? The tribunal of Gent recently ruled no, but at the same time the court of appeal came to another conclusion.

The Gent tribunal ruled not over one, but two houses

A man and a woman have a company, which they describe as a real estate company. This company was created through a couple of mergers and holds a commercial building, an apartment in Knokke-Heist and a house in Grembergen. In October 2014, the couple transfers its domicile from the house in Grembergen to the apartment in Knokke-Heist, together with company’s registered office. In March 2015, the house in Grembergen is destroyed by a fire. The compensation payment generates a capital gain. The company wants to temporarily exempt this capital gain. This is possible when the compensation is reinvested.

In 2017, there is a profound tax audit on the company for the tax years 2015 and 2016. The tax authorities assess that the immovable property which is made available to the director is not used as part of the company’s activities. As a consequence, the expenses related to the homes are not deductible. Moreover, the capital gain on the house in Grembergen cannot be tax exempt, since the first condition is not fulfilled – that the goods are used for the professional activity of the company. The capital gain is therefore fully taxable.

The Ghent judge immediately challenges the qualification as real estate company. It cannot be denied that the company holds immovable property, but the tribunal seems to qualify the company as a patrimony company (as a company for the management of one’s own assets) rather than a real estate company (a company performing real estate transactions).

The tribunal concludes that the fact that the company is registered as a real estate company does not mean that the expenses relating to the two immovable goods are automatically considered as deductible professional expenses.

The couple confirms that they use the homes themselves, but that they have the intention to sell them in the future and that they would generate capital gains.

Such theoretical consideration does not convince the tribunal: the fact that the buildings will eventually generate capital gains is not sufficiently demonstrated. And even if they would generate capital gains, currently the conditions for deductibility are not fulfilled, since the capital gains today are no given fact.

What about the remuneration theory?
According to this theory, a company can qualify the expenses in order to grant its director benefits in kind as a result of his professional activity within this company as deductible professional expenses.
This is the case here: the director obtains a taxable advantage through the free living.

However, it appears that the director paid a contribution for the house. This own contribution was accounted for on the debit side of his current account. The amount was exactly the same as the benefit in kind, so the director in practice didn’t have to pay any tax.

The tribunal found that the tax authorities legitimately came to the conclusion that the benefits cannot be considered as a remuneration, as the equivalent of the benefit was fully accounted for and the director should repay this benefit.
Therefore the remuneration theory does not apply.

The court of appeal on a villa with pool

A case before the Ghent court of appeal concerned a villa with pool and pool house, in the hands of a management company. The company itself used the building for 20%. During the rest of the time the building was put at the disposal of the director, which paid taxes on the benefit in kind.

The company invokes the above-mentioned remuneration theory in order to deduct the expenses related to the house for 100%.

The tax authorities reject the deduction and argue that the free provision of the house is not intended to remunerate the director for his services in the company. The director also received cash and the contract didn’t mention the house as the consideration for services. But the director refers to the minutes of the general shareholders meeting where it is explicitly mentioned that the director receives as the remuneration for his mandate both a periodical salary in cash and benefits in kind related to the private use of the house.

The tax authorities also refer to the disproportionality between the amount of the benefit in kind and the amount of the expenses. But this argument is never or rare accepted: the fact that the taxable benefit in kind is much lower than the real value of the benefits is due to the lump sum valuation which is imposed by the tax authorities themselves.

After all the court also rejects the argument that the real value of the benefits is very high. That is an opportunity judgment. The court assesses that there is only one director and shareholder. No personnel. Thanks to the director, the company obtains a considerable income and therefore the company can grant a considerable salary to its director.

The difference?

The judgment of the Ghent court of appeal shows that a house in a company – together with all its tax advantages – is still possible. On the other hand, the ruling of the Ghent tribunal indicates that there are still potential pitfalls.

The most important difference between both cases seems to lie in the question to what extent the free house is an alternative remuneration. There should be a reason for the compensation. This seems to be the case in the court’s judgment, which is not the case in the tribunal’s ruling. Fact is that who wants to get the most out of it will receive resistance from the tax authorities. And that can take a long time …