DGA tax current account measure

The 2019 Tax Plan contains seven legislative proposals, a surprising one of which is the ‘Director Major Shareholder tax’ (DGA tax). In the presentation letter of the 2019 tax plan, a new measure has been proposed which affects DGAs: the current account measure. What is this measure and how could it affect DGAs?

Borrowing as a DGA

Under the current regime, a DMS may borrow money from his or her own PLC untaxed without a specific cap. If a DGA takes on a debt from his or her own PLC, it must be a business loan, with a business interest rate. An interest rate that a bank or any third party would charge is an arm’s length interest rate. From 1 January 2022, it will no longer be possible for a DGA to borrow more than €500,000 untaxed from his or her own PLC, the so-called DGA tax. Anything above this amount will then be considered a distribution and not a loan. This distribution is taxed in box 2 as income from substantial interest.

Transition period

The period from 2019 to 2022 serves as a transitional period. During these three years, DGAs will have time to repay their debts to the company and reduce this to a maximum of €500,000. Minister Hoekstra’s offer letter stated that a further transitional measure will be taken for existing owner-occupied home debts to companies.

Box 2 rate

Besides the measure regarding the current account, the 2019 tax plan proposes an increase in the box 2 rate. Shareholders owning 5% or more of the shares in a company have substantial interest income. This makes them taxable in box 2 of income tax.

The box 2 rate will be increased from 25% to 26.25% in 2020; in 2021 it will be as high as 26.9%. The increased rate is only effective in 2020, so in 2019 there is still the possibility to pay dividends at 25%. Through these dividend payments, the debt to the company can be repaid. In contrast to the increase in the box 2 rate, the corporate income tax rate (vpb rate) for small and medium-sized enterprises will be reduced in stages from 20% to 15% in 2021. In 2019, the vpb rate is 19%.

Uncertainties DGA tax

After the announcement of the DGA tax, in the presentation letter of the 2019 tax plan, there were still many ambiguities. For example, there were still questions as to whether the €500,000 cap also applies in the case of tax partnership. Another question asked was what transitional measure will be taken for existing owner-occupied home debts.

In the parliamentary letter ‘reconsideration of establishment climate package’, these ambiguities were explained in more detail. Instead of a transitional measure for existing owner-occupied home debts, new owner-occupied home debts of the DMS will also be exempted. This means that newly contracted owner-occupied housing debts are also excluded from the €500,000 threshold of the current account measure. Furthermore, the maximum loan from a DMS to his or her PLC also applies in case of tax partnership. As a result, the €500,000 threshold therefore applies to a DGA and his or her partner jointly.

The bill is not yet finalised; it still needs to be passed by parliament. The final bill will be presented in mid-2019. Do you have questions about what the tax experts at Crowe Peak can do for your company or you as a DGA? Get in touch with a tax advisor at Crowe Peak.