Tax & Legal 28 February, 2023

Your business in dire straits, what should you look out for?

Crowe Peak/ Knowledge Hub/ Tax & Legal/

Your business in dire straits, what should you look out for?

The corona crisis has had a major impact on our society and business community in recent years. Still many companies are facing financial problems and discontinuity is looming. But even without the corona crisis, companies regularly find themselves in dire straits. As an entrepreneur, how can you prepare for this?

Companies that are part of a structure with several (national or international) companies often have to deal with internal loans within the group or loans provided by the shareholder. In addition, such a structure often involves a fiscal unity. We provide some tips around what to look out for in such cases, what is best to arrange during times when the company is still running well and what the consequences may be if the company runs into bad weather.

Internal loan

There is a business motive for the loan if there is a business reason why the loan is granted. Here, it is important to realise that one should not look through the glasses of the shareholder but with the view of a financier. A financier provides a loan to a company as an investment. For example, the financier earns on the interest income it receives and not on the benefit the loan might bring to the group as a whole.

It is common in a group structure to use internal financing. What is often forgotten with such internal financings is that these financings do need to have a business motive. Furthermore, the loan must be laid down in an agreement based on commercial principles.

This brings us straight to the next point. The loan must have been granted not only with an arm’s length motive, but also on an arm’s length basis. Think of a correct interest rate, sufficient collateral and a repayment schedule.

DMS with loan from own company

The same applies to loans granted to the DGA. Often, the DGA borrows from the company, for example, to purchase his or her own home. In such a case, sufficient security has been provided (the home) and a repayment schedule and a (generally) businesslike interest rate have been agreed as the interest is otherwise not eligible for income tax deduction.

Business motive

When the DGA provides a loan to the company, however, it is often different. Little or nothing is often recorded about this. Here, too, it is important that the loan is provided with a business motive from a financier’s point of view and not with shareholder motives. Again, it is important to clearly record the reason for the loan, the interest rate, the securities the company can offer and the period within which the loan will be repaid.

If these requirements are not sufficiently taken into account, you may face nasty surprises once the company runs into bad weather and cannot repay the loan. The tax authorities may rule that there is an impractical loan, as a result of which the loss incurred by the loan provider when the loan is not repaid is not deductible from profit/taxable income. It is therefore advisable to take timely measures and also draw up business agreements in advance so that no discussion can arise on this when the loan cannot be repaid after all.

Adverse effects of a fiscal unity


National group structures regularly make use of the benefits of a fiscal unity. For both corporate income tax and VAT purposes, a fiscal unity can provide benefits. Be aware that in times of bad weather, this fiscal unity can also have adverse consequences. First of all, companies forming a fiscal unity are (all) jointly and severally liable for the corporate tax owed by the parent company. If there is a fiscal unity for VAT, all companies within that fiscal unity are liable for the VAT debts of all companies within the fiscal unity.

Limitation of the liquidation loss regime

Another disadvantage of the fiscal unity, felt in worse times, is the limitation of the liquidation loss scheme in the fiscal unity. When a participation within fiscal unity is liquidated, the liquidation loss is not deductible, while if the liquidation were to take place outside fiscal unity, the parent company can, under conditions, deduct a liquidation loss. Furthermore, a bankruptcy of a subsidiary within the fiscal unity entails further adverse consequences.

Record everything in good time and prepare well

So even in good times, it is important to think about what might happen to the company when it runs into bad weather and record and prepare everything in good time. Arrange for business loan agreements within the group and with the DGA. Consider whether the fiscal unity is still desirable if you foresee that (one of) the company(ies) might be liquidated or go bankrupt yourself.

Do you want to check whether the financing within your group is businesslike? Or do you have questions about an upcoming bankruptcy of a company within the group? Then contact us so that we can see what is possible in your situation

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