From a tax perspective there are a number of advantages to a company being considered ‘small’. In this article we will take a brief look at those advantages. However, there are also considerable consequences when, during a tax audit, a company is deemed to no longer be small, and these not only affect the company itself, but others too.
A small company under article 15 of the Companies Code
As you most likely know, the criteria for company size, being those provisions under article 15 of the Companies Code (Wetboek van Vennootschappen), have been subjected to a thorough overhaul for financial years commencing on 1 January 2016 and afterwards. For the financial years starting as of 1 January 2016 the figures for the previous year must be used, and they cannot exceed more than one of the following thresholds:
- Annual average workforce: 50
- Net sales (excl. VAT): €9,000,000.00
- Balance sheet total: €4,500,000.00
We will not be re-examining all the ins and outs of article 15 of the Companies Code again, but what is of issue is that section 6 of that article asserts that if a company is affiliated with one or more other companies, the above figures must be considered on a consolidated basis. If a company does not want to implement the consolidation adjustments, the figures for the affiliated companies can simply be added together and, with 20 percent added, compared to the above thresholds.
So when are companies considered to be affiliated? The form of affiliation that most people think of is one where companies are affiliated to each other because all the companies in a group are directly or indirectly majority owned by a central holding company. But what is sometimes forgotten is that companies that make up a consortium are also affiliated. Without taking an in-depth look at the conditions for and types of ownership of a consortium, it will suffice to give the primary reason why companies belong to a consortium.
Companies where the majority of the managers are the same people means there is an irrefutable assumption that they constitute a consortium and will consequently be affiliated, which means the above figures must be viewed on a consolidated basis. So two companies with an identical management structure will always be considered affiliated.
The issue in practice
It is common for entrepreneurs using a management or property company to also have an operating company. If this person is the sole manager in both companies (if, for example, both are private limited companies) or if two partners are appointed managers for both companies, then the management or property company on the one hand and the operating company on the other make up a consortium. This means that the above thresholds must be seen on a consolidated basis. Even if there is a third manager in the operating company, the majority of the management of that company (i.e. both the partners) is likewise the majority of the management of the management or property company (where, in this case, it is made up of all the managers).
With due regard for the fact that the affiliation is often overlooked in these types of situations, management or property companies often enjoy the tax benefits that are supposed to be reserved for small companies alone. So if the tax authorities establish during an audit that the companies are indeed affiliated, this could have a considerable impact on your tax base, and thus also on your cash flow.
It can be difficult to grasp all the consequences of being re-graded as a large company. Below are the tax advantages that small companies enjoy and that will consequently be lost.
Measures concerning acquired assets and expenses incurred
If you have acquired assets during those financial years that are being audited and for the initial amortisation you used the full year instead of the proportional period of ownership, an amortisation excess will be retained. The acquisition costs that are now expensed will then also be added to the amortisation excess. When a deduction percentage of 120% is applied to security costs, then the exempted reserve created for that purpose will once again be taxed, should it emerge that these costs were incurred during the period under audit. Should your company be new and the first three financial years are still subject to audit, then the company can also see its taxes raised due to insufficient advance payments, if taxes would already be payable. While the investment reserve has not often been used since the introduction of the deduction for notional interest, this deduction is still available to small companies. If it were to emerge during an audit that a company no longer qualifies as a small one and you created an interest reserve during that period, it will now be taxable in full.
Measures concerning tax deductions
When it comes to tax deductions the notional interest deduction remains the most popular. A large company will once more no longer be able to use a higher percentage for the deduction for risk capital, while the lowering by 0.5 percent of the percentage could of course result in higher taxes. The recently scrapped patent income deduction could also be affected. When taking out patents small companies do not have to satisfy the condition of having a separate research centre. When a patent is applied for in a year that falls under the audit period and it emerges that that company is no longer a small one, the process will be much stricter and the patent income deduction could even be rejected.
Over and above the notional interest deduction, the investment deduction is also still very popular. In 2014 and 2015 the rate for the ordinary investment deduction for small companies reverted to four percent from zero percent, and for the 2017 tax year it will be as high as eight percent for small companies, while still stuck at zero percent for large ones. Small companies can also benefit from a increased investment deduction for digital investments. Once again, an audit could result in the investment deduction being rejected, which will then immediately lead to tax being payable, as the investment deduction is the penultimate tax deduction, after the notional interest deduction.
Additional taxes that are only payable by large companies
Aside from the loss of beneficial tax measures for small companies, there are also two taxes that are payable solely by large ones, being the fairness tax and the capital gains tax on shares sold more than one year after their acquisition (0.412%). If your company is now considered large after being audited, then you will also be required to pay these taxes, where applicable.
Paying out dividends
In the event of a distribution of dividends and all the related measures, there are also differences between small and large companies. First and foremost, the liquidation reserve as well as the special liquidation reserve cannot be applied for large companies. So if a liquidation reserve was created during the period under audit, it could be re-qualified as a standard reserve. The question is then also whether ten percent taxes levied at source and already paid can be reclaimed, given that the law says on liquidation reserves that the ten percent is definitively acquired by the state and it cannot be repaid or offset. Another method for distributing dividends at lower rates is what is known as the VVPRbis regime. This is the lower rate that is awarded to dividends distributed on shares issued after 1 July 2013 and that satisfy a number of conditions. One of those conditions is that the company must be a small one when issuing shares, so if a company is considered a large company at the time of the share issuance, the lowered rates are no longer applicable, and not just for dividends already distributed but for all future ones too.
In more-or-less the same scope we had the transitional measure for the liquidation surplus in 2013/2014, which allows companies to pay out their reserves on a one-off basis at ten percent, should they immediately use the net received dividends for a capital increase. Small companies had to retain the capital increase for four years, while large companies had to keep it in place for eight years. The size of the company at the time of the capital increase applies for this rule, so companies that introduced a capital increase in 2013 are no longer affected by it. Those capital increases that took place during the period of grace in 2014 could be affected by it if an audit was still to take place. In this case further taxes will not be payable, but it is still a four year wait before the capital can be reduced tax free.
Measures for small (startup) companies
A final set of measures that could be affected by the change from a small company to a large one is those that benefit startup or small companies. This includes the higher exemption rate for paying withholding tax for small companies, the status of being one of the Young Innovative Companies, which may only be held by certain small companies, and of course the startup measure introduced in 2015. That latter measure includes the tax shelter for startups, the exemption on withholding tax for startup companies and the exemption on income tax deducted at source on interest from loans to startup companies. The final three measures are exclusively available to small companies. The effect is probably worst for the tax shelter measure for startup companies, as referred to above. While the company won’t see any difference, the investors will suddenly see their tax credit disappear.
As you have seen, there can be many negative consequences when a company is suddenly rebranded as ‘large’, which is why it is crucial that the size of the company is correctly estimated so that the tax position of a company can be determined with certainty, instead of waiting for a tax audit to do that.