What is the Law of Excessive Borrowing?
From 1 January 2023, director-majority shareholders (and a related person such as a partner or children) who borrow more than 700,000 euros from their own BV must pay income tax in box 2. Currently, it is often possible for large stakeholders to borrow money from their business without paying tax at that time. As a result, there is a tax incentive not to be paid dividends or wages and instead lend the money.
Why do director-majority shareholders borrow from their own BV?
A director-main shareholder – official holder of a significant interest – owns at least 5% of the share capital in a BV or a NV. This shareholder is liable for tax. Where salary is taxed in box 1 and savings and investment in box 3, a person with a significant interest is taxed in box 2.
As a significant stakeholder, you can currently borrow money from your own company without directly paying tax on it. This makes it interesting not to pay dividends or wages, but rather to borrow money from your BV. By borrowing from your own BV, the taxation in box 2 can be postponed and even adjusted.
Too large a loan from own company limited
It has become clear that it has become more and more popular to borrow in your own business. Where in 2007 there was still 19.7 billion euros outstanding in debt to the private limited company, this increased in 2018 to 62.4 billion. Logically, because you could postpone or even adjust the payment of tax, this was a very economical choice.
The previous government found this form of loan undesirable and has presented a bill to combat inequality between entrepreneurs. The law on excessive borrowing in own company has been confirmed by the House of Representatives and is expected to enter into force on January 1, 2023. Significant stakeholders have until the end of that year (reference date December 31, 2023) to prepare.
Consequences of too high a loan bill
The bill on excessive borrowing ensures that borrowing in one’s own business – without directly paying tax on the money – is limited. From 1 January 2023, director-majority shareholders who borrow more than 700,000 euros from their own private limited company must pay income tax in box 2 of the so-called notional ordinary benefit. The rate for this is 26.9%. This concerns joint debt for a DGA and associated persons, such as a partner or children.
The measure will not come into effect until 2023. This gives you the opportunity to pay off an excessive loan or start reducing the debt. If you have sufficient cash privately, you can use it to reduce the loan.
The new bill provides for more equal treatment in tax treatment. Not all entrepreneurs have the luxury of borrowing from their own business. This is only possible with a BV or NV. This excludes other legal forms.
An entrepreneur with a sole proprietorship must pay income tax on the profit because he is personally liable. A BV has the status of a legal person, so that commercial and private assets are separated.
It is still possible to borrow in your own company
Entrepreneurs were already prepared for this change and have already acted on it. Now that the benefits of borrowing are diminishing, entrepreneurs are once again choosing to pay out dividends or wages. In 2019, 13.6 billion euros more in dividends were already paid out. This has resulted in additional tax revenue in box 2 of 3.4 billion euros.
But don’t worry: it’s still possible to borrow from your own business, and there are still benefits. The loan must meet certain conditions. For example, it must be registered in writing, there must be agreements on repayment and arm’s length interest must be paid.
In addition, BV must of course be able to do without the money and it must be likely that BV could also grant the same loan to a third party in the same situation.
Now is the good news: the business interest on a loan for the owner-occupied home is deductible. This makes borrowing one’s own – perhaps less than before, but still – attractive and popular.