When the surety by a director and major shareholder (dga) is called upon, the amount paid can be deducted from the earnings. That is to say, if the surety is on an arm’s length basis. According to the Court, a surety that in fact continues infinitely does not fall into that category. When granting a bv a loan, the financiers often require the dga to provide extra security in the form of a surety. The dga then signs for agreement to take over repayment of the loan if the bv should no longer be able to pay. Because the dga assumes private liability for the debts of the bv, the bv pays a compensation. This is the surety fee. For the dga, the fee is taxed as income in box 1. For the bv on the other hand, the fee is deductible against profit. If the bv is indeed unable to pay the debt, the financier will call upon the dga. Having paid, the dga will then have a claim on the bv, the so-called recourse claim. But it is not very likely that the dga will be able to recover the debt, as the bv could not pay its own debts in the first place. The dga may then write down the amount of the recourse claim and deduct it from his earnings. However, the whole story only applies if the surety is on an arm’s length basis. Generally speaking, this means that an independent third party would have provided the surety on the same conditions.
If the tax inspector finds the surety is not on an arm’s length basis, there can be no write-down. In this case that is what happened. The dga stood surety towards the bank for ‘all that the bv may owe now or at any time, for whatever reason’. The surety also remained in force if the bank, by granting other loans, had more to claim from the bv than at the time the surety was signed. According to the tax inspector, this was an ‘infinite’ surety which also applied to future debts and an independent third party would never have agreed to it. The Court of Appeal came to the same conclusion. Whether or not it had been a wise decision from the entrepreneur’s perspective to sign this surety was irrelevant to the judgment, the Court emphasized. The issue was if an independent third party would have considered it a wise decision, too. This did not seem the case to the Court. Therefore, the write-down of € 50,000 was not awarded.
Court of Appeal Arnhem-Leeuwarden, April 13, 2021, ECLI (abridged): 3500