Management companies and the tax authorities
Are you a director? Do you act in person or through a company? The tax authorities do not really like such management companies and when there is a court case neither the judges seem to be fans. But the Court of Cassation put an end to this distrust.
Management companies. Why?
It happens often. Mr. X is director of operating company A. On a sunny day Mr. X decides to occupy this function through a management company. In practise not much changes for company A. The management company is now appointed as director, but it is still Mr. X who is in the board of directors. However he is no longer director, but now acts as representative of the management company.
Why would you do this? Under the previous companies law this was a way to somehow limit your liability. But in most cases income tax was, and still is, the main reason to use a management company. After all there is a huge difference in tax rates between personal income tax (50% as from approx. 40.000 euro) and corporate tax (20% up to the first amount of 100.000 euro, and 29,59% above - as from 2020 even only 25%). Watch out: a number of other elements will determine the choice, but you understand that the difference in tax rates plays an important role.
The tax authorities do not like it
The tax authorities do not like management companies. There are two reasons for that.
The first reason is that management companies do not always have 'substance'. It could be possible that the management company only serves to shift the profit of the operating company. This is easy by letting the management company issue invoices for services to the operating company. Earlier, with increasing SME rates this was more important than now, but it is a fact - if all conditions are fulfilled - that an SME is taxed at 20% on the first amount of 100.000 euro. Above the tax rate becomes 29,58% and as from 2020 only 25%. By shifting 100.000 euro from the operating company to the management company, you still save (as from 2020) 5.000 euro.
In practice the tax authorities will tackle this way of working by proving that the management company does not really perform services or that the invoices do not match the reality. The expenses are simply disallowed.
Another reason for the tax authorities' position is that in reality there is little difference between the situation whereby X acts as director of the operating company and X acting as representative of the management company which is director in the operating company. In both cases it is X signing the documents and doing the daily management.
Tribunal and courts do not like it either
We have to note that tribunals and courts often side with the tax authorities. If it shows that the management company has no staff, or in case that it has no other activities than the director activity which the director already held in the operating company, it will be very hard for you as tax payer. After all you should prove that the management fees (which you want to deduct in the operating company) coincide with the reality.
It is of no importance who renders the services
What if the tax authorities do not contest the reality of the services, but also have a problem with the person rendering the services?
Consultants will advise you - in case of a management company - to make it very clear that you act as representative of the management company and not as director of the operating company. This seems obvious but mistakes are very easily made and it is a crucial element for the tax authorities to show that everything which has to do with the management company has no substance.
But recently, the Court of Cassation whistled the tax authorities somehow back. The tax authorities disallowed the deduction of management fees, solely based on the fact that the tax payers (previous directors of the company who transferred their activity to a management company) could not prove that the services were provided in the name of the management company. The document only contain the name and signature of the individuals. But for the tax authorities it was not clear whether these individuals acted as directors of the operating company, or as representative of the management company.
According to the Court of Cassation this is of no importance. The only thing that counts in order to be deductible is that there were actual services provided. Whether or not the management fees are paid to the one who has provided the services is of no importance.
Green light for management companies?
This conclusion is not permitted based on the judgment of the Court of Cassation. In most cases the tax authorities contest the reality of the services. And that is sufficient to disallow the deduction of the fees. As previously, you should detail the invoices for management services very well and allign the fees with the provided services and yes, use the correct title for your function.