Benefits in kind: what if the actual benefit is lower than the lump sum calculation?
When you as a director obtain a loan from your company, the tax authorities will check whether the applied interest rate is in line with the market rate. The market interest rate is determined annually. Question is whether the lump sum benefit should be accepted as such.
Actual value or lump sum
The Income Tax Code 1992 (ITC92) provides that when you obtain benefits linked to your professional activity, these benefits are taxable professional income. Article 36 ITC92 further states that you will be taxed on the actual value of the benefits. However, in some cases the actual value is replaced by a lump sum valuation. Article 18 of the Royal Decree executing the ITC92 (RD/ITC92) contains different sorts of benefits with a lump sum valuation. This article e.g. states how to calculate the benefit in kind when you obtain free living, a company car, a mobile phone with or without a subscription... It also contains the free loan or a loan at a favorable interest rate.
The tax authorities publish annually an update of this article with the rates as they apply for the past year. For 'non-mortgage loan without a fixed duration' (e.g. debit position on your current account with your company) the reference interest rate for income year 2017 is 8,78% and for 2018 8,94%. Around May 2020 we will know the reference interest rate for 2019. This is the interest rate which will be used for the income tax calculation of the benefit in kind for 2019, but also for the calculation of the professional withholding tax on the benefits during 2020.
The benefit in kind equals the reference interest rate minus the interest rate you pay to your company.
But before the lump sum can be applied, there should be a benefit in kind. The Antwerp Court of Appeal recently demonstrated it is not that simple.
In the case at hand, a company director had a debt to his company via the current account. The company charged 4,5% interest. For tax year 2011, the reference interest rate was 9%. The tax authorities opined that the benefit in kind was 9%-4,5%.
But the tax payer argued that there was no benefit in kind and consequently the RD/ITC92 did not apply. The fact that the RD/ITC92 foresees a reference interest rate of 9% does not mean that a loan with a lower interest rate is a benefit in kind. The Antwerp Court of Appeal follows this line of reasoning. The Court states that the tax authorities rightfully presume that there is a benefit in kind in case the applied interest rate is lower than the reference interest rate. But this does not mean that the tax payer cannot prove the actual benefit in kind is lower than the reference interest rate laid down in article 18 RD/ITC92. Article 36 ITC92 states that a tax payer should be taxed on the actual benefit in kind. If it is demonstrated that there is no benefit, article 18 RD/ITC92 is not applicable to calculate the benefit in kind.
In this case, the tax payer convinced the Court that the applied interest rate of 4,5% was in line with the market interest rate, so there is no benefit in kind. Proof was submitted that given the duration and risk level a lower rate was applicable. This was confirmed by a bank loan in 2012 for which an even lower interest rate was obtained.
You should therefore not consider the lump sum calculation for a benefit in kind as an irrefutable fact. If you can prove that the benefit in kind you obtain is lower than the lump sum amount, there are tribunals and courts which accept the actual value. The tax authorities in their own turn do not have the possibility to demonstrate that the actual value of benefits in kind is higher than the lump sum calculation of article 18 RD/ITC92. This is not illogical, since the tax authorities themselves calculate and apply these lump sums.
Remark: the lump sum calculation of the benefit in kind for company cars is foreseen in the law. Even when it is demonstrated that the actual benefit is lower, the lump sum will be applied in any case.