Tax authorities correct DGA salary: justified?

A limited company operates a jewellery shop and trades in gold. All shares are held by the managing director (DGA). The DGA receives no salary in 2022. The tax authorities first impose an additional tax assessment with a salary of €48,000 (customary salary 2022) and later reduce it to €25,000. The jeweller argues for a salary of nil. How does the court rule?

The parties did agree in court that a customary wage would be at least €25,000. In dispute, however, is whether and to what extent the financial-economic situation of the company should lead to further reduction of the salary.

Now that the Tax Office has already set the customary wage at a lower amount than that resulting from the text of the law (€48,000 in 2022), the jeweller has to make a plausible case that it is still too high.

A reduction of the established customary wage is considered businesslike if payment of that wage would jeopardise the continuity of the company. It follows from the BV's figures that payment of a wage of €25,000 in 2022 would have led to the immediate discontinuity of the company. Indeed, payment of that salary would have required the use of not only all cash but also stocks and/or operating assets, so that the BV would no longer have had at its disposal the working capital needed to run the business.

The court also took into account that the law does not purport to levy a tax on more than the DMS's net salary and benefits from substantial interests (including liquidation payments) during the company's lifetime. In view of the equity position at the end of 2023 (€ 17,000), the court did not agree with the tax authorities that the customary wage should be set at € 25,000.

But the court also did not follow the jeweller's view that the customary wage should be zero. It follows from the profit reserve available at the end of 2023 that it was possible to make salary payments in the preceding years.

The judge sets the customary wage in good justice at €7,500.

Note: If paying a higher salary would jeopardise the continuity of the BV, a lower customary salary than the legal amount may be businesslike. The burden of proof is on the BV.