During 2010–2015 Q OÜ channelled significant funds to its board members M and N through cash withdrawals, transfers and payment of personal expenses, financed M’s casino gambling and let a company owned house to M at a much lower rent than a comparable property rented to a third party. It also granted loans to related entities W OÜ, Y OÜ and C OÜ, recorded a loan to K, and later wrote off the loans to Y OÜ and C OÜ as unrecoverable.
The tax authority assessed about EUR 1.12 million of income tax, treating undocumented outflows to or for M and N as non business expenses, the casino spending and low rent as special benefits, the W OÜ apartment structure and the K loan as fictitious arrangements to withdraw money, and the write off of the Y OÜ and C OÜ loans as taxable gifts.
X OÜ argued that dealings with M and N were part of a running mutual account so no final expense or benefit arose, that W OÜ received a real loan and the apartment was a profitable investment, that the Y OÜ loans were ordinary business loans to a failed nightclub and their write off reflected hopeless recovery rather than a gift, and that the loans from N and to K, as well as the rent level for the house, were genuine.
The Administrative Court and Circuit Court largely upheld the tax authority’s position, finding the W OÜ and K loans not genuine, accepting taxation of undocumented outflows and personal expenses, treating the reduced rent as a taxable benefit, and classifying the write off of the Y OÜ loans as a taxable gift, the latter partly by referring to a commercial pledge over Y OÜ’s assets.
Judgment of the Supreme Court
The Supreme Court confirmed that Q OÜ’s accounting blurred company and personal funds and that, given monthly assessment of income tax, the authority could tax unexplained withdrawals and personal spending as non business expenses or special benefits, and treat the W OÜ and K loans as fictitious. It upheld the view that the low rent conferred a taxable benefit and that alleged loans from N were not credibly proven, supporting use of the extended limitation period due to intentional concealment.
For the Y OÜ loans, the Supreme Court held that waiving a recoverable claim may be a taxable gift, but writing off a genuinely hopeless claim is not. It found a procedural breach because the Circuit Court had relied on the commercial pledge over Y OÜ’s assets without that issue being examined in the tax procedure or at first instance or argued by the parties, and this could have affected the finding that the loans were recoverable and thus a gift.
The Court therefore annulled the decisions and assessment only as they related to the Y OÜ loans and remitted that part for fresh fact finding, while in all other respects upholding the tax authority’s assessment and the earlier courts’ conclusions.
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