When a flat-rate cannot be a flat-rate anymore

Expertise Rooted in Practice

Some tax discussions are not about taxes, but about trust. Trust that begins with a simple thought. If the legislator, or by extension the King in implementation of the law, introduces a flat-rate, the taxpayer may assume that he or she can use that flat-rate. Not just when that fixed amount generates revenue for the Treasury; also when it can bring a benefit to the taxpayer.

That premise appears to be under greater pressure than ever today, particularly regarding the tax treatment of real estate held by a company and made available to its manager or director.

In this context, the King has deliberately opted for a flat-rate approach. Article 18, §3, second paragraph of Royal Decree KB/WIB 92 stipulates how the benefit in kind is calculated when a housing is made available free of charge. The calculation is based on the cadastral income. The limitations to such a system are well known. The cadastral income is based on valuations that are sometimes decades old and does not always reflect the current rental value of a property. Nevertheless, the King has chosen to use precisely this flat-rate as a reference point.

A flat-rate has advantages and disadvantages. Sometimes it leads to a higher tax liability than an individual valuation. Sometimes to a lower one. But that is precisely the price of legal certainty. Anyone who enters a flat-rate figure accepts that the outcome will not always perfectly align with the economic reality.

In practice, however, we observe a clear trend under which the tax authorities consider the application of this flat-rate allowance structurally insufficient to justify the deductibility of costs and depreciation associated with the property in question.

There are cases in which a company manager is provided with housing free of charge as part of their remuneration package. In this instance this constitutes a benefit in kind. If the company manager performs actual services in exchange for this remuneration and the amount of the remuneration is substantiated in the minutes, then the so-called remuneration theory is correctly applied, and the deductibility of the depreciation on the residence should be beyond dispute.

This is not always the rule, however. In certain cases, the administration remains concerned about the limited magnitude of the benefit calculated on a flat-rate basis compared to the investment costs borne by the company. The conventional remuneration theory is then challenged, and depreciation on the building is rejected on the grounds that the remuneration is deemed insufficient by the tax authorities. In practice, however, it appears that the tax authorities are increasingly reluctant to accept this deductibility as the amount of the fixed benefit in kind charged drops in value.

There is a second development, just as remarkable. Some taxpayers – understand “managers” – no longer get housing free of charge. They rent the property from their company for a fee that aligns with the value derived from the same statutory flat-rate calculation. From an economic perspective, therefore, they are compensating the company for what the legislature evidently regards as a relevant benefit.

Huge conflicts are arising in this respect today. The tax authorities consider the rent paid to be too low and once again reject the depreciation charges on the grounds that the remuneration paid is not at market rates – even though the company is actually generating revenue. It is worth noting that, in practice, the tax authorities generally do not present an independent valuation report or any other objective valuation method demonstrating the lack of conformity with market conditions. The mere fact that the remuneration aligns with the statutory flat-rate is sufficient for an auditor to conclude that the rental payment made is not at arm’s length.

This leads to a remarkable result. Whether housing is provided free of charge or rented out, the tax authorities consider the deemed rental benefit – determined on a flat-rate basis – to be too low. This happens even though the taxpayer is using a valuation method provided for by Royal Decree and has the effect of shifting the discussion from taxation to legal certainty.

Of course, opinions may differ as to whether the current flat-rate valuation still reflects economic reality. One could even argue that reform is desirable. But as long as the flat-rate exists, the taxpayer must be able to trust that it is more than a theoretical exercise. A flat-rate amount imposed by the legislature, yet systematically viewed with suspicion by the tax authorities whenever it is applied, loses its raison d’être.

Perhaps that is the fundamental question underlying these cases. Not whether housing is worth more or less than the flat-rate suggests. but whether a citizen can still rely on the rules that the government itself has written.

For a flat-rate arrangement that is accepted only when it yields sufficient tax revenue is no longer a flat-rate arrangement. It is a presumption against the taxpayer.