Implementing private property investments using company assets is slowly becoming a national sport. While the approach seems tempting, it carries a lot of risk. And the tax authority, NAV, has this type of arrangement firmly in its sights.

holiday homes

Buying or building a holiday home or family house is a particularly expensive undertaking these days given the high cost of materials and runaway labour expenses. As a consequence, everyone tries to reign in their costs where they possibly can. For those who own private companies that have accumulated significant assets, the obvious answer would seem to lie in making these investments in the name of the company. In this way, VAT may be offsetable, and the assets do not need to be withdrawn from the company giving rise to a personal income tax liability either – so the urban legend goes. The reality, however, is far from being this rosy.

Why isn’t it good to keep a private property in the company?

One of the reasons for making property investments through a company is that the 27% VAT paid on the investment may be offset or reclaimed this way. However, this is only the case if the company continues to operate the property as a VATable activity after the investment. If at least partial business use cannot be clearly established, the basic condition for deducting VAT will not be there and the deduction of VAT will become unjustified. The situation is similar for corporate tax as well. If the company utilises the property in a way that the owner of the company lives in it, the investment cost does not serve the profit-making activity of the company and therefore the costs related to the investment cannot be deducted from the corporate tax base.

And there’s a trap as regards personal income tax (PIT) as well. If the property owned by the company is fully or partly used for private ends, the provision of the property is classed as a benefit in kind. And this, besides generating a PIT liability, also entails an obligation to pay social security contributions.

NAV is on the case

Despite the above risks, a lot of company managers live or spend holidays in company-owned properties. In practice, this was not a problem until the trend did not catch the eyes of the tax authorities. Recently, however, NAV inspections in this area have mushroomed. If tax inspectors notice that certain invoices received by the company contain items are not related to the activity of the company, they may start to look more closely at what these purchases were related to. In fact, in certain cases NAV may even carry out an onsite inspection to see whether the property is being or has been used for private purposes.

And the result of the tax audit can be very painful indeed. Besides determining the above tax liabilities, NAV may impose a 50% – and in some cases as much as a 200% – tax penalty and late-payment charge. And if the intention to evade tax is suspected, criminal proceedings could ensue, which is not a pleasant thing, even for someone who has not been naughty.

How can we do better?

There’s no perfect recipe for how to implement private property investments tax-effectively and with minimal risk at the same time. Whatever we do, some tax must be paid. There are, however, ways by which we can reduce the tax burden.

The salami tactic

There are several legal ways to have the property in the name of both the company and the individual at the same time. And all the more so in today’s Covid-ridden world, when it’s easy to justify and where there are many ways to prove that someone is using their weekend house as an office as well. Therefore, the division of the ownership of the property between private and corporate owners can legitimately reflect the way the property is actually used while providing tax benefits too. But there may also be a tax advantage if the company remains the owner but creates a usufruct right relating to the property for the benefit of the individual.

27 % / 5 %

Another way of saving on tax is if the business making the investment can deduct 27% VAT, while, subject to certain conditions, the individual can buy the apartment from the company at a 5% VAT rate. Though the tax effectiveness of such arrangements would usually be reduced by the extra stamp duty that needs to be paid, if the purchase is made under the family housing benefit scheme (“CSOK”), the purchase of the property is not subject to stamp duty. (Not to mention the fact if this is the case, the 5% VAT can also be reclaimed.)

Bridging and exotic solutions

Although it does not permanently resolve the tax problems, a temporary tax advantage may be gained if the company rents the property to the private individual: in such case, while the company can immediately deduct the input VAT of its investment costs, the private individual only needs to pay the VAT in instalments. In addition, the company has the option of claiming a full refund of the VAT even if it rents out only 90% of the apartment.

Trust arrangements, sometimes referred to as the “Swiss Army Knife of tax planning”, can also provide a range of tax planning options.