Providing a mortgage from the holding company to the DGA

Insights

November 12, 2019

Providing a mortgage from the holding company to the DGA

What should you do with capital savings as a BV (private limited company)? Interest on savings is minimal, investing in ideas from friends can be risky and it might not be the right time to invest. So why not use the money for a personal mortgage? This way, you pay interest to your own BV instead of a bank and, since you’re also the provider, you know the customer!

When a business has built up capital, it’s wise for the DGA (director and major shareholder) to think of ways this capital can be optimally used. Some examples worth considering are:

Providing a mortgage as a business.
Investing in other companies or projects with the holding company.
Taking out annuity policies.

In this blog, we’ll discuss the option to let the BV finance your personal mortgage. Suppose you’re looking to buy a house using capital from your holding. In that case, you have two options to finance the house:

Paying out dividends to you as a private person.
Use the holding company to provide a mortgage to yourself.

The disadvantage of the first option is that you pay 25% tax on dividends (this will soon even be increased to 26.25%). Because you pay tax on dividends, only 75 cents of every euro is left to invest in the purchase of your house.

Using the holding company to provide a mortgage to yourself

When you take out a loan from your own holding company, you can use the full amount of the loan. Of course you can also take out a mortgage from your BV to refinance your existing mortgage.

It’s important to note that a mortgage loan you take out from your holding company is a real loan. It must be repaid and you also pay business interest. Pretty much the same as a mortgage you take out at a bank.

The interest you pay leads to a tax advantage that comes from borrowing money from the holding company. You can deduct the mortgage interest you pay to your own holding company (up to 49%) from your income tax. On the other hand however, the holding company pays corporate income tax (19% or 25%) on the income coming from the interest.

You can see that the deduction of the mortgage interest in the income tax is higher than the rate at which it’s taxed in the corporate income tax. This is very beneficial. As a result, it’s more profitable to set the interest rate as high as possible. Incidentally, the law imposes restrictions on this. The interest you and your BV agree on must be determined and registered professionally.

The height of the corporate interest is determined on a case-by-case basis. Just as with the assessment of the business loan, things like the term, amortization, securities, creditor rights, etcetera, are taken into account for the assessment of the corporate interest.

Low interest? That’s profit distribution in disguise.

It might seem tempting to set the interest rate as low as possible, because you’ll pay less interest. However, this is not necessarily beneficial. As mentioned before, from a tax point of view it’s more interesting to set the interest at a slightly higher rate. That’s because you can deduct the interest at a higher rate than it’s taxed. Even more important is that if the interest rate is too low, the Dutch Tax and Customs Administration might state that it’s not a loan but a profit distribution in disguise. In that case the tax authorities will say: ‘You and your company might have a loan agreement, but with an interest this low it’s practically a dividend payout.’.

Documentation is key

When this situation occurs, the amount of the loan is treated as dividend and you then pay 25% tax on it. This can lead to major problems if you used a substantial part of the assets of the BV for your house. You definitely want to avoid this! Therefore, always make sure that you properly document why a certain interest rate has been chosen.

As a shareholder who works for the BV you actually have two roles in the organisation: you’re a shareholder as well as an employee. This makes it important to properly record in which role you’re taking out a loan with the BV, as an employee or as a shareholder? This is necessary because there are additional requirements for taking out a loan as an employee. Different rax rules apply as opposed to when you take out a loan as a shareholder of the BV. It's best to explicitly state in a shareholder resolution that you take out the loan as a shareholder.