Posted: 08 Apr. 2022 7 min. read

Current case law on the designation of recipients

Overview

In recently delivered decisions on the designation of recipients, the Administrative High Court dealt on the one hand with the effective request for information on the designation of recipients. On the other hand, the Administrative High Court dealt with due diligence obligations when entering into business relationships in the construction industry.

In general, the tax authority may require taxpayers to name the recipients of the expenses claimed. If this request is not met, the expenses are not deductible and a penalty surcharge of 25 % is imposed for corporations. This consequence occurs specifically if the information is refused or if it turns out at that the named persons are not the actual recipients. The request for information can also be made orally, but a file note must be drawn up.

Especially in the construction industry, the High Courts often dealt with the existing due diligence obligations before entering into business relations, as the construction industry is burdened with a certain mistrust. In addition to the application of general caution (eg inspection of the commercial register and the order register, VAT numbers, tax numbers, clearance certificates from the tax office and the health insurance fund; regular inspection of the employees present on the construction site, etc), the usual practices have to be taken into account.

Facts of the case 1 (Effective request as prerequisite for non-recognition of expenses)

A corporation in the construction industry was denied the deduction of expenses in the course of a tax audit. This reasoning was on the grounds that certain invoices from subcontractors were suspected to be issued for services not provided at all. This finding was argued, among other things, with fraud scenarios in the construction industry uncovered in the past: subcontractors issue invoices for services not provided, the invoice will be paid afterwards (usually in cash) and recognized as an expense. However, the payment flows back at the end of the day (minus a commission for the subcontractors). In the course of the tax audit, suspicious subcontractors were first identified on the basis of the recognized invoices. In a free assessment of evidence, shareholders, managing directors and accountants were interviewed, all of whom could not remember these subcontractors. The deduction of expenses was therefore refused because it could not be conclusively clarified whether the subcontractors were the service providers of the invoiced services and thus the recipients of the amounts deducted.

Decision of the Administrative High Court

The Administrative High Court (16 November 2021, Ra 2020/15/0019) held that the request to name the recipient is necessary in order to deny the deduction of the claimed expenses. The legal consequence can only occur if either the requested designation is refused, or it is determined that the named persons are not the actual recipients of the deducted amounts and no procedural rules have been violated by the authority. In addition, the request to name the recipient could be made orally.

The administrative file of the tax audit did not contain any requests for the designation of the recipients or any indication of the legal consequences. This was also not made up for in the proceedings before the Tax Appeals Court. Only verbally expressed doubts about the supposedly provided service and the payee are not sufficient to be understood as an invitation to name the recipient. Furthermore, the request to provide evidence shall not be regarded as an effective request to name the recipients. Even a finding by the authority that the subcontractors are not the recipients of the amounts deducted cannot replace the necessary request to name the recipient.

Facts of the case 2 (Due diligence when entering into business relationships in the construction industry)

In the course of a tax audit of a corporation in the construction industry, an effective request for the designation of recipients was made. There was a presumption that certain business partners (personnel service providers) were fictional companies. The deduction of expenses was subsequently denied because, in the opinion of the external audit, the request was not complied with. The Tax Appeals Court also noticed that the personnel service providers were not the true recipients and that the due diligence obligations applicable in the construction industry were not complied with.

Decision of the Administrative High Court

The Administrative High Court (3 December 2021, Ra 2019/13/0074) stated that due diligence obligations must be observed when entering business relationships. If business relationships are designed in such a way that it is not possible to name the recipients, it is at the expense of the requested taxpayer.

In the present case, the High Administrative Court ruled that the due diligence obligations were violated. For example, signatures on contracts did not correspond to the sample drawing in the corporate register. In addition, some of the contracts did not correspond to the actual circumstances, contradictory services were shown on invoices and the general absence of written offers and cost estimates were determined. Although, documents of the business partners were provided it is known, that these would usually be supplied by fictional companies to deceive the authorities. In the knowledge of the fictional companies, the actual recipients of the amounts had not been named. In addition, the company knew about the fictional companies and employed undeclared workers. Therefore, the refusal of the expenses deducted was justified.

Conclusion

Especially in the construction industry, the Administrative High Court is often entrusted with cases involving the designation of recipients. The authority's finding that subcontractors are not the actual service providers and consequently not the recipients of the amounts deducted does not justify a refusal to deduct expenses. In fact, it is absolutely necessary to require the taxpayer to designate the recipient and to record this request sufficiently.


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