Corporate money for private purposes: examples and most common mistakes

In the Slovak business reality it is still a relatively widespread practice to use corporate funds for private purposes. In the most explicit cases, even the company’s cash register is literally confused with the wallet of its owner/statutor, who drives the company car on holidays and for the children, for which he/she has claimed a full VAT deduction.

“Paying for holidays with a company card” – what about the law and taxes? [TRAINING]

Especially smaller entrepreneurs doing business, for example through their LLCs, forget that the business company (and therefore the LLC) is corporately, accountingly and tax strictly separate from its owner. If this were not the case, a shareholder of an LLC, for example, would not be able to enjoy the benefits of relatively absolute limited liability for the obligations of his corporation. It would be easy to run a business with limited liability of a partner and at the same time use the company assets for private purposes.

With the increasing social and economic situation in Slovakia and the rate of information development in public administration, the maturity of the Slovak business sector and the possibilities of the state to fight more effectively against these legal and tax ills will probably increase as well.

In the first instance, this seems like bad news for a businessman who does not respect these basic rules. However, the current legislative as well as its executive position in Slovakia can be, upon deeper reflection, much more uncomfortable.

A more chaotic business environment is associated with a higher degree of volatility in the predictability of decision-making by public authorities. For example, the Kiska and KTAG case showed how unpredictable the practice of tax and law enforcement authorities can be. The case concerned the claiming of expenses for the alleged private use of Andrej Kiska as tax expenses of the company.

However, if clearer boundaries to these practices were introduced in Slovakia and there was a relevant practice, the taxpayer would be able to estimate in advance what the nature of the sanction for his tax offence would be (i.e., for example, a fine or imprisonment).

Corporate vs. private money

SZCO vs. one-person s.r.o. vs. s.r.o.

In addition to very generous flat-rate expenses (60%), less administration and a relatively low tax burden, small entrepreneurs often choose a self-employed business ( e.g.: a sole proprietorship) due to its practical flexibility. With a self-employed person (also a sole trader), the entrepreneur does not have to worry about when and how to withdraw money from the business in order to use it for private purposes.

He will simply use them for private purposes.

So-called one-person LLCs are an alternative to the sole proprietorship. Entrepreneurs choose them mainly due to:

• limited liability (although there are a number of exceptions, as discussed in the video “Paying for holidays with a company card” – what about the law and taxes?),
• optional obligation to pay social contributions (if the entrepreneur does not pay himself a salary/statutory remuneration – more in Can I have zero or minimum wage in my own company? or Is it worth paying social contributions? ),
• and a 15% income tax rate.

On the other hand, among the disadvantages we include, besides the risks associated with not paying market wages/statutory remuneration, using company property for private purposes, the practical peripeties associated with the aforementioned legal and tax separation of the company from its owner.

This is because if the owner wants to legally use the profit for private purposes, he must pay himself dividends (there are other options, but dividends are the basic, legally presumed alternative), which are subject to withholding tax.

In larger companies, accounting and economic transparency is more present. Although the level of taxpayer aggressiveness discussed is lower by default, even larger companies cannot avoid technical errors. These include, for example, situations where corporate assets are used with full VAT deduction for employees’ private purposes, giving away shares in the company to employees without taxing and “justifying” this income, various non-cash benefits, and so on.

Payments from a corporate vs private account

In practice, it is not rare for an entrepreneur to use the company account to pay for a dentist, cinema tickets or a holiday in Thailand. In addition to the obvious tax implications, which we describe in part below or more fully in the video (“Paying for a holiday with a company card” – what’s the law and tax implications?), these transactions also have significant legal connotations.

In extra-legal terminology, it is a tunnelling of company assets for which not only the statutory body but also the recipient(s) of these benefits are liable. And this may have criminal consequences in connection with other, non-tax offences (for example, defamation of a creditor).

Common examples and mistakes when using company money for private purposes

I recently wrote an article about the “deductibility” of the cost of acquiring an expensive watch. I was also inspired by the accounting practices of corporations, where its owners/statutors not infrequently demonstrate their de facto flexibility. Similarly, we could look at suits or more expensive cars. Given the current appetite and fearlessness of entrepreneurs, the tax benefits of including costs in tax expenditures, as well as for VAT purposes, appear to be driving relatively significantly the demand in the economy for more luxurious goods.

Company car and petrol for private use

In business practice, such more luxurious goods include expensive cars. The VAT deduction, together with the possibility of gradually applying the purchase price of the car to tax expenses, is perhaps a stronger motivator to buy a car for the company than a well-targeted advertisement.

Generally speaking, if a car is also used for private purposes, whether by the owner of the company, a statutory officer or an employee, this needs to be taken into account not only from a tax point of view but also from a legal point of view. If such property is used by the owner of the company without adequate consideration (rent), this is contrary to the Commercial Code and both the statutory body and the owner in question, each from a different legal position, are ‘liable’ with all their assets.

From a tax point of view, it is necessary to distinguish in which regime the car in question is located. The tax laws allow the taxpayer to take into account the private use of the car. Even in the case of income tax and, to some extent, VAT, the legislator has been so generous as to allow the taxpayer to include 80% of the cost of the car (i.e. depreciation, repairs and other related costs) and the petrol in the tax expenditure without the taxpayer having to prove the extent of the private use of the car. This is a significant aid and used in practice in part.

But it’s not that straightforward. The problem may be the ambiguous classification of non-cash income of either an employee or a company’s statutory officer, which arises from the use of company property for private purposes. VAT is also an issue, as the VAT Act does not provide for a flat deduction of 80% for the acquisition of a car partly for private purposes, as is the case under the Income Tax Act. Thus, what appears to be generous in terms of income tax may be at cross-checking at VAT cross-checks.

As with other types of company expenses, it is important to remember the criminal dimension of any grossly aggressive tax optimisation. I stress to clients, and in many of my lectures and articles, that the threshold for crossing from the “penalty” to the criminal liability zone is very unclear in Slovakia (and not only in Slovakia). This leaves a wide margin for law enforcement authorities to exercise their own, even more arbitrary, discretion. For more on this topic, see the video (“Paying for a holiday with a company card” – what about the law and taxes?).

Holidays from company money

Taxpayers like to refer to holidays as business trips for the purposes of reducing their tax liability. I dealt with this topic relatively intensively, also from practical experience of tax audits, in my lecture : Does the “Danko 15% tax” bring new opportunities for tax optimization?

For example, taxpayers classify trips to Southeast Asia as business trips in order to gain new customers or even as a necessity for the purpose of gaining new work inspiration. There is not quite space in this article to discuss this issue, but in defending these positions it is important to keep in mind the basic procedural relationship between the taxing authority and the taxpayer. The burden of proof lies primarily on the taxpayer.

Property from company money

The investment demand for real estate has been shaken by the amendment to the VAT Act of 2018, under which the rental of flats, apartments and family houses is considered exempt from VAT. This means that the standard business model of buying a property with VAT deduction for rental purposes can no longer be practiced in the form and to the extent it was until the end of 2018.

Nevertheless, interest in “tax-advantaged” purchases of investment properties is still very high.

Learn more about the tax and levy aspects of buying and renting property.

In addition to the VAT deduction, various other scenarios are standard for real estate tax modelling in practice. These include, for example, renting an office in a flat or repairs for business purposes. These are very common situations in practice. More about this in the video(More about the tax and levy aspects of buying and renting real estate) or in a personal consultation.

Restaurants and alcohol from company money

The Income Tax Act allows, to a very limited extent, for the inclusion of representation expenses as a tax expense. Similarly for VAT. If representation costs appear in the company’s accounts to a greater extent and without relevant justification, the tax authorities may treat such costs as income of the company’s statutory body or owner. In such a case, differences in the classification of such income then arise in practice. The tax authorities may treat them as dividends, employment income or other income. The exact classification depends on the circumstances of the case as well as the preference of the tax authorities. From a tax burden perspective, there is a significant difference whether the tax authority reclassifies the income as dividends rather than as employment income or other income.

Business phone for private use

A very common case in practice is the use of small tangible assets for private purposes. Probably the most prominent example in practice is a company mobile phone for private purposes. Here, much the same rules apply as for cars. This can be particularly problematic from a VAT point of view.

Tax optimisation

For more information on tax optimisation options in general, please see the section “Tax optimisation” or visit our law firm Highgate Group’s website. Manoeuvring and being able to justify costs as tax expenses or supplies for which a VAT deduction can be claimed is also part of tax optimisation. Tax optimization is all the more complex when we represent the client in potential tax audits.

Example from practice

Consider a case from practice: the cost of sponsoring a sports club or a social event. The practice of the tax authorities today is that they generally do not consider such sponsorship to be a relevant activity for subsuming the expense in question as a tax expense and an expense for which VAT can be deducted.

However, if you put a different practical lens on the cost in question, the tax authority may already look at the cost in question as being related to the generation of income and the carrying out of taxable transactions at the output. In order to identify this boundary, it is necessary to be familiar with the relevant Slovak, as well as Czech case law, which has provided quite meaningful insights in this respect.

In addition to sponsorship, there are many other cases in economic practice where the line between ‘recognisability’ and ‘non-recognisability’ is not clearly discernible in practice. For example, this may be the cost of purchasing a property with a VAT deduction, the taxation of cryptocurrencies or the aforementioned purchase of an expensive watch.

Tax optimization is mainly about knowing the law and the boundaries within which the taxpayer can move. We will be happy to help you with that.

In conclusion

The topic of the use of company property for private purposes is thus very complex and the potential penalties for tax and legal offences may be diverse. It is not just a question of whether you can “put a microwave in expenses because you heat your lunch in it during home office”. Also, given the aforementioned unpredictability of the decision makers, I recommend, at least for larger transactions, the opinion of an attorney. In good faith, it is precisely such an opinion that protects against criminal liability.