The Zeeland-West Brabant District Court recently ruled (for the first time) on the consequences for the pledgee if the pledgee executes the collateral without notifying the tax authorities (Zeeland-West Brabant District Court, December 15, 2016, ECLI:NL:RBZWB:2016:8015). Consequence: the pledgee had to pay the execution value of €80,900.00 to the tax authorities.
Suppose you invest in your own company or someone else's. Then, of course, you want assurance that your investment will be repaid at some point. Or that you can recover the company's goods if you are not repaid. You can accomplish this by placing a lien on the debtor's business property. If after some time the payment terms are not met, can you simply enforce ("execute") the lien?
I will leave out the bankruptcy scenario in this blog.
The basic premise is that the tax authorities may recover in priority from all of a tax debtor's ("the debtor") bottom property as long as that property is on its bottom property. The tax authorities even have priority over a silent lienholder or leasing company. Thus, the silent pledgee actually had to tolerate the tax authority collecting the tax claim first from the proceeds of the bottom property. Only then is it the silent pledgee's turn.
As of January 1, 2013, pledgees who want to take execution measures (or have them taken) must notify the tax authorities, so that the tax authorities themselves first have time (4 weeks) to seize the bottom items for their own claim. If the pledgee does not do so and executes a bottom item anyway, he runs the risk of the tax authorities imposing a hefty "fine" on him in the amount of the value of the item. The fine is imposed in the form of a tax retroactive assessment, and the tax authorities may then use all available resources to collect that assessment. Interest and costs are borne by the lienholder, and the value of the bottom case is also determined by the tax authorities themselves.
So risky not to inform the IRS, but it is also hugely annoying if the IRS throws a spanner in the works by seizing your own property when you have given proper notice of your intention to foreclose.
Now, as a lienholder, do you always have to report your intention to foreclose to the IRS? Yes, in principle you do, but there are some exceptions (conceivable).
Cases up to €10,000.00
The policy of the tax authorities is that the pledgee does not have to report the execution if the value of the ground assets to be executed was equal to or less than €10,000.00. What is decisive is the moment the pledgee and the debtor entered into an agreement (This follows from: Article 22bis paragraph 17 Iw1990 and Article 1cj of the Implementation Regulation Invorderingswet 1990). That moment is therefore not the moment when the bottom case is executed, but lies in the past.
Therefore, it is wise to have an appraisal report prepared for the goods on which the lien is to be placed at the same time as you invest the money in the business. This has three advantages: first, you will know whether the value of the goods will cover the loan, second, you will know whether you have to report the foreclosure if the debtor does not repay you, and third, the tax authorities will find it more difficult to sue you later if they believe that the goods were worth more than €10,000.00 at the time the agreement was made.
The creditor may also be able to choose to only execute goods up to a maximum amount of €10,000.00. Perhaps he can avoid the notification requirement this way. I explain this and note for the record that the tax authorities and case law have not (yet) ruled on this.
Suppose you invested € 25,000.00 and obtain a lien on a number of machines worth € 30,000.00. Then you can also execute machines that together are worth (less than) €10,000.00 without having to notify the tax authorities. This is possible, for example, because your debtor is less than €10,000.00 in arrears in his interest and repayment obligations. After the foreclosure, the debt is then €0.00 again and the debtor is no longer in arrears. If arrears arise again after a while, the pledgee may be able to execute part of it again without having to report it. In the event that the debt is larger, I believe that a second foreclosure of under €10,000.00 constitutes continued foreclosure, which may have required the pledgee to report. So being tight on collection and executing small portions all the time can pay off.
Business under revision
According to the Recovery Act, the pledgee may not take or cause to be taken any action that would cause certain items on the ground to cease to qualify as items on the ground. Thus, the pledgee may not instruct the debtor or a third party to remove the bottom items.
But what if the machines happen to be at a garage or repair shop? The machines are no longer on the debtor's property and are therefore no longer property. A pledgee then has no duty of notification. So in that case it seems possible to also execute machines worth more than €10,000.00, without the tax authorities being able to impose a penalty for violating the duty to report.
Waiting pays off....
Finally, I note that it is up to the tax authorities to find out whether a pledgee has complied with its reporting obligation. The tax authorities may only exercise their powers against the pledgee within one year after the land assets have been executed, unless the pledgee still notifies the tax authorities. After the expiration of that year, the tax authorities can therefore also no longer impose a penalty on the pledgee.
Conclusion
The pledgee who wants to execute bottom items worth more than €10,000.00 must report this to the tax authorities. If he fails to do so, the tax authorities can impose a fine within one year equal to the value of the ground assets. It is therefore wise to have a valuation report drawn up when establishing the pledge, so that the pledgee knows whether he has a reporting obligation. With small arrears (less than €10,000.00) already executing, the pledgee may not have to report. The same applies to items that are no longer on the bottom.
