THE BOTTOM LINE
- Profitability Isn’t Optional: Businesses that consistently generate losses without a concrete, substantiated plan for future profitability risk having the Dutch tax authorities disallow those losses as tax deductions.
- The Burden of Proof is on You: If challenged, the onus is on the business owner to prove there is an “objective expectation of profit.” A strong personal belief in an innovative idea is not enough to satisfy the courts.
- Documentation is Crucial: A business plan with vague projections is insufficient. Courts require evidence of concrete steps, realistic financial forecasts, and a credible strategy to turn losses into profits to justify ongoing deductions.
THE DETAILS
In a recent decision, The Hague Court of Appeal provided a stark reminder for entrepreneurs and established companies funding new ventures: tax deductibility for losses is not guaranteed. The case involved a former dentist who started an innovative business using horses to treat patients with dental anxiety. While the Tax Authority initially allowed the losses to be deducted, it reversed its position for the 2020 tax year after the company continued to post significant losses (€42,774) against minimal revenue (€589), arguing the venture no longer qualified as a genuine “source of income.”
The core of the legal dispute centered on a key principle in Dutch tax law: for an activity to be considered a business (a “source of income”), there must be an “objective expectation of profit.” While the court did not question the entrepreneur’s subjective intent to make a profit, it examined whether that goal was realistically achievable from an objective, commercial standpoint. Crucially, the court ruled that the burden of proof was on the taxpayer to demonstrate this objective expectation, as she was the one seeking the tax benefit of deducting the losses.
The Court of Appeal ultimately sided with the Tax Authority, finding that the taxpayer failed to meet this burden. Despite the innovative nature of the business and arguments related to the COVID-19 pandemic, the court pointed to a multi-year history of substantial losses. The taxpayer’s business plans and future profit scenarios were deemed too speculative and lacked concrete, actionable steps for client acquisition and revenue generation. The ruling underscores that after a reasonable start-up period, a venture that remains structurally loss-making without a credible, evidence-backed path to profitability may be reclassified by tax authorities as a non-deductible activity, akin to an expensive hobby.
SOURCE
Source: Gerechtshof Den Haag (The Hague Court of Appeal)
