Taxation of Shareholders Emphasizing on the Tax Challenges between Company and Shareholder

Jannie Strøm Skjærbæk

Student thesis: Master executive thesis

Abstract

In the area of tax law, it is extremely important who the right cost carrier is. This is because of the different taxation of income and different deductions for costs for persons and companies. The first element is that corporate income is taxed a lot lower than the income of persons, in addition, persons do not have the same opportunities to deduct costs in their income as companies.
A shareholder and his company are independent legal entities and taxpayers and they are free to trade among themselves. In many smaller companies, the shareholder is the sole owner of the company, as well as he is employed by the company as a director. In their ordinary course of business and the ordinary (and legal) tax planning for company and shareholder there may be various transactions between them. What is special about these transactions are that the shareholder, based on his partnership with the company, may have incentives for the transactions not to take place on market terms but at special prices that are financially favorable for one or both parties.
He has an incentive to "hide" expenses in the company where he can receive a tax deduction, and the expense is not subject to the usual double taxation. In the meantime, he has an incentive to let the company buy property and allow the company to pay its current expenses, without paying tax.
The consequence of the above actions is that the tax authorities have the opportunity to make corrections, but challenges then come from the fact that far from all major shareholders have done these actions based on a deliberate goal of tax evasion. A correction may affect the ignorant shareholder, who was convinced that he acted based on market conditions and therefore was avoiding corrections.
It is a jungle for the shareholders to figure out what the rules and regulations are. They must always be careful about whether the tax authorities will interpret the situation differently. And in some situations, they have acted to the best of their ability and are convinced that they have followed the rules but are nevertheless caught in an interpretative case where the courts are now beginning to consider the disposition or whether the ownership of the asset itself in the interests of the company.
Of course there are shareholders who deliberately try to circumvent the rules and find new ways that are most profitable for tax purposes. But, in this jungle of rules shareholders who have tried to act according to the rules will also be caught. It is possible they end up not having the option of payment correction or conversion because there may be an unproven assumption that shareholders will always try to save or postpone taxes. In general, legal rules should be formed in a way that they are understandable to citizens, advisers and authorities, so that a given action provides a predictable picture of their tax consequences. This while being objective and can be used for an objective assessment of the individual situation.
In relation to legal regulations and practices regarding property, the thesis finds it difficult to see the specific guidelines in this area. Although there are gradually many judgments in this area, the doubt may arise that if the details of our situation is a little bit different what are then the tax consequences? The area must be considered to be in a gray zone as not all possible scenarios can be listed in a law. Therefore general guidelines should be drawn up for the assessment to be made, of what taxation shareholders, companies and advisers should expect in the given situation.

EducationsMaster i Skat, (Executive Master Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages49