Through our k-startup initiative, we offer customers a quick health check that highlights commercial law, tax law, and social insurances matters. For this, we have also collected some case studies. Case study 2/4 focuses on the topic of tax law.
In this case, a start-up company that provides IT services has also provided services to a company in the construction industry. The shares of the IT start-up company are 100% owned by Mike. The company in the construction industry (the customer) is fully owned by Mike’s sister. Due to the family relationship, the service was provided by the start-up company at a special price. This special price is significantly below the usual price for third-party customers.
The tax office that audited the IT start-up company determined that the services provided to the company of Mike’s sister are obviously not a third-party market price, i.e. this special price would never have been offered to an independent third party. Thanks to the difference between the price invoiced and the market price, there is a so-called benefit in kind to Mike, and the following tax consequences could arise in the worst case:
- Mike’s IT start-up company’s corporation tax calculation
- Withholding taxes of 35 % on the benefit in kind (a concealed profit distribution)
- Mike’s income tax
- Gift tax charge for Mike’s sister for the benefit in kind that her company has received in the construction industry as a concealed investment (in the form of the favourable price invoiced between the two companies).
Our way to resolve this: Invoices for services must always reflect the third-party price. In the case of services to related parties, the third-party price must be properly documented (contracts, invoices, calculations, etc.) in order to be able to defend it in the event of a challenge by the tax authorities.
Are you facing a similar issue, or do you have another situation where you need help? We are looking forward to your inquiry. More case studies can be found at the Quick-Health-Check download on k-startup.ch.