Business people/directors and principal shareholders and divorce
When a business person or a director and principal shareholder is involved in a divorce, this may give rise to complicated issues. It is often difficult to determine what is really earned by the business person – in salaried employment. Also, it often difficult to determine what the financial capacity of a director or principal shareholder is and hence how much they can pay for child and spousal maintenance.
The need for child and spousal maintenance is determined on the basis of the family income. This is often more difficult to determine because net family income often fluctuates.
It is not only the annual accounts that provide an insight into the state if affairs in a company. To get a good insight into the assets at the disposal of the director and principal shareholder, it is important to draft a cash flow statement that is as complete as possible and includes an exact determination of the free cash flow and a future forecast.
In this way child maintenance can be determined according to the financial capacity of the business person without endangering the continuity of the company.
When the spouses were married in community of property, the division of the business may result in income tax being levied because the tax authorities consider the division as a partial cessation of the business activities. We will advise you on this, if necessary – and after consulting you – with the help of an expert tax consultant.
For the consequences of a director and principal shareholder’s pension accrued in the company, please see the section on pension rights.
In the case of a marriage settlement, other questions arise. Some of those questions are listed below.
Am I entitled to any hoarded profit?
A marriage settlement often includes a set-off clause. This set-off clause states that at the end of the year, that which both parties have got left of their net income, will be shared. The question then of course is what the income is if one of the spouses owns a business. Does income then mean the salary he or she has withdrawn from the company or the income he or she could have withdrawn?
It all depends on the definition of income. A marriage settlement usually includes a definition of income. If the marriage settlement does not include a definition of income, the law will prevail and the income the business person is deemed to have been able to withdraw from the company, will be used for calculations. Whatever a business person left in the company is called “hoarded profit”.
Am I entitled to shares or stocks in the company of my spouse?
First the list of property brought into the marriage for the purpose of the marriage settlement will have to be looked at. If the company shares are listed on the list of property brought into the marriage by one of the spouses, the other spouse is not entitled to the shares themselves, because they are considered to be private assets, but there may be an entitlement to the increase in share value during the marriage. When the shares were obtained during the marriage with money that is subject to a set-off, the shares are considered to be an investment of saved income. The value is then subject to a set-off.
Can I request an inspection of the annual report and accounts of my husband’s company?
To be able to quantify what may be owed in maintenance or alimony, the full annual report and accounts are required, also to see whether there is any so-called hoarded profit. For the proceedings, the court will need the annual reports and accounts concerning the three preceding years to be able to calculate the need for maintenance and financial capacity. Annual reports and accounts may also be required to have an expert calculate the value of the company or of the shares in the company. These accounts may therefore be requested.
How will a company be divided?
A company need not be divided if there is no community of property. If the company was – the shares in a company were – on the list of property brought into the marriage there need not be any division, but at the most the increase in share value arisen during the marriage needs to be set-off, that is, if there is a set-off clause
How are the shares in a limited company divided/set off?
Naturally, the shares in a limited company will remain with the spouse/director who continues the company. The share value may have to be shared or set off. This does not mean the shares are attached to the spouse who is an entrepreneur. If, within two years after the divorce, the shares are divided and provided to the spouse/entrepreneur, no material interest tax need be paid and the so-called transfer facility may be used. If the shares are provided after this two-year term, tax will have to be paid by the spouse transferring the shares. This concerns a levy of 25% of the value. Fiscal assistance in this process is essential.
We are experienced in guiding divorcing business people through the process and know the right fiscal consultants and valuators to bring your divorce to a favourable conclusion.
Any questions about the above or about another topic? Please call us at 070-3154000, or send a mail to: firstname.lastname@example.org.