When you are getting divorced, you may have to pay spousal support to your ex-partner. In first instance, it is important that the person asking for spousal support is unable to provide for himself/herself. This is also called neediness.
Subsequently, the marital need must first be established. This means determining what both parties need financially after the ending of their relationship to enjoy the same degree of prosperity as during the relationship.
If it is established that the person entitled to spousal support is in need of financial support because he/she is unable to meet the marital need, the financial capacity of the person obliged to pay spousal support will have to be determined.
This blog will specifically deal with the financial capacity of the entrepreneur. Both the director/major shareholder and the entrepreneur with a one-man business will be discussed.
Financial capacity of the entrepreneur with a one-man business
If the obligated party has a one-man business, the calculation of the financial capacity will be based on the company’s profits. Practice shows that in legal procedures generally the average company profit of the past three years is taken as a starting point. The profit made is then derived from the annual accounts, income tax returns and income tax assessments.
Since the determination of the financial capacity in the above-mentioned manner takes place on the basis of data from the past, a realistic picture of the profit to be gained from the business is not always given. In view of this, there are calls in legal literature for the continuity of the enterprise to be taken into account when determining an entrepreneur’s financial capacity, based on profit forecasts and cash flow statements. A cash flow statement shows how much on balance negative or positive each calendar year has flowed out of or into the cash. Based on this, it can be deduced what can reasonably be withdrawn from the company in the future. This amount then forms the profit from business which is taken into account in the alimony calculation.
Support capacity of the director and major shareholder
As director and major shareholder (in Dutch: DGA), you receive salary from the limited liability company. In practice, it happens regularly that the person entitled to maintenance takes the position that the person obliged to pay maintenance can pay himself a higher income than he/she does at that moment. In that case, it is up to the entrepreneur subject to maintenance to substantiate with underlying documents that no more salary can be paid than is currently the case.
Just as in the case of the entrepreneur with a one-man business, the director and major shareholder should also seek to connect as much as possible to profit forecasts and cash flow forecasts and not just the figures from the past.
In 2018 (dated 2 November 2018, ECLI:NL:HR:2018:2045), the Supreme Court reaffirmed the previously initiated line in case law regarding this issue. When determining the financial capacity of the alimony-paying director and major shareholder, not only the income that the alimony-paying shareholder actually receives should be taken into account, but also the income that he or she can receive. Therefore, it is not only about the salary the entrepreneur receives monthly, but also about the profits made in the private limited company.
Are you an entrepreneur with a one-man business or director and major shareholder and will you soon have to pay spousal support, or do you wonder whether the spousal support you are paying is still accurate? Please contact one of our lawyers. We will be happy to help and assist you.