Music production not deemed source of income despite fiscal profits

A taxpayer who produces electronic music comes into conflict with the Tax Authority regarding the deduction of losses from his music activities. The tax inspector maintains that these activities do not qualify as a source of income for income tax purposes. He issues final tax assessments, rejecting the losses from the music activities.

Source of Income
To qualify as a source of income, three conditions must be met:
1. participation in economic transactions
2. the intention to generate profit
3. the reasonable expectation of generating profit

The Tax Authority is in a favorable position in this regard. After all, the inspector can decide at a later stage. If profit has been made by then, the inspector won't make difficulties. If there are still losses, it must be assessed whether it can reasonably be expected that the activity will generate positive returns in the future.

Position of the Music Producer
The music producer maintains that his activities do indeed constitute a source of income. He points to his professional approach with logos, websites, and business cards. He also argues that the investments he made would serve no purpose for hobby use. For instance, he cannot use the lighting and sound equipment in his home due to the size of his apartment. Additionally, he points out that his results are progressing according to the business plan and show an upward trend. He argues that a two-year period is too short to assess whether there is a source of income in the creative sector.

Position of the Inspector
The inspector maintains that the activities do not constitute a source of income because no profit can reasonably be expected. He points to the negative results and argues that the later small profits only arise from the use of tax facilities such as arbitrary depreciation. With normal depreciation, losses would have been incurred in all years. He considers the business plan too optimistic. The actual revenue is much lower.

Court's Ruling
The court rules that there is no source of income. They base this on the low revenues and the total loss over the period 2015-2022. According to the court, the assessment must look at the business-economic result, without tax facilities. The business plan provides insufficient substantiation because it is based on general market trends without specific research into the intended niche market. The activities are therefore classified as income spending rather than income generation.

Tip
Ensure thorough substantiation of profit expectations, where possible with specific market research. When assessing whether there is a source of income, the Tax Authority critically examines the business-economic result, independent of tax facilities. Timely action is crucial. The Tax Authority has three years to issue a final assessment, extended by any granted postponement for filing the tax return.