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Business taxation in the Netherlands

Categories: Finance,Tax

As an expat, you might want to start your own business in The Netherlands. Starting a business is an adventure you do not want to miss. Setting up a business in The Netherlands starts with choices regarding the type of business entity you may want to use for starting your business.

Before starting a business, you should be aware of the tax and legal aspects of business entities used by entrepreneurs. The tax and legal implications of each entity will be discussed later.

Business taxation in the Netherlands-featured

The following business entities are commonly used for starting a business:

  • Eenmanszaak (ZZP-business or sole proprietorship)
  • Maatschap (partnership)
  • Vennootschap onder Firma (business partnership related to certain types of business)
  • Besloten Vennootschap (BV) (Limited Liability Company)

All entities must be set up by registering at the Chamber of Commerce. A limited liability company must be incorporated using a notary and must be registered at the Chamber of Commerce as well.

The following tax and legal implications apply for each discussed entity. Please note that the Dutch tax year runs from 1 January until 31 December of each year.

Eenmanszaak

  • Not a separate legal entity therefore, all legal obligations and liabilities are attributed to the owner. The owner is personally liable for all legal obligations and liabilities
  • An eenmanszaak cannot own assets itself as it is not a separate legal entity however, assets may be attributed to the business if they are used in the business. Attributed business assets and liabilities are reported in the financial statements
  • Must be set up by registering at the Dutch Chamber of Commerce (no notary needed)
  • Is usually set up by sole individuals wanting to start a business
  • Is also known informally by expats as a ZZP-business (legally the definition does not exist)
  • Business profits (revenues minus costs) are taxed at progressive income tax rates up to 51,75%
  • Business owners are entitled to a general deduction of EUR 7280 and a starters deduction of EUR 2123 (for the first three years) provided the business owner works at least 1225 hours per year in the business. The deductions lower the taxable business profit
  • Apart from the deductions, business owners are entitled to an additional deduction of 14% of taxable profits (the percentage is applied on profits after the above-mentioned deductions have been deducted)

Partnership

  • A partnership is not a separate legal entity, therefore, all legal obligations and liabilities are attributed to the partners in relation to their share in the partnership
  • All partners are personally liable for legal obligations and liabilities, however, the partners are only liable in relation to their share in the partnership
  • A contract must be concluded between the partners
  • The profits (revenues minus costs) are taxed at progressive income tax rates up to 51,75% whereby the profits are first split in accordance with the share of the individual partners before being taxed at an individual level
  • Each partner is entitled to a general deduction of EUR 7280 and a starters deduction of EUR 2123 (for the first three years) provided the business owner works at least 1225 hours per annum in the business. The deductions lower the taxable business profit
  • Apart from the deductions, business owners are entitled to an additional deduction of 14% of taxable profits (the percentage is applied on profits after above-mentioned deductions have been deducted)

Vennootschap onder Firma (Vof)

  • A Vof is not a separate legal entity, therefore, all legal obligations and liabilities are attributed to the partners
  • Unlike the partnership discussed above (maatschap) all partners are personally liable for all legal obligations and liabilities in the Vof
  • A contract must be concluded between the partners
  • Profits (revenues minus costs) are taxed at progressive income tax rates up to 51,75% whereby the profits are split in accordance with the share of the individual partners before being taxed at an individual level
  • Each partner is entitled to a general deduction of EUR 7280 and a starters deduction of EUR 2123 (for the first three years) provided the business owner works at least 1225 hours per annum in the business. The deductions lower the taxable business profit
  • Apart from the deductions, business owners are entitled to an additional deduction of 14% of taxable profits (the percentage is applied on profits after above-mentioned deductions have been deducted)

Besloten Vennootschap (BV)

  • A Dutch BV is a separate legal entity similar to a UK LLC, German GmbH or US Corporation. Due to its legal personality, third parties may conclude contracts with the BV. The BV is able to own assets in its own name and has limited liability indicating that the BV as a separate legal entity is liable for all legal obligations and not the shareholder (exceptions exist in case of fraud or abuse by the shareholder).
  • Upon incorporation, the capital contribution must be at least Eur 1 cent. However, we always suggest contributing at least a few thousand Euros. When applying for a residence permit under the Dutch – American Friendship treaty, we suggest contributing at least Eur 6000 or a higher amount as to ensure that the IND capital requirements of Eur 4500 are easily satisfied and taking into account business expenses such as notary costs.
  • A Dutch BV must be incorporated by a notary
  • As the BV is a separate legal entity, profits are taxed with corporation tax at a rate of 19%. Profits distributed to a shareholder are in principle taxed at a rate of 15% dividend taxes which may be credited in the income tax. In addition, profit distributions to an individual as a shareholder are taxed at a rate of 25% in the income tax. As the withholding tax may be credited, only the 19% corporate tax and 25% income tax are borne by the taxpayer
  • A BV is obliged to pay a salary to its shareholder provided the shareholder holds at least 5% of the shares in the BV. The salary amount has to be set according to guidelines set by the Dutch tax authorities. The 30% ruling may be applied on the salary
  • Unlike the other discussed entities, the general deduction and starters deduction is not available for a BV

Eenmanszaak or BV

Due to the difference in tax rates between an eenmanszaak and a BV, choosing the correct entity depends on facts and circumstances. In general starters with low profits should use the eenmanszaak. If profits increase above 65.000 euro’s it would be wise to investigate whether a BV may be an option. This depends on the business risks, the height of the mandatory salary and future profit expectations. ExpatTaxes can help you determine the correct entity or if you already own an eenmanszaak, whether or not it should be converted into a BV at current rates of revenue and profit.

Conversion is useful when the eenmanszaak contains property or other assets with capital gains or goodwill. When conversion occurs, the taxes on capital gains and goodwill is deferred and will not have to be paid until the BV is sold or liquidated. Without conversion, an eenmanszaak will have to pay taxes on capital gains and goodwill if it is closed down. ExpatTaxes can help you determine if conversion is the best option from a tax perspective or if it is better to use restart the business in a BV and close down the eenmanszaak.

Business taxation in the Netherlands-post1

Doing business using a foreign entity in The Netherlands

You may use a foreign entity when starting a business in The Netherlands. The foreign entity must be registered at the Dutch Chamber of Commerce. Foreign entities are often used by expats when the expat already owns a business and immigrates to The Netherlands. When immigrating to The Netherlands, the business usually immigrates to The Netherlands as well provided the business is classified as a transparent entity for Dutch tax purposes.

A different situation applies to foreign limited liability companies due to the fact that a legal entity usually remains a resident in the state of incorporation unless its place of effective management is transferred to The Netherlands. Increasingly (depending on the tax treaty), treaties stipulate that the tax authorities of the two countries concerned will jointly determine residency by negotiation. ExpatTaxes can help determine the residency of your business and can startup the negotiation process.

Business taxation in the Netherlands-post2

Holding structure

If you own a limited liability company or intend to set up a limited liability company a holding structure could be an option. A holding structure includes at least two BV`s (a parent (holding) BV and a subsidiary BV. The subsidiary BV contains the actual business.

The advantages of a holding structure are:

  • Profits may be distributed tax-free (no withholding taxes) to the Holding company
  • Distributed profits from subsidiaries which have been taxed at the subsidiary level are exempted at holding level thereby avoiding double taxation
  • Capital gains from selling shares of a subsidiary are tax exempted
  • Profit distributions from (EU) subsidiaries to the Dutch Holding are tax-exempt and EU Member states (in general) are not allowed to tax profit distributions from a subsidiary resident in an EU member state
  • Risk management: if a subsidiary goes bankrupt it does not affect other subsidiaries or the main holding company
  • Intellectual property rights and pension capital may be accumulated in the Holding company keeping the assets safe from business operations in the subsidiary
  • The Holding may be used as a private bank since – apart from shares of the subsidiary – its assets usually consists of accumulated distributed cash from subsidiary profits

Cash in the Holding may be used to finance the purchase of properties (held directly or through a legal entity), to set up other business ventures or to finance assets for the shareholder using loans. Please note that the authorities look critically at loans to shareholders as the loan might be classified as a profit distribution (and taxed!) if not properly structured.

ExpatsTaxes can help you with international tax and legal services. Please contact us if you have any questions related to (international tax and legal issues). We work with local accountants on international tax issues as well as additional consultant.