Running a business requires vision, dedication, investments, and knowledge about business taxes and other issues in the Netherlands.
Business activities require monetary investments that may qualify as business expenses. These expenses are tax-deductible. However, other deductions also exist in order to lower taxable business income.
The following deductions most often applied to the income tax are:
- the general deduction for entrepreneurs;
- the starters deduction;
- the small business profit exemption;
- the investment tax credit
- the pension reserve deduction
- deduction for a fiscal partner working in the business
The above-mentioned may only be deducted if the entrepreneur works at least 1225 hours per annum for the business. Officially these hours will have to be registered and logged. The 1225 hour criterium also includes time spent working for clients, travelling, administrative activities, meetings, promotional activities etc. Note that the 1225-hour criterium is fixed and does not change irrespective of whether a business starts in January or September within a given year.
If the 1225 hours are met, the following deduction may be applied:
- The general entrepreneur tax deduction of € 7030;
- The starters deduction of €2123 which may be applied in the first three years of starting a business or;
- The small business profit exemption is 14% of profit (the percentage is applied on profits after the above-mentioned deductions have been deducted) and lowers the taxable profit.
- The investment tax credit is a credit for business investments. The credit depends on the total amount invested in a given tax year and applies as follows:
|Below € 2400||0%|
|€ 2401 – € 58.238||28%|
|€ 58.239 – € 107.848||€ 16.307|
|€ 107.849 – € 323.544||€ 16.307 less 7,65% of the amount above
The investment tax credit does not apply to cars and property (such as land, office buildings, and private housing). Other specific exemptions may apply but we won’t discuss them here.
In order to classify for the investment tax credit, the investment must be, at least, an asset used for several years in the business. The investment must be used in the production of the service or goods delivered. Investments below 450 euro do not qualify for the investment tax credit.
Additional tax credits may be used when investing in low energy or environmental equipment and mainly relate to energy-intensive and/or agricultural businesses.
- The pension reserve deduction (FOR) allows the entrepreneur to allocate up to 9,44% of profit with a maximum contribution of € 9.218 of profit for his or her pension. Limitations apply with regard to the total amount which may be allocated to the pension reserve depending on the total amount of capital in the business. The pension reserve may be invested tax-exempt into a life insurance policy under certain conditions.
- A deduction exists if a fiscal partner provides work for the business without receiving compensation or when compensation is less than 5000 euro per year. The deduction is a small percentage (1,25% – 4%) of taxable profit depending on the amount of hours worked in the business per year with a minimum of at least 525 hours worked by the fiscal partner per year.
Other credits exist but will not be discussed in this article. They relate to energy and environmental investments, innovation, liquidation, transferring the business to a third party, or transforming the business from an eenmanszaak to a BV.
Income Tax system
The Dutch income tax system uses three boxes of taxable income. Each box has its own tax rate and type of taxable income. Box 1 relates to income from housing, business, and employment, box 2 relates to income from a substantial interest and box 3 to income from savings and investments.
Each box has its own tax rate. Income in box 1 is taxed at progressive rates as follows:
|Bracket taxable income||% Tax|
|€ 0 – € 68,507||37,35%|
|Above € 68,507||49,50%|
Income in box 2 is taxed at a rate of 26,25% and relates to income from owning 5% or more of the shares in a Dutch limited liability company. Examples of income are dividend payments and income from capital gains.
Income in box 3 is taxed at a rate of 30% on a deemed rate of return between 1,8% and 5,33% depending on the combined net value of the assets in box 3. Examples of box 3 assets are bank accounts, savings accounts, stocks and bonds, and ownership of Dutch and foreign properties not used as a primary property.
Income classified as business income is taxed only once and will not be taxed as savings and investments if the amount accrued is deposited into a business bank account. The same applies to assets and liabilities. For example, if an asset is classified as a business asset such as business property, the business asset or liability will not be taxed as savings and investment.
In order to avoid excessive accumulation of capital/cash in a business bank account so as to avoid the cash being taxed as savings and investments, the tax authorities will only accept a classification of cash as a business asset if it is needed to finance the business or for future business-related investments. Excess cash not needed for business purposes will be taxed as savings and investments.
Business income relates to all income that may be classified as business income such as income from invoicing clients, capital gains from selling company assets or income from company assets such as interest income, rental income, dividend income from shareholdings, Intellectual property income, etc.
Business costs are tax-deductible although some exceptions may apply. Local and foreign business costs are tax-deductible in The Netherlands. Certain costs such as lunch/dinner and costs related to representation, seminars, and associated costs are only tax-deductible for 73,5% (income tax) or 80% deductible (corporate tax).
Investments above 450 euro must be depreciated over 5 years. Therefore, each year 1/5 of the invested amount must be reported as costs. Investments below 450 euro are treated as regular costs and may be deducted as costs.
Business or private costs?
Some assets may be used both for business and private purposes such as a computer, a mobile phone, or furniture. Assets which by design can only be used for private purposes may not be allocated as business assets. Assets such as machines that can only be used in a business must be classified as business assets.
If an asset has a dual-use purpose, the taxpayer may decide to either allocate the asset as a business asset or a private asset. These dual-use assets which can be used both privately and for business purposes allow the entrepreneur to make a decision if the asset should be classified as a company asset or private asset provided the 10% norm is satisfied. Dual-use assets may only be classified as such if they are used for at least 10% for business or private purposes (10% norm).
Many entrepreneurs start the operation of their business from a home office. Usually a separate room within the house or apartment or maybe even just the living room table. As a main rule costs for a home office such as rental costs (if the property is rented) and utility costs are not tax-deductible. Only if a home office provides access to a separate entrance and has separate toilet facilities is a deduction of rental and utility costs related to the home office deductible. In general, the same rules apply for a home office when the property is owned, however, there are additional criteria to take into account depending on the legal status of the property used as an office.
Businesses that are not VAT exempt must charge VAT for services rendered and/or goods delivered to clients. Unlike the income tax, VAT has less strict rules on the deduction of VAT related to home office costs. VAT on utility and rental costs may be deducted but only for a percentage that corresponds to the area used as a home office. VAT on items purchased for business purposes is fully tax-deductible in the VAT return. Items that are both used for private and business purposes may be pro-rated in accordance with business use.
If you have any questions, please contact ExpatTaxes for more information