Many employees dream of becoming entrepreneurs. However, when transitioning to entrepreneurship, it’s crucial to choose the right business structure to optimize your tax situation. In the Netherlands, you have several options, especially if you’re currently benefiting from the 30% tax ruling.
Choosing the right business structure in the Netherlands
As you prepare to start your business in the Netherlands, you need to decide which structure is the most tax-efficient. The two main options available are:
- Sole proprietorship (Eenmanszaak): A sole proprietorship links directly to the individual and involves simpler reporting through personal tax returns.
- Limited liability company (B.V.): This structure offers more flexibility and may allow you to maintain the 30% tax ruling benefit, which could reduce your overall tax burden.
Sole proprietorship in the Netherlands
A sole proprietorship (known as eenmanszaak) is a straightforward structure where you, as the owner, are responsible for the company’s obligations. The income generated is taxed under Box 1, and it’s included in your personal tax return. Sole proprietors can benefit from various tax deductions, including the small business discount (14% of the gross profit). This reduces the effective tax rate from 51.95% to around 44.67%.
Sole proprietors are also eligible for deductions like:
- Self-employed tax deduction of up to €9,403.
- Mortgage interest deductions, if applicable.
- Business-related expenses like travel, administration, and marketing.
However, the full profit is taxed in the same year, potentially leading to a higher tax burden compared to operating as a B.V. Incorporating a sole proprietorship requires only a registration at the Chamber of Commerce.
The B.V. structure and the 30% tax ruling
The B.V. (Besloten Vennootschap) is an incorporated entity that offers the advantage of limited liability. This structure allows you to apply for the 30% tax ruling, which significantly reduces your taxable income. The 30% ruling allows you to receive 30% of your salary tax-free, making your effective tax rate lower than the regular tax rates.
The B.V. offers flexibility in terms of salary and dividend distribution. As a shareholder of a B.V. with 5% or more shares, you are required to pay yourself a salary, which must be at least €45,000 per year. If your company’s income is insufficient, an exception may be applied.
Tax benefits of the 30% tax ruling
The 30% tax ruling provides substantial benefits for employees transitioning to entrepreneurship. If you opt for the B.V. structure, you can retain the tax-free 30% of your salary, effectively lowering your tax rate to around 36.36%. Moreover, if your business is profitable, the B.V. structure offers opportunities to distribute dividends, though these come with a 15% withholding tax.
In addition to salary benefits, the 30% ruling can provide exemptions for:
- Box 2 dividends from foreign companies.
- Savings and investments in Box 3, excluding real estate in the Netherlands.
The B.V. also offers tax advantages, such as a lower corporate tax rate (20% for the first €200,000 of taxable profit in 2018, with plans to reduce it further in the future).
The B.V. vs. sole proprietorship: Which is right for you?
Choosing between a sole proprietorship and a B.V. depends on your income goals and business growth expectations. A sole proprietorship is ideal for small-scale businesses or freelancers, while a B.V. is more suitable for entrepreneurs who expect substantial profits and plan to scale their operations.
One of the key differences between these structures is that while the sole proprietorship offers fewer administrative responsibilities, a B.V. offers more tax benefits, especially when combined with the 30% tax ruling. The B.V. also provides flexibility in salary and dividend distributions.
If you are currently employed and receiving the 30% tax ruling, it may be beneficial to opt for the B.V. structure. However, if you choose to switch to a sole proprietorship later, you will lose the ability to apply for the 30% tax ruling in the future.
Taxation of the B.V. and dividends
The corporation tax rate for the B.V. is 20% on profits up to €200,000. Profits exceeding this threshold are taxed at 25%. After corporation tax, you can distribute net profits as dividends. Dividends are subject to a 15% withholding tax, and an additional 10% tax is applied in Box 2 when the shareholder files their personal income tax return.
The total tax burden on distributed dividends, including the corporation tax, is around 40%. However, if the 30% tax ruling applies, distributing an additional salary instead of dividends can be more tax-efficient.
Choosing the best business structure for your entrepreneurial journey
When transitioning from employment to entrepreneurship in the Netherlands, choosing the right business structure is essential for optimizing your tax situation. Whether you opt for a sole proprietorship or a B.V., each structure has its advantages, depending on your income level and future business goals.
If you expect high income and growth, the B.V. structure combined with the 30% tax ruling could offer significant tax savings and flexibility. For smaller, low-risk businesses, a sole proprietorship may be the simpler option. Always consult a tax professional to determine which structure best fits your specific needs.
