There are the following options to start your business in the Netherlands:
• work as a sole proprietor;
• work through an own incorporated B.V. (LTD company) and pay yourself a salary. This may allow you to get the 30% ruling application.
A sole proprietorship is a transparent entity, which means that it is linked to the owner. The owner is liable for the company’s obligations in private.
The owner is, after deduction of all costs, taxed for the profit of the company. The sole proprietor needs to declare the profit in his Dutch annual personal income tax return. The administration will be the basis for the income tax return which will be filed after the year is ended.
As a sole proprietor you are entitled to the general small companies discount of 14% of your gross profit. This makes the max effective tax rate 44.72% instead of 52%.
The applicable tax credits of up to € 9.403 may also be claimed. The self-employed tax deduction is € 7.280 (plus € 2.123 applicable for the first three years).
The most important requirement to be able to claim the tax credits is that you have worked at least 1.225 hours for your business in the calendar year. This includes direct working hours but also hours you spend on traveling, market research, administration and more.
With the sole proprietorship the fully profit is always taxed in the same year what could result in a higher taxation than the B.V. The incorporation of the sole proprietorship requires however a registration only at the chamber of commerce.
An entrepreneur could work through an own incorporated B.V. and pay himself a salary. This may allow him to apply for the 30% ruling application if he fulfills the general criteria for the 30% ruling application.
The minimum required salary to benefit fully of the 30% ruling is approx. € 54.000 and the max. effective tax rate is 36.4% (70% of 52%). However the minimum salary to be eligible for the 30% ruling application is € 37.000.
On top of that, if the 30% ruling is applicable, you can opt for the partial non-resident taxpayer status. If you opt for the partial non-resident taxpayer status, your taxable income from savings and investments in box 3 will be exempt from income tax.
Property that is located in the Netherlands is however always taxed in the Netherlands. Dividend payments received as a shareholder from foreign entities during the period that you are under the 30% ruling application are also not taxed.
The B.V. is treated as a separate entity and has to meet additional requirements, such as filing monthly payroll tax returns, quarterly VAT returns, an annual corporate income tax return and filing the annuals at the chamber of commerce. This also means that operating a B.V. brings higher costs than operating as a sole proprietor. The extra operating costs are approximately € 3.000 on annual basis.
The liability and taxability by operating through a B.V. is different from operating as a sole proprietor. The B.V. gives also more flexibility with salary payment and dividends.
The shareholder of a B.V. who owns 5% or more of the shares is obliged to receive a salary if he performs work for the company. The company is obliged to withhold wage tax on the salary.
The obliged salary needs to be determined on the basis of the usual wage rules. This means that the salary needs to be determined on the basis of the sort of performed work by the shareholder and have to be at least € 45.000 gross on annual basis. There may be an exception made if the B.V. would not generate sufficient money.
The wage tax rates are the same as the tax rates for the sole proprietorship However the effective tax rate is lower if you are under the 30% ruling application as an employee of the B.V.
After all company costs are deducted (among other the salary) the profit will be taxed. The corporation tax in the Netherlands for 2017 is 20% till € 200.000 and 25% on profit exceeding € 200.000. The net profit after taxation can be paid out as a dividend to the shareholders whenever desired. However if the 30% ruling application applies, it is more beneficial to distribute an additional salary instead of dividend.
The dividend tax which the company is obliged to withhold is for 2017 15%. Additionally, the dividend is taxed with another 10% tax when the shareholders files his personal income tax return. The total tax burden on distributed dividends is therefore 40%. This is only the case when the shareholders are Dutch residents.
If you are planning to reside in the Netherlands for an indefinite or longer period a B.V. structure in combination with the 30% ruling application may be an appropriate alternative. Especially if you expect to generate a sufficient turnover and expect a growth of your income for the coming years.
The 30% ruling application allows you to receive (max) 30% of your salary tax free for 8 years. What makes the effective max tax. rate 36.4%. Note that if you choose to go for the sole proprietorship you would not be able to apply for the 30% ruling application in a later stage.
Please contact me for more specific questions.