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For many entrepreneurs, the question is relevant from when they can gain a tariff advantage by converting their IB business into a BV. After the cabinet announced in the Tax Plan 2021 that the self-employed deduction will be reduced as the years progress, this question will of course become interesting for more and more IB entrepreneurs. By at the same time reducing the low corporate tax rate and increasing the rate, obtaining a rate advantage with a BV seems to be getting a lot closer. In this blog we will briefly discuss some important factors that makethis rate advantage of the BV possible.
Where an IB entrepreneur carries out work on his/her undertaking for at least 1,225 hours in a calendar year, the IB entrepreneur meets the hours criterion. When an IB entrepreneur meets the hours criterion, the entrepreneur can use a number of different deductions that qualify as business deductions. For example, the SME profit exemption or the self-employed deduction. The application of all kinds of facilities that qualify as business deductions therefore causes the effective tax rate to decrease, because the facilities reduce the taxable amount. As the self-employed deduction is greatly reduced in the coming years , the lowering effect on the tax burden on the IB entrepreneur will decrease.
The fact that the IB entrepreneur can therefore make less use of deductions will have to be paid more income tax.
Another important factor strengthening the bv’s rate advantage is the payroll tax on the salary earned. When you drive a business as an IB entrepreneur, the full annual profit – after applying the business deduction and tax credits – is taxed according to the income tax system. As a result, there is a higher, progressive rate than a profit from a BV. In the case of a BV, it is of course the case that – on the basis of the usual wage scheme – a director-major shareholder (DGA) has to pay himself a ‘normal wage’, which means that part of the profit is still involved in income tax.
The payroll tax then, for two reasons, makes a difference that favours the bv’s rate advantage. The first reason is that there is a higher income in income tax. As a result, the IB entrepreneur ends up in a higher bracket and has to pay the top rate on that part of the profit. If the DGA were to use a normal wage of EUR 50,000, it would not end up in the top rate. The second reason is the existence of the tax rebates (the labour discount and the general tax credit). The tax rebates are – like income tax itself – progressive. The higher the income, the less tax credit one gets. If the DGA has a low salary, the DGA receives more tax credit than the IB entrepreneur.
Indirect levy significant interest
Finally, when undertaking through a BV, there is another factor that facilitates the bv’s tariff advantage. Because the DGA is obliged to grant itself a normal wage, it will not be necessary for the DGA to pay the profits made to itself in private. The fact that in corporation tax – on profits up to EUR 245,000 in 2021 and EUR 395,000 in 2022 – 15% tax is levied and there is no obligation to distribute the net profit to the shareholder, a part of the taxation on profits can therefore be deferred. If the DGA distributes the profits to itself, it still has to pay a significant interest charge of 26.9%.
The question of when doing business through a BV provides a tariff advantage depends on many different factors. It also differs by sector what is a common wage for the DGA and may depend on the employees it employs. As a result, no clear answer can be given as to the amount of profit from which the bv’s tariff advantage occurs. Are you unsure about turning your IB company into a BV? Please contact us, we can then make a tailor-made sample calculation and make an estimate of the expected tax benefit.