If your sole trader business, professional partnership or general partnership is generating good profits, it may be worth considering switching to a private limited company. The profit threshold at which this becomes worthwhile depends on your personal circumstances. VWG would be happy to work this out for you.
Retroactive
You can still operate a sole trader business, a partnership or a general partnership on behalf of a private limited company with effect from 1 January 2019. However, you must before 1 October 2019 set out in writing in a letter of intent or a preliminary agreement. And you must submit this document, also before 1 October 2019, together with a form send it by registered post to the Tax and Customs Administration.
The private limited company must then have been incorporated and the business must have been contributed to it before 1 April 2020. However, this means that two years’ profits will be included in the same financial year. If this results in you paying more corporation tax, it may be advisable to finalise the transfer to the private limited company before 1 January 2020.
To achieve retroactive effect from 1 January 2019, you must make use of the ‘silent contribution’ facility. If you wish to make a ‘noisy’ contribution, the maximum retroactive effect is only 3 months. However, in the case of a ‘noisy’ contribution, an annuity is usually agreed with the private limited company. Given current interest rates, this is generally not a particularly attractive option.
Please note that the dates mentioned above are based on a standard financial year (1 January – 31 December). If your financial year is not a standard one, you should use the date on which your financial year begins.
Tax benefit
The tax advantage of a private limited company (BV) compared to a sole trader, a partnership or a general partnership (VOF) lies in the tax rate. The profits of a sole trader, a partnership or a general partnership (VOF) are subject to income tax. In Box 1, you pay tax (in 2019) on your income above €68,500 at a rate of 51.75%. To the extent that your income consists of business profits, a 14% SME profit allowance is deducted from those profits. If you factor this into the tax rate, this results in a rate of: 86% * 51.75% = 44.5%.
The profits of a private limited company (BV) are subject to corporation tax. The rate is (in 2019) 25%, but the BV pays only 19% on the first €200,000. If you wish to use the BV’s net profit for personal purposes, you must pay out a dividend. You pay income tax on this dividend under Box 2 (substantial interest tax), where the rate is 25%. The combined tax on the profit in the private limited company amounts to 39.25% (for profits up to €200,000) and 43.75% above that threshold. In both cases, therefore, this is less than the 44.5% you pay in income tax.
Changes to rates
We set out the rates for 2019 below. However, these rates are subject to change. The rate for Box 2 will be 26.25% in 2020 and, with effect from 2021, 26.9%. However, the corporation tax rate will fall to 15% for profits up to €200,000 and to 20.25% for profits above €200,000. These rates will apply from 2021.
Under income tax rules, the self-employed person’s allowance and the SME profit exemption are no longer deductible at the highest rate with effect from 2020. These allowances are ultimately only applied at the lower rate of 37%.
These rate changes do not have a significant impact on the decision as to whether it is worthwhile to incorporate your business as a private limited company.