Are you expecting to make a high profit in 2016? If so, it may be worth transferring your business into a private limited company (B.V.). This can be done with retroactive effect from 1 January 2016, provided you set out your intentions in a before 1 October 2016 registered with the tax authorities letter of intent or preliminary agreement.
High profits?
You may well ask what constitutes a high profit in this context. That, of course, depends on your personal circumstances. Below, we set out a hypothetical example illustrating the difference in tax burden between the business under income tax (IB) and as a private limited company (B.V.).
Corporate tax
A private limited company (B.V.) pays corporation tax (Vpb) on the profit it makes. The rate is 25%, but a lower rate applies to the first €200,000 of profit: 20%. It has been announced that this lower rate will apply from 2018 to the first €250,000 of profit and, from 2021, even to the first €350,000 (the bill setting this out has yet to be tabled).
However, you cannot yet spend the private limited company’s profits once corporation tax has been paid. You can only do so once the company has distributed these profits to you. You will be liable for substantial interest tax (income tax in box 2) on this distribution. The substantial interest tax rate is 25%. You are only liable for substantial interest tax when you have the private limited company distribute its profits, sell your shares, and so on. The deferral of this tax is one of the advantages of the private limited company.
Of a profit of €100,000 made by a private limited company, the net amount remaining (for personal use) is:
| Corporation tax rate | Corporation tax rate | |
| 20% | 25% | |
| € x 1,000 | € x 1,000 | |
| Profit | 100 | 100 |
| Corporation tax | 20 | 25 |
| Profit after corporation tax | 80 | 75 |
| AB | 20 | 19 |
| Net (private) | 60 | 56 |
Income tax
As an entrepreneur, you are entitled to the following tax reliefs for income tax purposes:
- SME profit exemption (14% of your profit is exempt from income tax);
- self-employed person’s allowance (a deduction from profit of €7,280, increased by the start-up allowance for new entrants);
- retirement provision.
Of the profit realised by an IB company, the net amount remaining (excluding the retirement reserve) is:
| € x 1,000 | ||
| Profit | 100 | |
| Self-employment deduction | 7 | |
| 97 | ||
| SME exemption | 14 | |
| Taxable | 83 | |
| IB | 22 | |
| Net | 61 |
Usual wage
The comparison above shows that, for a profit of €100,000, the difference in the tax levied on business profits between a private limited company (B.V.) and a sole trader under the income tax scheme is not particularly significant. As the personal income tax rate increases as income rises, the comparison favours the B.V. more significantly for higher profits. The highest personal income tax rate is 52% and is payable on income in box 1 exceeding (approximately) €66,000.
One aspect not taken into account in the calculations is that, under the so-called ‘customary salary scheme’, a salary must be received from the private limited company amounting to at least 75% of the customary salary in a comparable situation. This salary is subject to income tax, without taking into account the tax reliefs available to business owners. The higher the salary to be paid, the higher the profit must be in order for running a business through a private limited company to be more tax-efficient than operating it under the income tax regime.
Other considerations
As well as differences in the tax burden, there may, of course, be other factors to consider when deciding whether or not to set up a private limited company. The advisers at VWGNijhof would be happy to go through these factors with you.
If you have a preliminary agreement or letter of intent registered before 1 October 2016, you will ensure that the contribution to the B.V. is backdated to 1 January 2016. However, you still have time to make your final decision. This is because the private limited company must be incorporated by 1 April 2017 at the latest. If you decide not to convert your business into a private limited company after all, there are, in principle, no consequences attached to this.
Uit B.V.
Of course, the reverse is also possible. If you operate your business as a B.V. but, for tax or other reasons, this is no longer the most suitable legal structure, there are options for converting back from a B.V. We would be happy to assist you with this as well.