Just before the publication of the Rutte III’s coalition agreement Significant shareholders (AB shareholders) believed that they would be able to draw dividends from their private limited company tax-free. In our article Dividend tax abolished, but AB levy remains we explained that this is not a result of the abolition of dividend tax. A day later, the article appeared Coalition agreement and it turned out that the AB rate is also being increased.
AB tariff: how does it work?
Imagine you own all the shares in a private limited company (BV). You run your small business through that company, which generates a profit of €100,000 (your director’s salary has already been deducted from this). The BV then pays corporation tax. This amounts to €20,000 (the corporation tax rate applies up to €200,000) 20%; above that 25%). Your private limited company’s profit after tax is €80,000.
You want to reward yourself for all your hard work with a lovely new car. It costs €60,000. Naturally, this must be paid for with the money you’ve earned through your private limited company. So you have your private limited company pay out the profits. As you are a director, you pay income tax in box 2 on this dividend (of €80,000). That tax amounts to 25%, or €20,000. After tax, you are left with the €60,000 you need for your new car.
In total, you have paid €40,000 in tax on your private limited company’s profit of €100,000: €20,000 in corporation tax paid by the company and €20,000 in income tax paid by you. The total tax burden is 40%.
Lower corporation tax
The Rutte III government is set to reduce the corporation tax rate. Up to €200,000, the rate is currently 20%; above that, it is 25%. These will be reduced to 16% and 21% respectively.
The main rationale behind this rate reduction is that large international companies should continue to regard the Netherlands as an attractive place to set up business. It is not the intention to reduce the tax burden on Dutch AB holders. For this reason, the AB rate will be increased from 25% to 27.3% in 2020 and 28.5% in 2021.
If your private limited company makes a profit of €100,000 again in 2021, you will pay corporation tax: 16% * €100,000 = €16,000. The profit after tax will then amount to €84,000. If you distribute that profit, you will pay income tax in box 2 (AB levy): 28.5% * €84,000 = €23,940.
The total tax burden would then amount to €16,000 + €23,940 = 39,940 (39.94%). This is roughly equivalent to the tax burden based on the current rates.
Past profits
But what if you do not distribute the profit your private limited company made in 2017 in 2017, but in 2021? In that case, the private limited company’s profit after tax will still be €80,000 (€100,000 less the 20% corporation tax already paid by the company in 2017).
When this profit is distributed, you pay income tax under Box 2: 28.5% * €80,000 = €22,800. The total tax liability is then: €20,000 + €22,800 = €42,800. That is €2,800 more than if the profit had been distributed in 2017.
The title of the Coalition Agreement is “Confidence in the future“. To live up to that title, Rutte III must come up with a way to ensure that the increase in the AB rate does not apply to profits earned before the increase in the AB rate. Or is it the Government’s intention that the profits accumulated before 2020 should be distributed from all private limited companies?