For entrepreneurs generating good profits, it may be tax-efficient to run their business as a private limited company (BV). The transition from a sole trader, professional partnership or general partnership (VOF) can be carried out smoothly from a tax perspective. And, if you wish, you can postpone your final decision to convert your business into a private limited company for the time being.
Letter of intent or preliminary agreement
But then you do have to before 1 October 2018 set out in a letter of intent or preliminary agreement that you intend to convert your business into a private limited company. And you must provide evidence of this by submitting that letter of intent or preliminary agreement, also before 1 October 2018, together with a form send by registered post to the Tax and Customs Administration.
The date of 1 October mentioned above assumes that your business uses a January financial year. If your financial year is not a full calendar year, the letter of intent or preliminary agreement must be sent to the Tax and Customs Administration within 9 months of the start of the financial year.
You draw up a letter of intent if you run the business as a sole trader. Partners in a partnership or members of a general partnership (VOF), who are all converting their business into a private limited company (BV), set out their intention in a preliminary agreement. Partners or members may also choose to convert only their share in the partnership or general partnership into a private limited company.
You’re simply setting out your intention. If you eventually decide not to set up the private limited company after all, that’s no problem.
Incorporation of a BV
Your company’s contribution to the private limited company can be backdated to the first day of the financial year in which you formalise the letter of intent or preliminary agreement. For a financial year starting in January, this is, of course, 1 January.
The private limited company must then have been incorporated by that date at the latest, and the business must have been transferred within 15 months of the tax transition date. If the transition date is 1 January 2018, the transfer must be recorded in notarial deeds by 31 March 2019 at the latest. You therefore have until the start of next year at the latest to make up your mind.
Postponing the transfer of the business to 2019 may, incidentally, also result in a tax disadvantage. For the purposes of corporation tax, the financial year of the private limited company (BV) only commences on the date on which the deed of incorporation is executed before a notary. This would result in a short financial year for 2019, running from the date of incorporation of the BV until 31 December 2019. The profit for the period from 1 January 2018 until the date of incorporation will be allocated to that short financial year.
As a result, in the 2019 corporation tax return, the profit is taxed over two full calendar years (2018 and 2019). However, the progressive tax bracket in corporation tax can only be utilised once. Suppose your profit for 2018 is €275,000 and that for 2019 is €300,000. In that case, the amount taxed in the 2019 corporation tax return will be €575,000. The corporation tax on these profits amounts to 20% * €200,000 = €40,000 and 25% * €375,000 = €93,750. Total corporation tax: €113,750.
If the profit for 2018 had been taxed in 2018, the lower rate of 20% would also have applied to the first €200,000 of that year’s profit. This results in a saving on corporation tax of 5% * €200,000 = €10,000. You can avoid this disadvantage by incorporating the private limited company in 2018. However, this does require an interim balance sheet to be drawn up as the basis for the description of the assets and liabilities to be transferred to the private limited company. There are generally costs involved in compiling this interim balance sheet. The maximum of these costs depends on the work required to draw up a reliable interim balance sheet.
Personal consideration
To answer the question of whether a private limited company (BV) is a viable option, you need to weigh up the pros and cons based on your specific situation. And the tax rules offer more options than simply transferring your business into the BV, the procedure for which is described below. You can read more about this in our article Sole trader, private limited company or something in between?. Of course we’ll help we We’d like to help you decide what suits you best in this regard.
Incidentally, it is in any case advisable to postpone the final decision on transferring your business to a private limited company until Prinsjesdag 2018. By then, it will be clear exactly how the Rutte III cabinet will implement its announced plans regarding income tax and corporation tax. It does, however, appear that these plans will not have much impact on the assessment Limited Company: Yes or No?.