The substantial interest rate is set to rise in the coming years. It is therefore important to consider whether it would be wise to receive a dividend in 2019.
Dividend
When a private limited company distributes part of its profits, the shareholders receive a dividend. The general meeting of shareholders decides on the distribution of dividends.
A private limited company may only pay out dividends if it meets the capital and distribution tests. The means test means that, following the payment of the dividend, the private limited company’s capital must be at least equal to the reserves which must be maintained by law. To the benefit assessment is met if, following the dividend payment, the private limited company is able to continue to settle all its debts.
If the private limited company has pension or annuity liabilities (entitlements), you must ensure that these are not (deemed to be) surrendered as a result of a dividend payment.
Dividend tax
The rate of dividend tax (15%) remains unchanged. Dividend tax is the withholding tax that a private limited company must deduct from most profit distributions. For quite some time towards the end of last year, there was talk of abolishing dividend tax. However, this did not go ahead in the end.
The dividend tax paid by the private limited company to the tax authorities may be set off against income tax by the recipient of the dividend. Consequently, the dividend tax as such does not place a burden on a shareholder resident in the Netherlands. However, such a shareholder will usually still pay income tax because they hold a substantial interest.
Significant interest
A shareholder who holds 5% or more of the issued share capital of a private limited company (BV) is regarded as a holder of a substantial interest for income tax purposes. Income from the shares is then taxed under Box 2 (income from a substantial interest). Tax is levied on regular benefits, such as dividends, as well as capital gains (for example, on the sale of shares or the death of the shareholder).
The tax rate on income from a substantial interest is currently 25%. However, this rate will be increased to 26,9%. This higher rate will apply from 2021; a transitional rate applies in 2020: 26,25%. Although the increase in the substantial interest rate is necessary to offset the reduction in the corporation tax rate, the higher substantial interest rate also applies to profits retained within the private limited company.
Will it be paid out in 2019?
The benefit of paying out dividends in 2019 is clear from a simple calculation. If you pay out €1,000,000 in dividends on 31 December 2019, you will pay €250,000 in income tax under Box 2. If you pay out the same amount on 1 January 2021, the income tax due will be €269,000. Your “benefit” amounts to: €269,000 – €250,000 = €19,000 (or 1.9% of €1,000,000).
However, if you pay out the dividend at the end of 2019, the private limited company must pay 15% in dividend tax immediately. And as a shareholder, you must pay (no later than the first half of 2020, to avoid incurring 4% tax interest) the 10% income tax (25% substantial interest tax -/- 15% dividend tax). You can no longer earn a return on any amount you pay to the tax authorities. If you expect the net return you will achieve on the tax amount to exceed the tax benefit, it is of course better not to pay out the dividend just yet.
Once the dividend has been paid out, the net amount forms part of the shareholder’s private assets. The shareholder is then liable for income tax on this amount (usually under Box 3: income from savings and investments). If desired, this tax can usually be avoided by reinvesting the dividend as capital in the private limited company.
Current account measure
Dividends may be used to settle the shareholder’s debts to the private limited company. In this context, the announced “current account measure” is also significant. Under this measure, the amount of the shareholder’s debts to the private limited company will be subject to income tax (income from a substantial interest), insofar as the total amount of the debts exceeds €500,000 (plus the tax-deductible mortgage debt on the shareholder’s own home). The bill introducing the current account measure is likely to be published on Prinsjesdag 2019. The intended date of entry into force is 1 January 2022, but this may be a reason to restructure the debt position as early as 2019, for example through dividends.
The decision must be taken before 1 January 2020
The answer to the question of whether it is wise to pay a dividend in 2019 depends on various circumstances. It is certain that the substantial interest rate will be increased after 31 December 2019. You must therefore have decided by 1 January 2020 whether to pay out a dividend (and if the dividend is to be reinvested as capital in the private limited company, it is important to allow sufficient time for this). VWG would be happy to help you weigh up the pros and cons.