If your business generates high profits, a private limited company (BV) offers tax advantages. See our article High profits? Set up a private limited company. Where profits are not particularly high, a sole trader (or, if you run the business with others, a partnership or general partnership) is an excellent tax structure. See our article Start-up entrepreneur: 5 reasons not to set up a private limited company. An intermediate option might be even better: part of the business as a private limited company and part as a sole trader. That way, you’ll get the best of both worlds, tax-wise!
That’s possible!
It is possible to run your business as a partnership or a general partnership (VOF) with your own private limited company (BV). If you have a sole trader business, you set up a private limited company (BV), through which you enter into the partnership or general partnership. And if your private limited company (BV) runs the business, you enter into the partnership or general partnership (VOF) with the BV, whereby the BV contributes the business.
A portion of the company’s profits is then channelled into the private limited company, where it is subject to corporation tax. Only when the private limited company distributes the profit to you (or the shares are transferred) are you liable for substantial interest tax (income tax in box 2).
The remaining portion of the company’s profit is payable directly to you as the business owner. This portion of the profit is taxed as business profit. In this context, the tax reliefs available to business owners are taken into account. This relates in particular to the SME profit allowance of 14% of the profit. If you meet the hours criterion, you are entitled to the self-employed person’s allowance (including the start-up allowance, provided the conditions are met) and you may make contributions to the retirement reserve.
But watch out!
This tax manoeuvring is a very fine line to walk. For example, you may find yourself faced with a tax inspector who argues that you must pay out (part of) the profit from the private limited company as salary. The inspector would base this argument on the ‘usual wage’ rule. Whilst this salary is deductible from the profits on which the private limited company pays corporation tax, it is subject to full income tax.
The inspector may also take the view that the shares in the BV are deemed to be business assets. The BV’s profits are then subject to corporation tax. And the capital gains on the shares will be subject to income tax, not deferred in box 2 at a rate of 25% (substantial interest), but taxed directly in box 1 at a rate of up to almost 45% (business profits).
Retroactivity
In a judgement of the Court of Appeal for Arnhem-Leeuwarden The case concerned a situation in which a director and major shareholder had entered into a general partnership (VOF) with his private limited company (BV). The BV contributed the business to the VOF and the director and major shareholder contributed his labour. He entered into this VOF on 13 September 2011, with effect from 1 January 2011. The director and major shareholder derived the retroactive effect from an approving decision by the State Secretary for Finance.
The inspector takes the view that this decision cannot be relied upon because it concerns an incidental tax advantage. According to the Court, however, there is no indication whatsoever that the chosen corporate structure is incidental. Consequently, this is not an incidental tax advantage, but a structural one. The Court considers the use of the business facilities to be inextricably linked to the retroactive effect for tax purposes.
The inspector’s second argument is that the shares in the private limited company must be included in the business assets of the director and major shareholder. This argument is also rejected by the Court of Appeal. The Court of Appeal ruled that the director and major shareholder had not exceeded the bounds of reasonableness in classifying the shares in the private limited company as private assets.
The time limit for lodging an appeal on points of law against the Court’s judgment has not yet expired. However, the Court’s judgment appears to be so closely intertwined with the facts of the case that lodging an appeal on points of law does not seem an obvious course of action.
Tax follows business
By this term, we mean that, in principle, tax advantages should not be the main factor in determining the legal form you choose for your business. It is very important to carefully weigh up the non-tax-related pros and cons of a sole trader, a private limited company (BV) or an intermediate form.
With that, and by weighing up the tax pros and cons, VWGNijhof We’d be happy to help.