If your sole trader business, professional partnership or general partnership is generating good profits, it may be financially advantageous to switch to a private limited company. Furthermore, the limitation of your liability may be a factor in this decision.
To assess whether switching to a private limited company (BV) is financially advantageous, you need to consider your personal circumstances. The advisers at VWG We’d be happy to work it out for you.
Changes to income tax and corporation tax rates with effect from 2021
In our article In our update dated 23 October 2020, we have summarised the 2020 end-of-year tips for you. The 2020 end-of-year tips discuss, amongst other things, the changes to income tax and corporation tax rates with effect from 1 January 2021. The rates are set out below.
The rates for the corporation tax amounts applicable from 2021:
| Taxable amount | corporate tax rate |
| Up to €245,000 | 15% |
| From €245,000 | 25% |
The rates for the income tax Amounts applicable from 2021 (for people who are not yet eligible for the state pension):
| Taxable income from employment and property (Box 1) | IB rate |
| Up to an income of €68,507 | 37,10% |
| For incomes of €68,507 or more | 49,50% |
| Taxable income from savings and investments (Box 2) | IB rate |
| Tax rate | 26,9% |
Tax benefit
The tax advantage of a private limited company (BV) compared to a sole trader, a partnership or a general partnership (VOF) lies primarily in the tax rate (for the sake of clarity, we have not included the effect of tax credits in this article). The profits of a sole trader, partnership or general partnership (VOF) are subject to income tax. As mentioned above, from 2021 onwards, you will pay tax in box 1 on your income above €68,507 at a rate of 49.50%.
To the extent that your income consists of business profits, the 14% SME profit allowance is deducted when calculating the profit. In 2021, this deduction is applied at a rate of 43%. If you factor this into the rate, it results in a rate of: 49.50% -/- (14% * 43%) = 43,48% (This figure is even lower when the self-employed tax allowance is also taken into account).
The profits of a private limited company (BV) are subject to corporation tax. As mentioned above, the standard rate is 25%, but the BV pays only 15% on the first €245,000. If you wish to use the BV’s net profit for personal purposes, you must pay out a dividend. You will pay income tax on this dividend under Box 2 (substantial interest tax), where the rate is 26.9% with effect from 2021. The combined tax on the profit in the private limited company amounts to in 2021 37,87% (for profits up to €245,000) and above that 45,18%.
For profits of up to €245,000, the combined corporation tax rate is more favourable than the income tax rate, but for amounts of €245,000 or more, the income tax rate is more favourable.
As described in our article As of 15 August 2019, the restriction on the self-employed person’s tax allowance and the SME profit exemption to 43% in 2021 does not have a significant impact on the assessment of whether it is worthwhile to transfer your business into a private limited company (BV).
The calculation is actually a bit more complex. An entrepreneur who works for their own private limited company must, in fact, receive a salary from the company. In principle, this salary must amount to at least €46,000. This salary is deductible for corporation tax purposes and is subject to income tax without taking the SME allowance into account.
Liability
As a result of the coronavirus outbreak, many business owners are facing financial difficulties. A logical consequence of this is that they wish to limit their liability.
In the case of a sole trader, a general partnership (VOF) or a professional partnership, you are liable with your entire assets, both personally and professionally.
In the case of a private limited company (BV), the company itself is liable for any obligations it has entered into. Creditors can only seek recourse against the company’s assets. As a director of a BV, you are, in principle, not liable with your private assets. Despite this protection, a director may still be held liable in the event of improper management.
Conversion to a private limited company
From a tax perspective, the conversion of a sole trader business, a share in a general partnership (VOF) or a partnership interest can be facilitated by means of a silent contribution.
Legally, this is not possible. All assets forming part of the company’s assets must be transferred to the private limited company. In the case of debts being transferred to the private limited company, consent must be obtained from the creditor(s). If a creditor or the creditors do not agree to this, you will remain personally liable for these debts.
When is it worthwhile to make a capital contribution to a private limited company, and where is the tipping point?
A business contribution is of interest in the following cases.
- Your business profits exceed approximately €120,000 (in the case of a general partnership or professional partnership, this amount applies to each partner).
- If you wish to limit your liability.
- Whether you want to enter into a partnership, bring someone into your business, or take over a company.
- You want to raise external capital.
- There are hidden reserves within your business and you wish to wind up your business in due course.
- Your business is highly innovative, and you wish to make use of the innovation box.