They’ve been getting a lot of attention in the press recently: the Zuidas developments. So what are they all about?
DGA
We are referring to the director and majority shareholder (DGA). This person operates a business through one (though in practice often several) private limited companies, holds a stake in a company via a private limited company, or, following the sale of the business, retains (part of) the assets in a private limited company.
In the Netherlands, the profits of a BV are subject to corporation tax. The rate of this tax in 2022 is: 25,8%. A significantly lower rate applies to the first €395,000 of the taxable amount: 15%.
Withdrawing profits from the private limited company
If the director and major shareholder wishes to use the private limited company’s profits to pay for personal expenses, there are broadly three ways to withdraw funds from the company: 1) salary, 2) dividends and 3) loans.
The salary The dividend received by the director and major shareholder from the private limited company is deductible from the company’s profits. However, it is subject to income tax at a rate of 49.5% (on the portion of the income up to approximately €69,000, approximately 37% in income tax is payable). A director and major shareholder who receives a gross salary of €100,000 from his private limited company is left with a net amount of €59,125 (without taking into account other income, tax deductions and the like).
Dividend may not be deducted from the BV’s profit and is subject to income tax at a rate of 26.9%. If the BV makes a profit of €100,000, €15,000 (15%) in corporation tax is payable. The profit after tax, €85,000, can be distributed. Income tax of €22,865 (26.9%) is payable on this amount. The director and major shareholder receives a net dividend of €62,135. This is more than the net amount remaining from the salary (only 50.5% remains of the salary above €69,000).
The director and major shareholder who borrows No tax is payable by his private limited company on the amount borrowed. However, taking out a loan does imply that the amount has not been permanently withdrawn from the company: the loan must be repaid at some point.
Structures
The situations described as ‘Zuidas arrangements’ essentially amount to directors and major shareholders now being criticised, to a greater or lesser extent, for choosing – within the framework of the applicable laws and regulations – the methods described above that are most favourable to them from a tax perspective.
Under current legislation, a director and major shareholder (DGA) who works for his private limited company must draw a market-rate salary from the company. That salary must amount to at least €48,000 or, if higher, 75% of the salary received in the most comparable employment relationship, or 100% of the salary of the highest-earning employee. By setting the salary as low as possible within these rules, the (high) tax rate of 49.5% is avoided.
By not paying out a dividend, the 26.9% tax can be deferred. However, this deferral has not been indefinite for some time now. This tax liability can now only be carried forward (subject to conditions) upon the sale of the private limited company’s shares, upon the death of the director and major shareholder, and in various other situations, if and to the extent that the private limited company operates, directly or indirectly, a material business.
The options for borrowing from a private limited company are highly likely to be restricted in the foreseeable future following the introduction of the bill on excessive borrowing. We describe this bill in our factsheet Excessive borrowing from own company law. The Rutte IV Cabinet has indicated its intention to introduce this bill, which would raise the threshold from €500,000 to €700,000.
Whether there will be any further legislative changes is a political decision. Until then, the director and major shareholder is free to make tax choices as he or she sees fit.