From employee to entrepreneur: Keeping the 30% ruling tax break

Are you planning to move to the Netherlands, just arrived or living and working here for a while and in need of tax assistance? Taxsight provides tax advice at the highest level.

Many employees have the ambition to become an entrepreneur. When you are planning to set up your own business, you want to make sure that you have the right business structure.

What are your options when you want to become an entrepreneur in the Netherlands? And what additional tax-benefits can you get as an entrepreneur if you are currently employed and receiving the 30% ruling tax break?

Having the right business structure 

There are a few options when starting your business in the Netherlands:

• Work as a sole proprietor
• Work through your own incorporated limited liability company (B.V.). This option may allow you to keep the 30% ruling benefit.

Sole proprietorship

A sole proprietorship is a transparent entity, which means that it is linked to the owner. The owner is liable for the company’s obligations and the taxes must be submitted via the personal income tax return.

The owner is, after the deduction of all costs, taxed for the profit of the company. The sole proprietor needs to declare the income in their personal income tax return.

Tax credits 

As a sole proprietor, you are entitled to the general small companies discount of 14% of your gross profit. This makes the max effective tax rate 44,67% instead of 51,95%. The applicable tax credits of up to 9.403 euros may also be claimed. The self-employed tax deduction is 7.280 euros (plus 2.123 euros, applicable for the first three years). Note that these discounts will probably be less favourable as of 2020.

The most important requirement you need to meet to claim these tax credits is that you have worked at least 1.225 hours for your business in the calendar year. This includes direct working hours but also hours you spend on travelling, market research, administration and more.

With sole proprietorship, the full profit is always taxed in the same year, which could result in higher taxation than if you had a B.V. The incorporation of the sole proprietorship requires registration at the chamber of commerce only.

The limited liability company (B.V.) in combination with the 30% ruling tax break 

There is also the option to work as an entrepreneur through an own incorporated B.V. and pay yourself a salary. This may allow you to apply for the 30% ruling benefit if you fulfil the general criteria. The liability and taxability of operating through a B.V. is different from operating as a sole proprietor.

The minimum required salary to benefit fully from the 30% ruling is approximately 54.000 euros. However, the minimum salary to be eligible for the 30% ruling is 37.296 euros (2018).

The wage tax rates are the same as the tax rates for a sole proprietorship or employee. However, the effective tax rate is lower if you are an employee of a B.V. receiving the 30% ruling tax break. The maximum effective tax rate is 36,36% (70% of 51,95%). This rate is applicable if your taxable income is more than 68.508 euros.

These are the tax rates for 2018:

Additional benefits of the 30% ruling tax break 

On top of that, if the 30% ruling is applicable, you can opt for partial non-resident taxpayer status. If you opt for partial non-resident taxpayer status, your taxable income from savings and investments in box 3 will be exempt from income tax. Property that is located in the Netherlands, however, is always taxed in the Netherlands.

Dividend payments received as a shareholder (5% or more shareholder) from foreign entities during the period that you receive the 30% ruling are also not taxed.

Tax obligations B.V.

The B.V. is treated as a separate entity and has to meet additional requirements, such as filing monthly payroll tax returns, quarterly VAT returns, an annual corporate income tax return and filing the annuals at the chamber of commerce. This also means that operating via a B.V. brings higher administration costs than operating as a sole proprietor.

Salary obligations B.V.

The shareholder of a B.V., who owns 5% or more of the shares, is obliged to receive a salary if they work for the company. The company is obliged to withhold wage tax on the salary. The obliged salary needs to be determined on the basis of the usual wage rules. This means that the salary needs to be determined on the basis of the sort of work carried out by the shareholder and has to be at least 45.000 euros gross annually. An exception may be made if the B.V. does not generate sufficient funds.

Taxes for a B.V.

Once all company costs are deducted (among other the salary), the profit will be taxed. The corporation tax in the Netherlands for 2018 is 20% up to 200.000 euros (this will be reduced in the coming years till 15%) and 25% on profit exceeding 200.000 euros (will be reduced in the coming years up to 20,5%). Net profit after taxation can be paid out as a dividend to the shareholders whenever desired. However, if the 30% ruling applies, it is more beneficial to distribute an additional salary instead of a dividend.

The dividend tax that a company is obliged to withhold in 2018 is 15%. Additionally, dividends are taxed a further 10% (2018) in box 2 when the shareholder files their personal income tax return, which makes the total tax rate 25% (the box 2 rate will go up in the coming years to 26,9%). The total tax burden on distributed dividends including corporation tax is therefore 40% (this will be around 38% in the future). A B.V. gives more flexibility with salary payment and dividends.

A good alternative 

A B.V. structure in combination with the 30% ruling may be an appropriate alternative if you are planning to start your own business and quit your current job. Especially if you expect to generate a sufficient turnover and expect a growth of your income.

The 30% ruling allows you to receive (max) 30% of your salary tax-free, making the effective maximum tax rate 36,36%. The B.V. option could become even more beneficial if the discounts for sole proprietors change in 2020.

Note that if you quit your job and choose to go for a sole proprietorship, you will not be able to apply for the 30% ruling at a later stage by incorporating a B.V. 

Individuals and entrepreneurs can contact Taxsight for tax advice, tax compliance and accountancy. They also assist corporations with their tax matters. Individuals, as well as corporations, can contact the company with their questions regarding the 30% ruling.