We often see that when a new client arrives at our office they are proud to state that they have started their own company, whether that be a healing company, part-time piano teacher, yoga enterprise, homework assistant, dog walker, or any other type of creative company.
With the aforementioned examples, the previous income tax returns might contain cost deductions that exceed what is possible: part of the home rental costs, electricity, new stairs or maybe even a house extension. Strangely enough though, the tax office never enquired about these things.
The explanation for the tax office not to respond is simple: the income of the company was far exceeded by all the costs of the company. Actually, if all the costs that are not accepted were deleted, the company still had a loss. This is usually the case for a couple of years already.
Upon learning of their company’s losses, the new client tends to point to the fact that they have followed this model for years and have not had any issues with the tax office. This may be true, but it is not the same as a correct income tax return. The fact that the tax office did not respond had to do with the fact that there was no other source of income.
The moment you have employment income next to this hobby, the hobby creates a loss. This loss is offset against the positive employment income resulting in a tax refund. The Dutch tax office is going to respond quickly to this.
Most clients with a hobby have no other source of income; it is the partner who funds it, basically.
An activity is a company when it participates in economic traffic. In other words, there are sales, purchases and commitments. The activity is a company when the aim is to make an income and profit. Also, from an objective standpoint, a profit is likely to be made.
The moment these three criteria are met, you have a company. Of course, nobody expects you to be profitable instantly. That said, if from an objective standpoint no profit is to be expected, the activity is labelled as a hobby. A hobby is often an activity that is characterised by costs and pleasure; where the income is often less important than the pleasure.
The moment the conclusion is drawn that your activity is a hobby, your first step should be to terminate the registration of the company with the KVK (Chamber of Commerce). This will also stop the request to file an entrepreneur’s income tax return.
You should also explain to the tax office that the VAT numbers need to be cancelled.
A nail polish BV company has not made a profit since 2013. Due to a transfer of shares, the taxpayer claimed a loss on their income tax return. This loss was denied by the Dutch tax office.
The case went to court and the court determined that the BV company did take part in economic traffic. A profit was the goal of the company. But the objective eye quickly came to the conclusion a profit was never going to be possible. Hence the court ruled indeed that the BV company loss was not to be deducted on the income tax return.
The taxpayer did prove that the turnover was increasing, but the turnover could not keep up with the costs. Also, the argument that companies such as Rituals, McDonald's and Amazon were loss-making in the startup years did not stand, as it was not made clear how the situation of those companies reflected on this case.
A BV company can, of course, not be allocated as a hobby company. That said, the execution of the tax return is done as if it were a hobby. No tax base, no tax deduction.