The tax aspects of an LLC in the Netherlands
Broadstreet has been advising professionals, entrepreneurs and expats on reaching their personal and financial goals for over 25 years. In this article, they explain how tax works when it comes to an LLC.
Contrary to what is often claimed, a US LLC is not quite comparable to a Dutch limited liability company, the B.V (Besloten Vennootschap). The biggest difference between the two is that the B.V. is a corporation and the LLC is a hybrid entity between a corporation and a partnership.
For US tax purposes, the LLC by choice is considered transparent which means that the LLC itself is not a taxable entity; the check-the-box system in the US allows for an LLC to be treated either as a partnership or as a corporation. When an LLC is checked as a partnership, the participants in the LLC will be taxed directly in their personal income taxes on their share of the LLC earnings.
The LLC from a Dutch tax perspective
Under Dutch tax rules, there is no option to elect to be treated as a pass-through for tax purposes. Therefore, depending on where the LLC is incorporated in the US, the LLC is considered a taxable entity in the Netherlands. This means that the LLC is liable for corporate income tax in the Netherlands if the effective management of the LLC is located in the Netherlands. The highest corporate tax rate is 25% in the Netherlands. The lower rate of 15% tax applies to the first 200,000 euros of profit in 2020. In 2021, the lower rate will apply to the first 245,000 euros of profit and in 2022, the lower rate will apply to the first 395,000 euros of profit.
Place of effective management LLC
When relocating from the US to the Netherlands with an LLC, it is crucial to determine the place of effective management. The LLC will only be liable for corporate income tax in the Netherlands if the place of effective management is located in the Netherlands.
The place of effective management is where the most important decisions of a company are made. The person or persons making those decisions are usually the director or the board of directors of the company. This means that if the director or the majority of the board of directors of the company relocate(s) from the US to the Netherlands, the company (and its taxability) also relocates from the US to the Netherlands.
For larger corporate organisations, instead of one director, there will be a board of directors in place. And in most cases, not all of the directors will relocate to the Netherlands. In this situation, a dispute can arise over the place of management being either the Netherlands or the US.
Here is a quick checklist to determine the place of effective management from a Dutch tax perspective:
|>50% of the board of directors in the Netherlands
|These directors can make decisions for the company (e.g.: hire/fire staff, sign contracts, make transactions)
|The decisions of the directors are made in the Netherlands
|Important meetings are held in the Netherlands
|The main bank accounts are in the Netherlands
|Bookkeeping is in the Netherlands
The questions in the checklist read from most-to less important. If the answer is YES to most of the questions in the checklist, the place of effective management will most likely be in the Netherlands.
The tax treaty between the Netherlands and the US prevents double taxation. This is the case when both countries levy the same taxes over the same earnings or income. However, the treaty does not prevent the effect of double taxation in all cases.
For example: A US person who is a > 50% member of an LLC relocates from the US to the Netherlands. The LLC is checked as a partnership in the US.
For Dutch tax purposes, the LLC is non-transparent, but for US tax purposes the LLC is transparent. This translates to a corporate income tax burden in the Netherlands up to 25% and a personal income tax burden in the US. These taxes will be levied on the same earnings in the LLC. The issue in this situation is that these taxes cannot be automatically offset against each other.
As an alternative, the incorporation of a C-Corp or the LLC checked as a corporation in the US should be considered. There are of course downsides to this from a US tax perspective, but the effect of double taxation can be avoided in this alternative structure. It is strongly advised to consult a US and NL tax advisor before setting up such structures.
Paying taxes is inevitable and the same goes for filing your tax returns. The Dutch tax authorities (Belastingdienst) have a popular saying when it comes to filing taxes: “We cannot make it more fun, but we can make it easier”. Though toe-curling, they do have a point: the burden of filing your tax return should not be more of an ordeal than it already is.
When setting up a tax structure it is therefore not only important to make sure that you are not paying too much in taxes unnecessarily, it is also important to make sure that your administrative burden is as light as possible.
In the previously mentioned example about double taxation, it also leads to a heavier administrative reporting burden in the US, which leads to higher consulting costs. As costs for consulting and assistance with tax reporting are significantly higher in the US compared to the Netherlands, it is advisable to take this into account when setting up your structure.
A matter of customisation
Ultimately, setting up a tax structure is a matter of customisation, as every company and its management is unique. Depending on the business, an LLC might even be advisable and an Inc. (corporation) might lead to a heavier tax burden. In any case, solid and dependable advice is key.
Broadstreet provides an intake service where your situation can be discussed from a Dutch tax perspective. After the intake, they will provide you with high-level conclusions and suggest a plan of action. They can then assist you further with the incorporation, accounting, payroll, tax reporting and everything in between.