Starting your own business can be a confusing and frustrating situation, tax-wise. Many entrepreneurs end up running what they think is a legitimate company or business but are actually just engaging in a hobby, according to the Dutch Tax Authorities (Belastingdienst).Whether your company is subject to income tax depends on a few factors and your own circumstances.
Low turnover rate
For instance, there was a client who was a Reiki therapist and who filed her own tax returns. There was a rather low turnover rate, next to nothing. Since the therapy took place in her home, all the costs of the house were deducted from the tax return, including rent, water, electricity, furniture, and food.
Somehow, an audit was never conducted. The therapist was thus quickly informed by tax advisors that the income source wasn’t subject to tax, because it is classified as a hobby and not a company.
The Reiki therapist felt amazed and relieved. She was glad that she was not required to complete Value Added Tax (VAT) returns nor the entrepreneur income tax returns.
A company without an entrepreneur
Another group that often believes that they are a company, but actually aren’t is a group that attempts to start a company through the money of investors. Often, it is the business partner of the company who is converted into an investor.
Since the company funds are that of another individual / group, people are more likely to take risks and recklessness burn their money, since it isn’t really theirs. These people are not considered true entrepreneurs.
The clever non-entrepreneur
In 2007, an individual registered a company that traded in bicycles and its parts with the Dutch Chamber of Commerce. From 2016 - 2019, the total turnover rate in their Value Added Tax return was 190 euros, with a reclaimable VAT of 2.899 euros during this period.
The Belastingdienst denied the reclaimable VAT and the 190 euros had to be paid, regardless. In addition, the Belastingdienst also issued a 10% penalty, a bit of a “losers” penalty. Typically, penalties start at 25%.
This individual went to court for this matter. The court asked them to substantiate the activities which their company had advertised. The individual did not give a direct reply to any of these questions, other than that extensive courses were followed by them and paid for with company funds.
The court stated that the individual’s “company” was not a legitimate business which could be claimed as a source of income on tax return, but it is actually a hobby.
Finally, the court ruled that no actions or investments were taken to make the company a part of economic traffic. Hence, the Belastingdienst classified the individual’s “business” as a hobby and not a source of income.
Is it a company or a hobby?
How do you know if your activities are considered to be a business or a hobby? Firstly, the activity needs to be a source of your income. Of course, you could have a few difficult years at the start, but if you do not manage to produce an income within a period of three years, it is a hobby.
If your activities do generate income, but it amounts to a maximum of 2000 euros per year, it is also considered a hobby. Most of the time, such “companies” are run alongside regular employment. What often happens is that the income made from regular employment is also funding the hobby. The hobby may be added to a tax return as a deduction and that is when the Belastingdienst steps in.