When Dennis van der Spoel (57) started his own business as a trainer and coach, he immediately opted to set up his own company. The freedom of that business form is particularly appealing to him. This way he can avoid the disability insurance (AOV), which is probably will become mandatory from 2030 for self-employed people. “In my BV I can build up a tax-efficient buffer for bad times. Because I think mandatory insurance is a waste of money. The premium is too high, because the risk that a self-employed person will rely on benefits is much smaller than for employed people,” says Van der Spoel.
Sick entrepreneurs usually continue working, he thinks, “as long as they can. Moreover, the benefit is related to a ridiculously low income. You will receive a maximum of the minimum wage. An advanced entrepreneur will never make ends meet.”
Different from becoming Van der Spoel by far the most people start their own business self-employed, which is called a ‘sole proprietorship’ at the Chamber of Commerce (KvK). Of all Dutch companies, 69 percent fall under this heading, according to data from the Chamber of Commerce. Such a one-man business is easier and cheaper to arrange than a private company. You only have to register with the Chamber of Commerce and you will then benefit from significant tax benefits.
Fewer deductions
However, the largest deductions for entrepreneurs, the self-employed person’s deduction and the SME profit exemption, have been reduced in recent years. For example, the self-employed person’s deduction will gradually decrease from 7,280 euros in 2019 to 900 euros in 2027. For self-employed people who earn well, this may be a reason to switch to a BV. In a sole proprietorship, the profit (after deductions) is taxed at the ordinary income tax rate. This can rise to 49.5 percent for a high income. With a BV you pay yourself a salary, on which you pay income tax, but you can leave the remaining profit in the BV. Of this amount, only 19 percent of profit tax goes to the tax authorities (up to an amount of 200,000 euros).
The sooner you start a BV, the better. You have to invest anyway. You start such a company to make it a success, right?
That sounds more favorable than it is. At some point you will want to withdraw those reserves from the BV and then you will still have to pay at least 24.5 percent tax on that amount. If you plan it right, you can end up with slightly more savings, but the difference is not really spectacular. Certainly not if the current profit tax rate of 19 percent increases, as the Central Planning Bureau recently advised.
Moreover, as an entrepreneur with a BV, you are not allowed to decide for yourself how much salary you give yourself annually, warns Edwin Heithuis, professor of fiscal economics at the University of Amsterdam and scientific advisor at BDO Tax Advisors. That salary must be ‘competitive’, or suitable for your position. In some cases you can earn a lot, but there is still so little left in the BV that you hardly benefit from the BV construction. Heithuis: “A good example is medical specialists with a private company. They have to pay themselves a large salary, which largely falls in the highest tax scale. Suppose, for example, that only 10 percent of the profit remains in the BV, then a sole proprietorship will be more attractive from a tax perspective.”
Tipping point
There are amounts circulating at which a BV would be cheaper than a sole proprietorship, for example when the annual profit is higher than 150,000 euros. Now that the self-employed person’s deduction is being phased out, lower amounts are also being mentioned. But according to Heithuis, it is very difficult to calculate such a tipping point, because it depends, among other things, on the salary that the entrepreneur has to pay himself.
That obligation to pay yourself a market-based wage is a disadvantage, says Martijn Nijland (50). He started his own business a year and a half ago as a real estate financing consultant and after a few months switched from a sole proprietorship to a private limited company. “I was previously employed at the Zuidas and now my salary as an entrepreneur must be at that level. While I want to spend the first few years building up and investing. I would rather pay myself less salary.”
Nijland was not concerned about tax benefits when he switched to a BV. He mainly feels safer that the BV is financially liable for his work. With a sole proprietorship you are yourself. “In my field, large sums of money are involved. Last year I provided approximately a quarter of a billion in financing. Suppose something were to go wrong, then that would be really unbearable in the private sphere.”
He also finds the appearance of a BV more professional. That’s why he quickly decided to switch. “Then the circus started,” sighs Nijland. It turned out that he could not simply submit current assignments to the company. To do this, he had to call in a tax specialist, an accountant and a notary.
For medical specialists, for example, a sole proprietorship can be more fiscally attractive
The other option was to liquidate the sole proprietorship and start all over again with a BV, but then he would have to make new agreements with all his customers. “In a period when you are just starting to become successful, you are very busy with peripheral matters. It cost me at least 10,000 euros and it took me three or four weeks.”
His advice to ambitious starters is to start a BV immediately. You will spend several thousand euros in notary costs and (annual) accountancy costs, but according to Nijland it is worth it. “You have to invest. And you start such a company to make it a success, right?” If you already have a sole proprietorship and want to convert it, his advice is to do so as soon as possible. “The longer you wait, the more complex it becomes with current contracts and other agreements.”
Benefits of BVs also phased out
In recent years, some benefits for BVs have also been phased out. You can like that no longer accrue pension in a BV, which was previously a tax-efficient approach. Borrowing money from the BV, a way to defer income tax, is also no longer allowed without limits: loans above 500,000 euros are still partly taxed. For many, this will be an astronomical amount, but Professor Heithuis does not rule out that this maximum will be significantly reduced. “GroenLinks-PvdA even wants to reduce it to 17,500 euros.” He would not be surprised if the mandatory AOV eventually also applies to entrepreneurs with a BV.
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And what about the new DBA Act against bogus self-employmentwhich comes into effect next year and will make many self-employed people and their clients nervous? According to Heithuis, a quick switch to a BV to avoid hassle makes no sense. “If the employment relationship remains unchanged and can be seen as a permanent employment contract, the tax authorities will see through it. The relationship of authority is assessed on the content, whether or not you work from a BV does not matter.”