If you are planning to start a Dutch business, you might be in doubt between a sole proprietorship or a BV. The sole proprietorship is typically used by residents of the Netherlands, but could in some circumstances also be used by global entrepreneurs and expats. In this article, we have prepared an overview of all considerations that are relevant to the choice of a sole proprietorship or BV.
|Legal formation||No||Yes, by notarial deed|
|Registration Chamber of Commerce||Yes||Yes|
|Mandatory (share) capital||No||EUR 0.01 minimum starting capital|
|Liability||Business and private 100%||Only the BV|
|Income||Tax on the profit||Corporation tax on profits. Income tax on salary and dividends|
|Employee insurance||No||No, unless the director-major shareholder (DGA) cannot prevent his own dismissal|
Personal liability vs director’s liability
One of the biggest advantages of the BV compared to the sole proprietorship is the difference in liability for the owner/director of a company. The owner of a sole proprietorship is 100% privately liable for the debts of the company. Every creditor can directly recover from private assets. The sole proprietorship does not have a legal personality, which means that it cannot independently have rights and obligations. This allows creditors of the sole proprietorship to recover their claim from you.
This is different with a BV. The BV is a legal person and therefore has its own rights and obligations. As a result, a BV can also own equity. As a director or director-major shareholder (DGA), you represent this BV, but you are not personally bound. Creditors can recover from BV’s assets, not your private assets. This is only the case if you as a director have committed improper management.
An owner of a sole proprietorship is nothing more than a person with a VAT number. After all, the sole proprietorship does not pay tax, the owner of the sole proprietorship does. The income of the sole proprietorship is taxed in Box 1. When calculating the taxable income of the sole proprietorship, the entrepreneur can make use of a number of favourable tax deduction facilities, such as: Deduction for old-age provision; Self-employed person’s allowance; Contribution deduction; strike deduction; SME profit exemption (profit exemption of 14%).
A BV pays corporation tax on the profit.
1. Corporate Tax
A BV does pay a (fixed) corporation tax on the profit. This means that, at a certain (profit) point, either option (the BV or the sole proprietorship) could result in a lower tax burden. In practice, it’s commonly considered that a profitable amount of more than 75.000 EUR would be better off being taxed in Box I (so the sole proprietorship would be a better option). The standard lower corporate tax rate then outweighs the deductions of a sole proprietorship and the gradually increasing income tax.
If you set up a Dutch BV, you pay company corporation tax on the profit of 15% up to 395.000 EUR of profit(tax rate for 2022). If you earn a profit greater than € 395,000, you pay 25,8% of the profit.
Usual salary / DGA salary
In addition, the BV is ‘obliged’ to pay a salary to the director (DGA salary). The amount of this salary is set at € 45,000 in fiction. But the word says it all, this is a fictitious amount. The director’s salary may be lower or higher. If the activities have just started, a lower or no salary is sufficient for the director. After all, the company does not yet generate enough money (free cash flow) to be able to pay the DGA salary. Read here about how to lower this DGA salary. Payroll tax and national insurance contributions are payable on the DGA salary. A DGA is not compulsorily insured for employee insurance unless he cannot prevent his own dismissal. This is usually only the case if no majority of the shares are held by the DGA.
Attracting an investor or new shareholder
Another advantage of a BV is that this structure makes it easier to attract investors. This can be beneficial if you want to make certain purchases, but do not yet have the required capital.
Investors will not be eager to put money into a sole proprietorship. An entrepreneur will not want to guarantee the debts of the company. It makes sense that an investor does not want to bear more debt than the amount of his contribution. A BV is a so-called capital company. This means that a BV must issue shares that represent a certain value. By issuing these shares, a BV can raise capital from new investors. The persons who acquire the shares, the shareholders, are not obliged to contribute in debts to more than their contribution. This makes it attractive for investors to invest in a BV.
The appearance of your business
Creating a sole proprietorship is easy. You register with the trade register of the Chamber of Commerce and you are in principle ready to start. A sole proprietorship does not publish figures that are transparent to others. A BV does. A BV is obliged to file annual accounts with the Chamber of Commerce. In this way, creditors and other interested parties have a good overview of what is going on in the BV. Usually, no complete annual accounts are filed, but a summary thereof. This must show how the company is doing financially and whether the BV is able to meet its obligations. This gives the company a slightly more professional appearance.
The start-up costs for a BV are higher than those of a sole proprietorship. This is because a notary public BV must establish and register and must create a shareholders register. The costs for the administration are fairly comparable. Both companies have to keep records. A BV must submit a corporate income tax return and annual accounts. Those extra costs are added. In the (simplified) example below, a company makes a profit of € 100,000 per year (without taking into account deferred future taxes).
Example 1 (2019):
|Profit for VPB||€ 100.00|
|Vpb||– € 19.00||19.00%|
|Net profit||€ 81.00|
|AB claim||– € 20.25||25.00%|
|Net in private||€ 60.75|
However, due to the use of various entrepreneurial facilities (which are not accessible to companies that are subject to corporate tax) and the rates in the lower income tax brackets, the choice for an IB company was nevertheless often more advantageous in many cases.
How will profits be taxed at an IB company and at a BV in 2020?
As of 1 January, 2020 (in accordance with the 2020 legislative changes) the highest rate in box 1 is 49.5%. In addition, the SME profit exemption is no longer deducted at the highest rate, but at a lower rate. For 2020, the highest rate bracket after SME exemption will therefore amount to 46%. In later years, it is even deducted at the lowest rate, further reducing the benefit of the SME exemption. This means that by 2020 the marginal tax burden for an IB entrepreneur will be 43.06%.
Example 2 (2020)
|Profit||€ 100.00||€ 100.00|
|SME profit exemption||– € 14.00||14.00%|
|Taxable profit||€ 86.00|
|IB due||– € 42.57||49.50% *)|
|IB due||– € 0.49||3.50% **)|
|Total IB due||– € 43.06|
|Net in private||€ 56.94|
**) Addition in connection with deduction restriction
As of January 1, 2020, the rate in the first corporate income tax bracket will be reduced to 16.5%. The rate in box 2 will be 26.25% in 2020. When the company is operated in 2020 by means of a BV that makes a taxable profit of up to € 200,000, the marginal tax burden is 38.42%.
Example 3 (2021)
|Profit for VPB||€ 100.00|
|Vpb||– € 16.50||16.50%|
|Net profit||€ 83.50|
|AB claim||– € 21.92||26.25%|
|Net in private||€ 61.58|
All in all, it can therefore be concluded that the tax burden of companies that are driven in IB and in a BV structure are starting to diverge considerably. The ultimate effective tax burden does not only depend on the company’s profit. The private situation of the client in question is also important for determining the effective tax burden. Ultimately, the tax position in a BV structure can still be optimized by determining the wages with due observance of the laws and regulations regarding customary wages.