While you orientated on starting a company in the Netherlands you very well could have learned about having one BV company is actually having no BV company. What is this about? This is about the participation exemption.
Dutch corporate income tax
Holding a BV company in the Netherlands implies Dutch corporate income tax is due over the taxable profit made in this BV company. The Dutch corporate income tax rate amounts to 20% over the first EUR 200.000 and 25% over the excess.
Day to day business profit is simply taxed, if a taxable profit is left over. When kicks the participation exemption in? This applies when you have a holding structure.
Holding structure
A holding structure is a structure where you hold the shares of the holding BV and the holding BV holds the shares of the working BV. The name holding BV refers to the core business of this BV, simply holding the shares. The holding BV is also the save haven for the profit you made in the working BV. As the holding BV only has holding the shares of the working BV as main activity, this implies the holding BV does not have risk full activities. Perfect to keep the profits you make, if the working BV goes bankrupt for any reason, you still have at your disposal the earnings of previous years. How is the profit of the working BV transferred to the holding BV?
Participation exemption
In the situation that the working BV made a taxable profit, you can pay this taxable profit as a dividend to the holding BV. First you need to determine if the working BV can actually make a dividend payment. Strict rules apply to dividend decisions with the sole purpose of keeping the working BV alive. Paying too much dividend can make the financial basis of the working BV fragile with the result that the working BV cannot meet its obligations in the short or long run.
The dividend withholding tax rate amounts to 25%. However, if the holding company holds at least 5% of the shares in the working company that is paying the dividend, no dividend withholding tax is due. That is caused by the participation exemption.
Sale of company
The participation exemption especially makes a difference when you are able to sell your working company. If you do not have a holding structure, then you pay 25% Box 2 personal income tax over the proceeds of the sale.
In case you have a holding structure, the proceeds of the sale fall in the Holding BV and due to the participation exemption no tax is levied over this profit made at the sale of the shares. Only when you decide to pay yourself a dividend or salary, this profit is taxed.
The major advantage is that you can reinvest the gross proceeds of the sale of your BV company into a new company.
Does every entrepreneur need to have a holding structure
Certainly not. Most entrepreneurs have a company that is highly connected to the person that they are. For instance the dentist, accountant, lawyer, cook. All professions where the client comes for the person executing the job at hand. Selling the BV company is not possible, as no buyer will pay for anything more than the share capital, as the goodwill connected to this company is personal goodwill. Personal goodwill you cannot transfer.
Nevertheless you can still decide for a holding structure to keep separated from each other the earnings made in the past and the risk of the business in the working company.
Orange Tax Services
We have extensive experience in the field of holding structures. We also notice problems. Problems that occur over time when the entrepreneur no longer sees the benefit of the holding structure, but does see the administrative costs that come of maintain the holding company.
