In the event you own at least 5% of the shares in a company that is active in the Netherlands, then rules set by the Dutch tax office apply. These minimum salary rules have been introduced to prevent these managing directors/shareholders to take out an extremely low salary in order to create more profit that can be paid to the shareholder as a dividend.
Not only is the tax on dividend substantially lower (25%) than wage tax, the managing director will be indicated in the Dutch tax system as a low income employee that can apply for rent benefit, health care benefits and other benefits. Benefits this employee is obviously not entitled to, as it is not a low income employee, as the dividend income compensates a lot.
To prevent this from happening the Dutch tax office introduced some time ago the minimum salary. The guidelines were not very clear, hence via jurisprudence in November 2011 the guidelines were made clear. The minimum salary of the managing director is about EUR 42.000 (increases every year with inflation), but cannot be less than 70% of the profit. The profit is the turnover minus the costs, except for the salary costs of the managing director.
For instance. Turnover is EUR 130.000, costs EUR 30.000, then the profit is EUR 100.000. The salary of the managing director cannot be lower than 70%, being EUR 70.000.
These court cases had a huge impact on the companies being charged, as the tax office corrects the salary over a five year period and adds to that a 25% penalty. This penalty can increase up to 100% depending on the situation. All companies that were in court in November 2011 went bankrupt as they could not pay the wage tax and penalties charged by the tax office.
The practice of the tax office is now that they tick in their system the box of the turnover, costs and salary and compare these details over a 5 year period. Even the smallest gap is charged by the tax office, increased with a penalty.
Therefore it is key to watch the result of the company and to balance out a difference with this minimum salary rule in the December payroll via a bonus.
