That is the question.
Doing business in the Netherlands while using the legal structure of a so called one man company is very much lucrative from a tax perspective due to the entrepreneurs discounts. However, do these discounts apply always? That is the question the tax office likes to challenge.
Zelfstandigenaftrek – entrepreneurs discount
If you are an entrepreneur registered with the Dutch Chambers of Commerce as being a one man company, then you can benefit from a EUR 7.280 (2015) deduction on your profit before taxation. The minimum requirement is that you need to have spend at least 1225 hours working for this company and you need to have earned the majority of your income with this company.
That implies that if you worked less, or if you have employment where you earn more income or when you are not able to make plausible you worked 1225 at least for the company, then you cannot have this discount. This discount makes the one man company interesting from a tax perspective.
Eenmanszaak – one man company
An eenmanszaak also referred to as one man company is the name of a registration with the Dutch Chambers of Commerce used for private companies not being a legal entity. The name one man company does not imply that no women can set up this company, neither does it imply you cannot employ staff. The one man stands for one man holding the capital of the company. This one man company can have as many employees as the company likes to have, men and or women.
Startersaftrek – starting entrepreneurs discount
Having qualified for the entrepreneurs discount makes it possible to use the starting entrepreneurs discount. During the first five years of you qualifying for the zelfstandigenaftrek, you can add to the EUR 7.280 entrepreneurs discount EUR 2.123 (2015) starting entrepreneurs discount.
Most startup companies do not have an immediate profit, so it is key to monitor in what year of the first five years it is wise to actually use this starting entrepreneurs discount. If randomly used it could evaporate without having had any effect.
MKB vrijstelling – small business discount
After the profit has been reduced with the zelfstandigenaftrek and the startersaftrek, the profit that is left behind is reduced with 14% small business discount to the taxable profit. The small business discount always applies even if you do not qualify for the zelfstandigenaftrek and even if you do not make a profit.
That implies when you make a loss, your loss which can be set off against other income of the current of previous years, is reduced with the 14% small business discount. This effect was foreseen when this MKB vrijstelling was introduced. Companies making a loss should not be subsidized with additional discounts. Instead an upcount has been created by this MKB vrijstelling.
Tax office challenging zelfstandigenaftrek
The tax office is keen to challenge the zelfstandigenaftrek when the situation that is being presented to the tax office might not meet the requirements of this discount.
Not being an entrepreneur
The tax office often claims that a person is in fact not a company, even though registered ad the Chambers of Commerce, as this company only has one client. This is a solid challenge, however, the tax office has also committed itself to a three year holiday from the start of the company. This implies that an entrepreneur has three years the time to proof he or she is indeed an entrepreneur and is able to raise the minimum of three clients to proof being an independent entrepreneur.
The reason for this challenge is to eliminate quasi entrepreneurs who in fact are employees. An employee is a person that works during an agreed upon time, for an agreed upon amount under the instructions of another person/company. Additional clauses such as continuance of payment during holiday or illness strengthen the employment ship.
Then again, if any starting entrepreneur was able to obtain three clients from the day the company was registered, anybody can start its own company, hence a three year holiday has been introduced.
The tax office does make house calls soon after you registered the company. This is a friendly visit during which the tax office helps you understand your obligations of filing the value added tax return in time, to take care of the bookkeeping and to meet your income tax return obligations. During such visits the entrepreneur discount is often discussed and we learn that often the tax office has already immediately the opinion that this discount does not apply. This is in conflict with the three year holiday and, as most clients are taken by surprise because the visits are not announced, the client had no time to prepare him or herself for such questions. We will be glad to assist you in challenging denied zelfstandigenaftrek discounts if that was an unfair denial.
Not meeting 1225 hour requirement
The tax office can challenge the number of hours you spend on the company. The tax office will then contact you with the request to provide them with an overview of the hours spend for the company.
Such an overview does not only include the actual number of hours you worked for your clients. It involves much more. Also the time you spend on developing your service/product, the time you spend on meeting potential clients, investigating the market, setting up your administration. This and any other time you spend on your company does qualify for the number of hours spend on your company.
Orange Tax Services
We will be able to assist you with setting up the administration of the one man company, we can assist you with creating your invoice layout. This is one of the more important aspects of your administration because the penalties on drawing invoices which are no inline with the invoice requirements set in the VAT legislation are enormous.
Furthermore we can assist you with the VAT filing, setting up a payroll if you hire employees and filing your income tax return. This income tax return filing is charged at EUR 500 ex VAT including your tax partner (2015 rates). Your tax partner is the person with whom you are married, registered partner, with whom you own a house or have children.
Contact us to set up a meeting to see what we can do for you.
