How not to cheat the minimum required income of a manager shareholder
Tuesday, September 13th, 2016 by Arnold Waal
The minimum required income for a manager shareholder has been introduced around 2001. The reason is best explained as follows.
A managing director shareholder states to his accountant. Please set my salary at EUR 10.000 annually and pay the balance as a dividend. The thought is that salary income is taxed at max 52% and dividend income is taxed at 25%. If you look at it like this, you do not need to have O levels mathematics to see what is better tax wise.
But then this managing director shareholder goes to the daycare for his children and they learn about his EUR 10.000 salary income. Oh, they say, you are poor. If you are poor, you can have day care center benefit from the tax office. But he is not poor, he receives a huge dividend.
The next thing is the rent, if applicable, of the house. His annual salary is EUR 10.000, so you are poor, you can have a rent benefit from the tax office. The same is with the health care insurance. You get a health care credit from the tax office because he is poor.
But he is not poor, he could even be earning more than EUR 70.000 per year and then you are in the top 3% of the best earners in the Netherlands.
The Government does not want to spend benefits on these types of employees that can influence their salary for tax purposes. Hence a minimum required income salary income of EUR 44.000 for managing director shareholder has been introduced. However, the salary cannot be lower than 75% of the profit of the company. A company where this managing director shareholder yields at least 90% of the profit. In other words, in case where the managing director basically earns the income himself.
Only if you can proof a similar person in a similar but not identical position earns a lower salary than the minimum required income, this lower salary can be use. You need to meet the EUR 44.000 nevertheless. That said, in the Netherlands nobody informs you about his or her salary. Good luck with this one.
How not to cheat this minimum required income?
A married couple worked in the Netherlands as tax advisors, we call them for easy of the story Mr and Ms Misfit. Mr and Ms Misfit were not very keen on having the minimum required income of 75% exceeding EUR 44.000, so they accepted the online offered off the shelf solution to this issue. A solution without taking any of the tax rules and regulations into account.
A United Kingdom (UK) trust was set up, this trust incorporated a UK Ltd and Mr Misfit was appointed as director of this UK Ltd. The UK Ltd incorporated a Dutch open Commanditarie Vennootschap (CV) which is in case of an open CV a legal entity, not quite like a BV company, but similar. The position taken was that the company was not a Dutch company but a UK Ltd, hence the minimum required income did not apply. And if that was not enough, a trust owned the company. The trust could be anyone, so how can Mr and Mrs Misfit be regarded the ultimate beneficiary that need to have at least 75% salary of the profit.
Where is a company situated for tax purposes?
In court the tax office challenged the above situation and stated that Dutch wage tax was due and that the minimum required income was applicable. This standpoint is based on the fact that a legal entity is subject to tax in the country where the managing director is living. In the registrar the director appointed to the UK Ltd was Mr Misfit. Mr Misfit has its fiscal residence in the Netherlands, hence the UK Ltd has its fiscal residence in the Netherlands. This makes that Dutch wage tax is applicable and Dutch rules. A EUR 12.853 assessment for wage tax was issued.
Both standpoints were argued by the tax advisors.
The court ruled that it is indeed a fact that the UK Ltd is a tax resident in the country where the managing director was living. The court also ruled that it is unlikely that both directors will work in this setting when the proceeds of the company end up in a trust. A trust of which was stated it could be anyone. Therefore the trust was dismissed and the court stated that Mr and Mrs Misfit are the beneficial owners of the structure.
The conclusion is therefore that Mr and Mrs Misfit are managing director and shareholder of the UK Ltd that is a fiscal resident in the Netherlands and then Dutch rules apply to the income. The EUR 12.853 wage tax was to be paid by the UK Ltd.
Off the shelf fiscal structures?
An off the shelf fiscal structure was used for the only purpose of avoiding paying more wage tax then desired. Off the shelf structures or any structure offered not to pay or to pay substantially less Dutch tax often only works when you actually move your tax residence. Your tax residence is moved when your central point of live moves. Your central point of live are your partner, possible children and the source of income, your job. Nearly always this is not moved or the partner does not want to move, and then the structure simply does not work. Doing everything on paper only without the theory matching with the practice of life will make you lose, as the tax office only checks what is the actual state of your situation.
Orange Tax Services
We do not offer these type of structures. Is it that bad to pay tax over a higher salary? There is more in life than tax. If you earn EUR 100.000 per year but you take out a EUR 44.000 salary, you think you are clever tax wise. You are not, as the tax office has checks and balances done by the computer and will find you quicker than you think.
But that is not even our point. You might want to purchase a house. Renting is not possible, either you pay to much rent or you had to be an a 20 year waiting list. Roughly you can loan 4,5 times your annual salary. So you go to Mie-Lan Kok real estate services to look for a house. Then Mie Lan shows you what you can buy for 4,5 times EUR 44.000 is EUR 198.000 and you think, that cannot be true. So you go to Expat Mortgages and you state, my income is not EUR 44.000, but it is EUR 100.000. I should be able to loan EUR 450.000 and basically I need that to live up to my standard. Then Expat Mortgages will check your salary income and deny you the possibility, as you only earned EUR 44.000. Dividend income does not count.
Yes, paying a dividend is cheaper, I cannot state it is a marginal difference, but when you compare this with your loan capacity to structure your private life with for instance a purchased home, the dividend might not be that profitable in the end.