The minimum salary requirement in a BV company has always been fiscal topic. That will not quickly change.
I will address some aspects of the minimum salary requirement in this article. The salary requirement addressed, is the salary a managing director shareholder can pay him or herself. As the managing director shareholder is in charge, he has the window of opportunity to pay himself as he likes. It turns out human beings are all the same, none of them like to pay tax. Hence creative solutions are executed.
No income – high dividend – very outdated ‘clever’ advise
Expat often contact us with an amazing inside on how they would like to have their BV company operate in the Netherlands. They simply do not draw a salary, but pay out a dividend instead. That saves tax.
Does paying no salary and high dividend save tax is the first question?
Let us assume this managing director makes a EUR 100.000 profit. This profit is then subject to 20% corporate income tax. That leaves an after tax amount of EUR 80.000. A dividend is taxed in the end at 25% dividend withholding tax, so another EUR 20.000 tax is paid. The result is EUR 60.000 net in the account and EUR 40.000 tax has been paid.
The result is also that as there is no salary income, this person is regarded poor. That implies a rental benefit is granted, health care benefit and child care benefit. If applicable. But to non of them this person is entitled to by law. Plus the bank thinks this person without salary is poor as well, hence no mortgage will be granted for the purchase of a house or a loan for a car.
A regular managing director shareholder with a EUR 100.000 salary pays EUR 45.720 wage tax (2017) including health care premium, hence EUR 54.280,15 is net received. With this salary the shareholder is not entitled to the benefits, but can obtain a loan with the bank for the purchase of a house.
Of course it is not the regular managing director that is better of, it is the managing director with the 30% ruling. The 30% ruling makes the EUR 100.000 salary a EUR 70.000 taxable salary and a EUR 30.000 net reimbursement of costs. EUR 29.056,85 salary including health care premium is paid, EUR 70.943,15 is collected net by the employee. Not only less tax was paid then in the ‘no income – high dividend’ construction, this employee is still a good client for the bank to obtain a mortgage loan.
Low income – high current account – again very outdated ‘clever’ advise
We do have shareholders managing directors that think they are more clever by complying to the base minimum salary requirement of EUR 45.000 (2017) and then have the difference paid by simply cashing the money via ATM or bank transfers.
It is very clear that the tax due over this construction is the winner, but a short lived winner. A BV company has three possibilities to obtain money out of the BV:
- A loan
A loan is basically nothing more or less than the title it has. It needs to be repaid. That part is misunderstood. But no longer with the Dutch tax office. In the announcement in September of the 2017 policy the Dutch tax office has announced that the current account loan situation a lot of managing directors shareholders have with their company, will be their ultimate goal to collect.
An estimate of EUR 10 billion is loaned by the managing director shareholders in the Netherlands. The tax office will label these amounts as dividend, which yields a 25% dividend withholding tax. Actually, the tax office is convinced none of them is able to pay for the tax, hence it will be grossed up to a 33%, being EUR 3,3 billion for our Government to spend.
Minimum salary requirement – high current account position – 25% fine (not equal to dividend tax)
A court case. A managing director holding 100% of his BV company claimed to have a negative income in 2009 of EUR 14.864. The court case does not mention how that was created, but it could be a nil income reduced with the mortgage deduction.
However, in 2009 the current account debt to his BV company was EUR 100.716, this current account increased in 2010 with EUR 189.859 and again in 2011 the current account increased with another EUR 167.724. No current account agreement was made, which implies no interest was determined, no collateral set and no repayment scheme made.
The shareholder admitted he spend the money on daily life and that it was the fault of the accountant. The accountant was not fiscally educated enough to see this problem according to the shareholder. The unanimous response from the court was that the shareholder should have hired an educated accountant.
The result was that the increase amounts per year of the current account were added to the taxable income of the share holder, taxed plus 50% fine for deliberately not reporting any income. Moreover, a 25% fine for increase of the current account, which was in fact not a current account.
Minimum salary requirement – how is it done?
The rule is that a managing director needs to have at least a EUR 45.000 salary, unless the company shows a permanent loss or it is clear that the company simply does not make enough money to pay this salary. If the current account has increased with the shareholder, then this is regarded salary.
The salary cannot be lower than 75% of the profit of the company. If the company makes a EUR 60.000 profit and EUR 45.000 salary was already paid to the managing director shareholder, then in fact the profit was EUR 105.000. 75% is EUR 78.750. This implies the salary needs to be increased in time, to prevent a penalty.
Should the profit of the company be EUR 400.000, then this implies a EUR 300.000 salary. Unless it can be proven that the salary of a person in more or less the similar situation earns for instance EUR 120.000. Then the salary can be reduced to 75% of EUR 120.000. As Dutch do not communicate about their income, this is a no go.
The salary cannot be lower than EUR 45.000, not less than 75% of the profit/relevant salary. And the salary cannot be lower than the best paid employee in the company, unless the employee has a very specific expertise.
The 75% of the profit requirement does not apply when the managing director of the company earns less than 90% of the profit of the company.
Orange Tax Services
We have the opinion that the BV company is so much restrained by fiscal rules and has lost it limited liability protection by civil law, that it will soon be an obsolete vehicle for anything other than a product that is being sold. Product liability can be massive and is different than personal liability.
Only if you are a holder of the 30% ruling, the BV company and the salary requirements can be very beneficial. That said, the self employed fiscal rules are also very attractive and the formalities here are much less than with the BV company.
This makes that the BV company is no longer the obvious choice to operate in. Actually, if you are aware of the penalties for not filing in time, the wrong salary, the publication lack with the chambers of commerce, then you need to be a control freak to operate one, or hire an accountant. Not the accountant mentioned in the court case above, obviously. No, we think we can be a good alternative. Happy to meet you.