In the Netherlands we have wage tax rules for major shareholders directors in a BV company with respect to the minimum salary they need to earn. Some think that if the legal entity is incorporated and kept abroad, these rules do not apply. This is the wake up message for them.
Wage tax rules (Gebruikelijk loon)
In the old days the managing director of a BV company was instructed by his tax advisor not to take any salary from the company which is taxed under the progressive tax rate (max 52%), but to take out a dividend instead (max 25%).
The side effect was that this person was regarded poor. If you have no salary, you are poor. If you are poor, then you can get the health care benefit, rent benefit, child care benefit. The Netherlands is a socialistic country, which implies the strong have to carry more than the weak. The weak needs assistance.
But this managing director is not weak at all, a substantial dividend was paid to him to support his private life and yes, he enjoyed the tax benefits on the side.
The Dutch Government put a stop to that many years ago. A managing director cannot earn less than 75% of a person in a similar position. If this cannot be proven, then the managing director earns at least 75% of the profit of the company. A profit excluding the salary costs he already received. In this framework the salary of the director cannot be lower than the best paid employee, unless the best paid employee has an exceptional position nobody can match.
Wage tax rules – is it a bad thing?
Maybe not. If you have all your income as dividend, there is no employment income, hence no income to set off against the mortgage deduction. That said, with the current low interest rates, the tax advantage is minimum already.
What is the math?
You earn EUR 180.000 profit per year. Will you make that a salary or a dividend (should you have the choice)?
The EUR 180.000 dividend implies that the EUR 180.000 is first taxed with 20% corporate income tax, being EUR 36.000, hence the after tax amount is EUR 144.000. That can be paid as dividend at total 25% tax, being EUR 36.000. The result is that you have EUR 72.000 tax paid and EUR 108.000 cash to spend.
The EUR 180.000 salary implies that EUR 85.236 wage tax is collected more or less. Hence you have EUR 94.764 cash to spend. A EUR 13.236 difference.
However, most of our clients have the so called 30% ruling, which makes not EUR 180.000 is taxed but EUR 126.000 is taxed. Then suddenly ‘only’ EUR 57.156 tax is due and you have EUR 122.844 cash to spend.
UK Ltd subject to Dutch wage tax rules
A clever Dutch resident tax payer incorporated a UK Ltd, had the shares hold by a trust, something British, which works in some countries abroad, but the Netherlands does not recognize the concept of such a trust.
The UK Ltd participated in a Dutch open CV (a legal entity). This open CV provided fiscal advise (!!). The services were provide by a couple that also both were the director of the UK Ltd.
First point of discussion is the fiscal residence of the UK Ltd. Of course the couple stated the UK, but the rule is that a legal entity is situated for fiscal purposes in the country where the managing director is a tax resident. The couple worked in the Netherlands, lived in the Netherlands and were the only managing directors of the UK Ltd, hence the UK Ltd was a Dutch resident company.
The next point was the salary income. The UK Ltd subject to Dutch wage tax rules. The case does not publish details about where the proceeds of the company went, but I think they thought to hide that in the trust vehicle. As we know no trust vehicle in the Netherlands, as this UK Ltd is a Dutch resident company, as they hold a majority of the shares in that company, Dutch wage tax rules apply. This was ruled by the court. The couple tried to argue the verdict, but there were no grounds for an argument. The appeal to the high court was dismissed as well.
What is the result? The case does not state this, but the profit of the past 5 years will be regarded salary, for which wage tax is due. A penalty for not complying with the rules will be added to that. The fact that they run a fiscal advise company, implying they should have known the rules, will make the penalty higher than for a regular tax payer. Such a penalty can make the company bankrupt.
Sometimes we feel like Don Quixote. Often we are approached by a foreign tax resident who would like to incorporate a Dutch BV company. We ask if he will move to the Netherlands, but that is not the case. Then we inform this person about the consequences of him not moving to the Netherlands for the fiscal position of the Dutch BV company. The only response we receive is disbelieve. That we can make even worse to inform that person, that no Dutch bank will open a bank account for that company, as long as the director/shareholder is not a Dutch resident tax payer.
Bottom line is that you can have a foreign legal entity in the Netherlands, but Dutch rules apply. If you would like to apply the foreign rules or not the Dutch rules, you need to become a tax resident of that country. However, moving your residence is