The most frequent asked question is about dividend versus salary in a BV company. How to correctly weight this question in the corporate income tax return.
Dividend versus salary
We notice mainly clients from the United Kingdom have the strong opinion that paying out dividend instead of salary is much better tax wise.
Whether that is true depends.
The issue in the question dividend versus salary is not so much the alleged tax advantage, but the rules we have in the Netherlands. The rule is that the salary of the managing director of the limited liability company cannot be less than 75% of the profit. This rule is more elaborate, but for the purpose of this article we focus on the 75%.
Is dividend cheaper tax wise?
Let us assume you make a EUR 100.000 profit. If you do not take out any salary, then this profit is taxed with 20% corporate income tax, being EUR 20.000. The after tax profit of EUR 80.000 that is open for dividend is subject to 25% dividend withholding tax, being EUR 20.000. Hence net in your pocket is EUR 60.000.
To be clear, the above situation is not legal, you cannot have no salary, so this is only for calculation purposes.
Is salary cheaper tax wise?
In 2018 EUR 100.000 salary is EUR 45.965 wage tax/social premiums and EUR 54.304 net salary. As now the profit is fully consumed, no corporate income tax is due. This is a legal salary. But not cheaper than dividend.
However, if we introduce the so called 30% ruling in this story and the criteria have been made, the application made, then suddenly the wage tax / social premiums amount to EUR 29.047 and the net salary is EUR 70.952. This is a legal salary. It is very much cheaper than dividend.
Why can we not pay a dividend instead of salary?
There is a very logical answer to this question. If you pay 100% of the profit as a dividend, you have not earned a salary. In the Netherlands you are regarded poor when you have no salary income. If you are poor, you are entitled to benefits. Benefits such as the healthcare benefit, rent benefit, higher child care benefit etc.
But, are you poor? You were paid EUR 60.000 in dividend, then you are not poor. And if you are not poor, you should not be open to facilities that are for the true poor. Hence rules have been installed.
Minimum salary requirement
The rule, to prevent managing directors / shareholders to benefit from tax credit that are not entitled to them, implies that all managing directors in the Netherlands need to have a minimum salary of at least EUR 45.000. Of course if the company does not make this amount of profit (excluding salary costs managing director), then a lower salary is to be paid.
Besides this EUR 45.000 the salary cannot be less than 75% of the profit. This is automatically checked by the Dutch tax office when the corporate income tax return is processed. If it does not match, the tax office will demand you to have it matched plus increase the amount of wage tax due with at least 25% penalty.
But do you want to have dividend versus salary?
We think not. Not only you need to be in line with the rules and regulations. For the formal dividend payout there is an additional rule. That rule basically states that should the limited liability company be liquidated due to shortage of money. In other words, the company goes bankrupt as it cannot pay its invoices anymore. Then the liquidator appointed will state that the dividend paid in earlier years was an act causing this bankruptcy. Such a process makes you become personal liable for the debt and that is exactly what the liquidator is after, because then your house can be sold to pay mainly his invoice.
We are often asked about dividend being paid, instead of salary. When no 30% ruling is in place, it is very tempting. However, most people in the Netherlands know that purchasing a house is cheaper to maintain, then renting a house. The bank that provides you with a mortgage will look at the employment income over the past three years. Not at the dividend payments. If then the salary was not high enough for the loan that was applied for, you cannot purchase the desired house. So the question dividend versus salary is a much more intense question, but the answer nearly always the same. Salary can be experienced as being better, but also more costly tax wise.