Minimum salary of an entrepreneur is subject to rules

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The minimum salary of an entrepreneur is ruled in the Netherlands, that implies it has been sorted, these rules have been appealed and the rules still stand. What is minimum salary of an entrepreneur?

Minimum salary of an entrepreneur

An entrepreneur that works via a limited liability company such as the UK Ltd, the USA Inc, German GmbH or Dutch BV company is paid a salary. The first remark we in general receive from the entrepreneur is to put the salary on zero, as he prefers dividend.

Why would he prefer dividend over salary? The assumption is that the progressive tax rate is due over the salary income and only 25% dividend withholding tax is due over the dividend. That is a mis assumption.  In order to be able to pay a dividend, there needs to be a profit in the limited liability company. In 2020 the corporate tax rate up to EUR 200.000 is 16,5% (15% in 2021).

Minimum salary of an entrepreneur is subject to rules
Minimum salary of an entrepreneur is subject to rules

Example EUR 200.000 profit is taxed with EUR 33.000 corporate income tax. That implies EUR 167.000 is the profit that can be paid as dividend at 26,25% in 2020 (26,9% in 2021) dividend withholding tax. EUR 43.838 dividend tax is due over this profit. The EUR 200.000 profit is taxed at EUR 76.838. That is a rate of 38%. Not bad.

The same amount paid as salary is taxed in 2020 for roughly EUR 90.675, being 45%. The same amount paid as salary under the 30% ruling is taxed in 2020 for roughly EUR 60.975, being 30% taxation. If you have the 30% ruling, a salary rules over dividend.

Minimum salary of an entrepreneur

The salary cannot be lower than EUR 45.000 and not less than 75% of the profit. If however, the highest paid employee of the group earns more than the EUR 45.000 or 75% minimum, the salary of the entrepreneur needs to match this employee salary as well. The exception to the rule is when the employee has such a specific expertise, then the salary does not need to be met.

What if your company does not make any profit?

In the event the company does not make a profit, hence structural loss making company, the rules of the minimum salary do not apply.  And what if you make a profit, but that is less than EUR 45.000. We have the opinion you cannot be asked to make a loss, hence your salary needs to be identical to the profit made. But at the same time the purpose of keeping on the limited liability company should be addressed.

Startups – exception for startups

The startup limited liability company does not need to comply with the minimum salary rules if:

  • The start up has a so called S&O statement (Search and Development)
  • The company qualifies for the increased starter deduction

Still then the entrepreneur cannot earn less than 75% of what a similar person would earn, the difference is that the minimum of EUR 45.000 is not applicable.

Director position dormant company

We do not know dormant companies in the Netherlands. However, if you are the director of a BV company that is not doing anything, an annual minimum salary of EUR 5.000 is applicable, unless the company is constant loss making company.

Minimum salary of an entrepreneur – why?

The Dutch Government does not want the high dividend earning entrepreneur who receives no or nearly no salary to  be labelled poor in the Dutch system. Poor by lack of salary. But this person is not poor.

If you are “poor” in the Netherlands you can get a tax credit for renting, health care, day care costs. By implementing the minimum salary requirements, the tax credits are not or much less open for this non poor entrepreneur.

Orange Tax Services – tax is exciting

Meeting the minimum income requirement is part of being the salary earning entrepreneur. This calculation is done at the very end of the financial year and we are happy to assist you. If you prefer to have the 25% part not used for salary, but to be used as dividend payment. We can arrange that for your too.