Corporate tax: rent privately owned office to your company

Creativity in tax is a joy the Dutch know very well, hence we get all kind of suggestions how to avoid paying too much tax. Often lack of knowledge of the fiscal legislation makes that suggestions simply cannot be executed as it is forbidden. Sometimes it is possible, but is it worth while pursuing?

Rent privately owned office to your company

You are the managing direct and 100% shareholder of your BV company, or for that matter your UK Ltd company registered in the Netherlands, or your US Inc. registered in the Netherlands as you are living in the Netherlands.

You have understood that, as you earn at least 90% of the turnover of the company, your salary cannot be less than 75% of the profit, or at least EUR 45.000. At the same time you have learned the hard way that we do have a 52% maximum tax rate. Even if you have the 30% ruling, which soften the blow, one day you will no longer have the 30% ruling. How can you avoid to pay EUR 0,52c over ever euro earned? Maybe generate  other income than salary income?

Rent privately owned office to your company. If you happen to own a property that is suitable to house your company office in, that is convenient. And as you learned that your Dutch property is taxed in Box 3 for about 1.2%, even if you have the 30% ruling. So you charge a high rent, which reduces the corporate income tax significantly, you receive money in your pocket and you are only taxed for 1.2%. Too good to be true.

Received rent tax free – indeed too good to be true

The Dutch tax office has thought about this scenario a long time ago and introduced Ter Beschikking Stelling (TBS). TBS stands for you the owner of the company makes available to the company an asset owned privately. This is not forbidden, but the asset it not taxed in Box 3 (1.2% wealth tax) but in Box 1 (52% tax rate).

Rent privately owned office to your company
Rent privately owned office to your company

Example rent privately owned office to your company:

Your BV company made a EUR 100.000 profit, taxed at 20% corporate income tax, hence EUR 20.000 corporate income tax is due.  The next year you have again EUR 100.000 profit, but you rented the building you own personally to the BV company for EUR 20.000, hence the profit is EUR 80.000 and EUR 16.000 corporate income tax is due. The rent income you receive is taxed in Box 1 in your income tax return for 52%. EUR 20.000 times 52% is EUR 10.400. Now you paid over the EUR 80.000 corporate profit and EUR 20.000 privately received rent EUR 16.000 corporate tax plus EUR 10.400 income tax is EUR 26.400 overall tax. That is more than the initial EUR 20.000 corporate tax.

Of course this example does not take into account the rent you are not paying to a third party anymore, but it is an indication of the situation. You might argue that the Box 1 rates starts at 37%, but that has already been used with the salary of the director, hence everything earned besides the salary is put on top in the income tax return, hence the 52% tax.

Rent privately owned office to your company – via your wife

The shareholder will counter to us that he could transfer the building to the name of his wife and she rents it out to the company. She has no shares in the company. But the rules in this respect are identical to the tax partner and children that are under age.

Some shareholders are more drastic and they suggest a divorce to generate a tax benefit. You might not believe me, but it is often suggested. Then we need to explain to our client that your wife might not fully trust you only divorcing for a tax benefit of the rental income and will launder you for every penny you have. Alimony to your ex-wife is tax deductible, but if that was the intended outcome of the renting out the building exercise, we doubt.

Orange Tax Services

Corporate tax planning is something you truly need to do ahead with one of our corporate tax experts. We have plenty of tax rules that make situations as they are now. We will be glad to explain them to you. Often the outcome is: make as much money as you can and simply pay the tax. That creates no issues with the tax office in the future during an audit.

Bookkeeping via app or via accountant?

Today’s age brings easy apps that help entrepreneurs make life easier, or are they? Is it maybe not the boring account that actually makes the difference?

Bookkeeping via app or via accountant – you are no accountant but entrepreneur

Apps are easy to download, you take a picture of the invoice and then it is automatically booked in software for you. You only need to push a button and you can file the Value Added Tax return (VAT), or can you?

We, the accountant, have of course the opinion that it is not this easy. There are rules what you can deduct and what you cannot deduct. For instance, you work from home and you think you can deduct part of the rent, or utilities, but can you? We doubt anybody can in the Netherlands. That said, you already took the picture of the NUON energy invoice and it is booked, including the paid VAT. As you need to keep your bookkeeping for 7 years on store, you cannot ever terminate the subscription to the app by the way.

At the end of a financial year the year needs to be closed. For that there are checks and balances. One of my favorite clients has such an app for a small side kick company and the VAT debt for instance did not match with the final VAT return of that year. The difference was not huge, but enough for the Dutch tax office to make a money laundry claim. That is what they do if not enough VAT appears to have been paid. Of course there was no money laundry, but simply an ill processed app. So it took  my client a couple of weeks to get straight the 18 invoices in the app and finally he gave up and we did it for him in a minimal period of time.

Bookkeeping via app or via accountant?
Bookkeeping via app or via accountant?

Bookkeeping via app or via accountant – you are accountant

Yes, if you know accounting and you like to work with an app, please use the app. If you are not, we prefer you do not use the app. If it is that you like to have more inside in your business, then we can work with you with an online bookkeeping program. Contact our accounting department and they are happy to set this up for you, if it is indeed a useful contribution to your company. If you have a 12 invoice per year company, we do not recommend this type of online bookkeeping.

Bookkeeping via app or via accountant – really?

We notice that many entrepreneurs do not inquire at all about their quarterly results. You can find that strange, but I think that these entrepreneurs keep track of the result with their own methods. You do not need to be an accountant to keep track of your accounts. You simply need to be organized. And if you are not organized, ask someone to organize for you and we will be glad to do so.

Orange Tax Services

Bookkeeping via app or via accountant, that is the question. We can set up for you an online accounting system where you can check the status of your result and accounts.

However, we can also provide you with a more simple manner of bookkeeping. Purchase an old fashioned binder, print bank statements, put behind them the turnover and the costs and provide us that on a quarterly basis. That is simple and clear.

Plus you need to keep the bookkeeping for 7 years on store, so the binder you put in the attic. Digitally stored bookkeeping can get lost by mail function of the lap top, server or mobile storage.

Year end balance – how much private money can you hold in your company?

Some entrepreneurs prefer to keep enough money in the company bank account for the business, the tax office has the opinion that the Box 3 wealth tax is being evaded.

This article applies to so called one man companies only, as putting in money in a BV company or other limited liability company, will show on the debt side an increased debt to the person putting in the additional funds. In the  one man company this is different.

Year end balance – window dressing

Window dressing is the technical term for dressing up the books. Why would you put in private cash in the company? Simple reason, the banks look at your balance as per December 31 to see if your equity in the company is sufficient in case of a loan or mortgage application. If you put in cash, the equity goes up.

In my opinion a silly check by the banks. A one man company is transparent, so the equity in the business bank account is not in a separate legal entity, but part of the equity of the person behind the company. You can show nice profits, but if the equity has dropped, the bank looks at that as an issue. We think that is strange.

year end balance
Year end balance

Year end balance – box 3 wealth tax

The tax office has an opposite opinion.  They basically see deposits made in the business bank account from the private bank account near the end of the year as a method to avoid paying Box 3 wealth tax. We understand their point of view, but if you as entrepreneur would like to get any type of loan for business or mortgage for a new house, you need to do window dressing for the bank.

There is no exact number what is considered too much by the tax office, but if you exceed EUR 50.000 balance in the business bank account, the tax office is triggered. That showed the next court case.

Year end balance – lawyer court case

A law firm had in their company business bank account in the year 2009 EUR 438.788. That is more than EUR 50.000, hence the Dutch tax office made a claim for not only Box 3, but a corporate deduction for pension based on the amount of assets. A bit complex to fully explain, but high assets can also create a higher pension deduction on paper.

The lawyer argued that he need the amount of liquidity for periods of less prosperity, which was not strange in the year 2009. The court partly agreed and fixed the required amount of assets at EUR 175.000. More or less in the middle of the tax office and the law firm.

Both the tax office and the law firm appealed this courts decision. The higher court accepted the fact that the law firm needed more than EUR 50.000 on the bank account within reason. Reasonable was keeping cash for running costs of the company, expected investments to be done by the company, but also keeping a balance for future risks for a fundament of the company in uncertain times. Moreover this court decided that the tax office had not proven that the EUR 50.000 was sufficient for this law firm.

Moreover, the court decided that because this law firm was a small firm, only two lawyers, hence the EUR 388.000 taken all into consideration, was not too much and acceptable.

Orange Tax Services

We have the opinion that you need to think ahead. Think ahead implies that in three years time you do want to purchase a house and the bank wants your balances over the past three years. Only showing high equity,  hence high bank balance in the last year, is not good. The bank will understand that this was only done for the purpose of getting the loan. Having a good balance every year is better.

Is your holding BV a true holding company?

It is the end of February and by now your BV company should have had its annual report from your accountant. Perfect time to actually open the report and try to understand what is stated in the annual report. If it is not clear to you, ask your accountant to make it clear to you. In the Netherlands the question would be to ask to have the annual report in Jip and Janneke language. Clear language without difficult words. An annual report is not a document that only contains value if complex words are being used.

What is a holding BV?

A holding BV company is a company that holds the shares of other companies, or participations in other BV companies. In the United Kingdom such companies can be dormant companies, in the Netherlands dormant companies do not exist. That implies you need to do the annual accounting, annual report and corporate income tax return.

A BV company is the Dutch equivalent of the limited liability company. A holding company can have many purposes. One of the purposes it to collect tax free the gain made in case of sale of the shares of the working company. A working company is the participation held in which the company is actually being executed. Within the participation exemption the gain made is not taxed, unless it is actually paid out to a natural person.

Another reason is to limited the liability more. A working company is also a BV company and BV stands for limited liability. You are liable for the value of the shares of the company. But in fact you are liable for the full value of the company. If you worked hard and earned a good profit in the working company, the company has a balance full of assets and a high equity amount. The moment the BV is in trouble, the full value of the BV company is liable.

Dividend pay out

Therefore it is important to pay out once in a while a dividend to the holding company, to take out some of the assets from the risk running company. A dividend is a decision made by the shareholders meeting and is only valid when future obligations of the BV are not harmed by this pay out.

Holding BV company orange tax

Current account

The commonly made mistake is that of the current account. The director of the working company either takes out himself more money than his salary or the holding company has no income source and has running cost being paid by the working company. Both scenarios are not desired. If the working company can no longer pay for its debts, the curator will try to get to the end of the line where is the money. That is either the managing director the natural person. The curator is very eager to hold him liable either for bad management. Or hold him liable for the current account debt. A bankruptcy of this person creates the possibility to sell his house for instance. The same is with the holding company, the curator would very much like to get to this company as well. The current account debt is the link. Solve if possible a current account.

Is your holding BV a true  holding BV?

Your holding BV should be out of harm in case one of the participations goes bankrupt. If for some reason a current account has been created, have the shareholders meeting decide on a legitimate dividend payment to settle the debt. Or if there is a substantial excess of equity in the working BV, have it paid out via a dividend to the holding company.

Annual report

So please open the annual report of your holding company. Under participations you find the participations the holding company holds. That is on the left side of the balance or assets side. If you find a name of the participation in other parts of the balance as well, you need to start ask questions why that is and how that situation can be solved.

If the bank balance of the holding company is rather high and the company has substantially less debts, decide about making dividend payment to set aside the liquid asset.

Orange Tax Services

We finished most of the annual reports for 2015. We are critical to current account situations, we address the issue, but sometimes the entrepreneur has reasons for the situation. Nevertheless, paying back the debts or fulfilling formalities is part of the job.