Difference employment versus self-employed: disability insurance

Difference employment versus self-employed: disability insurance

The question difference employment versus self-employed is often asked. The tax rates are compared, but not the disability insurance. Compare apples with apples, not with pears.

Difference employment versus self-employed

We have the opinion that this question does not really exist. Either you are an employee or you are a self-employed entrepreneur. It is not a choice.

Having said that, internationals do arrive from abroad. The employer abroad is aware of the Dutch tax rules, very protective for the employees. The employer is a bit hesitant. The international eager to move to the Netherlands does some research and finds that he can also invoice the current employer. The tax is much less, a no brainer you would think.

An employee is not an entrepreneur

The moment the assumed lower taxation is discovered, we are asked about the employment versus self-employed. We are happy to assist, but an employee is not an entrepreneur.

An entrepreneur creates his or her income source, is aware of current clients maybe leaving. The invoice might not get paid. Things like that.

The employee entrepreneur does not have this worry. He or she will have this income, unaware that the income can suddenly stop and no debtor risk. That is not an entrepreneur.

We are proven right the moment the Value Added Tax return had to be done, but was never done, as the employee was not use to file tax returns. In addition the entrepreneurs income tax return is be filed. That is a more complex income tax return, hence more expensive to process income tax return, than the regular one.

Difference employment versus self-employed: disability insurance

The true problem is with the disability insurance

The person making the comparison between being employed in the Netherlands for the foreign employer and being self-employed invoicing this foreign company, only looks at the amount of tax involved.

Indeed, the self-employed person can deduct company costs. This person can claim entrepreneurs deductions such as the entrepreneurs discount, starting entrepreneurs discount and the small business discount. That makes much less income tax is paid being self-employed.

Believe it or not, but even we know life is not only about taxation. If you are employed, the employer pays for the disability insurance and the unemployment insurance. Two insurances you do not have being self-employed. The disability insurance pays for the lack of income you have, when you are for instance hit by a tram. Every day a tourist is hit by a tram in the Netherlands. If you wake up three months later in hospital, who paid for your rent or mortgage?

Disability insurance

The disability insurance provides you with an income during a period you are not able to generate one due to health issues. For instance you have Covid issues, or taken into hospital.

The employer continues your salary payments at least for the first two years. Being self-employed, the client cannot continue to pay you. That would imply is was an employment all along.

Yes, you can take out a disability insurance and here comes the apples and pears correction. To compare being employed versus self-employed, you need to take the costs of a disability insurance into account. An insurance based on EUR 50.000 income per year can easily cost you EUR 10.000 premium per year. That is a tax deductible premium, but still a large amount.

Moreover, an insurance company is an insurance company. The moment the chance arises that a claim can be denied, this will be used. That problem does not arise with employment.

Tax is exciting

We think tax is exciting. Choosing between employment or being self-employed is strange to us. Either you are an employee or you are not. Same for the entrepreneur. The lower amount of tax is often the trigger to the self-employment option.

As much as we think less tax is exciting, there is more to the picture than tax alone. Rights employees have under Dutch rules. The disability insurance the unemployment benefit. All aspects you need to take into account, next to the entrepreneurs obligations. A true comparison will make you choose to be an employee any day.

Director salary can be taxed in multiple countries

Director salary taxed

The director salary can be taxed in multiple countries. This depends on where in fact the activities of the director took place.

Director salary  and tax treaties

The tax treaties determine where what is taxed. The tax treaties make a difference between employees not being a director and directors.

Employment article tax treaties

An employee is taxed in the country where the work is actually being done. This article is ‘famous’ because of the well-known 183 day rule. A rule everybody uses when not applicable. For instance: I have been less than 183 days in the Netherlands, so my friend told me I do not need to pay tax in the Netherlands.  Or: I am living in the Netherlands, but I worked less than 183 days for a foreign company, my neighbour told me that I do not need to pay tax in the Netherlands.

The 183 day rule is about you being send by your employer to another country. Another country is another country than the country where you are a tax resident. Otherwise it has no purpose. AND you are paid by your employer that is not residing in that other country. And your employer does not charge the entity you worked for in that other country.

That implies if you are a tax resident in the Netherlands and you worked less than 183 days in the Netherlands. You still pay Dutch tax as you are a Dutch tax resident.

If you worked less than 183 days in the Netherlands for a foreign employer, you still pay Dutch tax as the foreign employer should have started a Dutch payroll instantly. Based on exactly the article of this chapter.

Director article tax treaties

The director article states that the salary is taxed in the country where the work is being done. Or if the income should be allocated to another country, it is taxed in that other country. No 183 day rule for the director. The allocation possibility makes the director article different from the employee non director article.

The above description we would like to explain with the help of a court case.

Court case – Dutch tax resident, director of Belgium company

A Dutch tax resident was director of a Dutch company, Belgium company and French company. For all three companies he was active and received a salary income. In his Dutch income tax return he claimed a double taxation relief for the Belgium salary. A taxation relief based on fully excluding this income.

The Dutch tax office did not follow the filed income tax return and provided a double taxation relief. Not based on full exemption, but on partial exemption.

The Dutch tax resident appealed the decision and claimed that he should be treated equally in this respect as a Belgium employee that is a tax resident in the Netherlands.

The court ruled that as the income earned as Director of Belgium company was taxed in Belgium as such, that the director article in the Dutch Belgium tax treaty applies. This means that the director income is fully exempted in the Dutch tax return, not partly.

Director salary can be taxed in multiple countries
Director salary can be taxed in multiple countries

Director is not equal to regular employee

The Dutch tax resident in the above court case, appealed on equal treatment with that of a regular employee working in Belgium that lives in the Netherlands. We think you can compare apples with apples, but not lemons with apples.

For the regular employee a different article is in the tax treaty than for the director. Moreover, a regular employee has often no say in where the job is going to be executed. The director is often able to determine where, when and how he will do his job. As far as we can note, the court has not applied the comparison with a regular employee.

Director and company car

The court did make a remark in the case about the company car being taxed in the Netherlands. A company car is a remuneration in kind for which a percentage of the new Dutch catalogue value is added to the income.

If you are a regular employee, you have no say in the license plate the company car has. An Audi A3 purchased in the Netherlands is double expensive from the identical Audi A3 purchased in Germany. For the employee there is no difference, as the amount added to the income is based on the Dutch catalogue value.

The employee does have a problem, as it is forbidden to drive as a Dutch tax resident a foreign license plated car. The employer needs to request for a permit with the Dutch tax office. With that permit the employee can drive limitless in the Netherlands.

How wonderful would that be, you being the director to pick a car with a license plate where the car is the cheapest. Maybe Luxembourg where there is no or low tax on cars could be convenient. Lower costs is a higher bonus, not?

Indeed not. For a director the same rule applies with respect to the amount added to the income. For the director a different rule exists for the permit to drive in the Netherlands. A permit can be obtained, but only applies to the quickest road out of the Netherlands to the company in the country of which the car carries the license plate.

Tax is exciting

We think tax is exciting. We are also excited about the court case for this director article in the tax treaties. This article if often overlooked by directors and there is hardly jurisprudence over this article. We therefore welcome the court case.

BV company or one man company: what is limited liability?

income tax

A BV company stands for limited liability, one man company implies you are fully liable. What is limited liability?

BV company

A BV company is the Dutch equivalent of the Ltd, the limited liability company. Such a company can only be incorporated by the Dutch notary. The Dutch notary will ask the incorporator about the volume of the share capital. The minimum is EUR 0,01 and there is no maximum.

Honestly, the EUR 0,01 share capital is a bit silly. The balance will show zero, as EUR 0,01 equals zero on the balance. Potential investors or traders might wonder what is the situation. Then the silly one cent is often forgotten to be paid. The limited liability starts after the full share capital has actually been paid into the company bank account.

One man company

The one man company is a transparent company. That implies the company itself cannot own goods or be held accountable. The person owning the company owns the goods and is held accountable. The Dutch Chamber of Commerce (www.kvk.nl) is the organization incorporating these type of companies.

The Dutch Chamber of Commerce will ask basic questions while the process of registering the one man company is taken place. These questions are to avoid aspects as deemed employment.

BV company or one man company: what is limited liability?

Limited liability what is that?

Limited liability implies the obligations of the BV company shareholder is limited to the capital of the BV company. If a BV company has a EUR 1.000 share capital and the company goes bankrupt, the liability of the shareholder is limited to this EUR 1.000. The EUR 1.000 must have been paid into the business bank account, otherwise the limited liability has not started. The shareholder is then fully liable for the losses and debts due to bankruptcy.

Is the limited liability true?

No, of course not. Life is not this simple. Life is much more complex. A bankruptcy is not happening out of the blue on an early morning. Bankruptcy is a process that starts with no money coming in the BV company. The BV company does have payment obligations like Value Added Tax, Corporate income tax and maybe wage tax.

The standard situation is that money is not coming in, and obligations to pay tax or invoices are not proceeded. That implies there is a little amount of money in the BV bank account. That the shareholder often uses to simply pay the rent or mortgage of his or her house. Or pay for the food on the table. That is how simple life can be.

Personal liability is true

The moment a BV goes bankrupt, the curator, if one is appointed, has only one task: hold personal liable the shareholder. The shareholder might own a house or other assets that could be liquidated to pay for the debts. The curator will simply ask the shareholder to pay back the money he took from the account for the food he or she needs to eat. Nearly never the shareholder is able to pay back the money, and that is the moment the shareholder will be held personally liable and goes bankrupt as well.

If you would investigate the register with the Chamber of Commerce of the bankrupt BV companies and you hold next to that list the moment the shareholder of the BV goes bankrupt. Often the time between the BV bankruptcy and the shareholder bankruptcy is one week.

What is the point of the above?

The point of the above is not to assume that limited liability implies that the liability is limited. It is not. The name of the limited liability company is simple wrongly chosen.

Do you need to be afraid of liability?

Yes and no. You always need to be aware of your obligations. Then again, most entrepreneurs start a company that does not involve heavy machinery, a warehouse, team of employees. Most starting entrepreneurs offer consultancy services. Going bankrupt as consultant is nearly not possible. The investment is basically between your ears, not in financial investments.

If you trade in products, like you sell via an online platform products, you need to be aware of product liability. Even if you are only the company selling the products, not producing the goods, be aware of product liability.

What to do, BV or one man company?

That is a frequently asked question and the answer very much depends on the situation. A simple approach is to start with the one man company. If the company has proven itself with good turnover and opportunities, you can decide or consult about changing that one man company into a BV company. A BV company has many obligations and formalities, so maybe a BV company does not make your life better.

However, if you build value in a company with the intent to sell the entire company to an investor over time. Then it is important to start in a BV company instantly, as a later change will either cost you up front tax. Or a fiscal transfer rule cannot take place by lack of time. In this scenario the BV is the obvious choice. The question then is if you like to have a holding structure or not.

Tax is exciting

We think tax is exciting. We would love to be able to predict the future, but we cannot. Neither can you. We understand you are energetic about your company plans. We invite you to contact us to talk about company setup possibilities. Whether that will be in the end the perfect setup, time will tell. All we know is, get started. Stop planning, simply do it. We will be glad to assist you with the accounting and tax filings in your journey as entrepreneur.

One client entrepreneur issue

Entrepreneurs deduction (zelfstandigen aftrek)

The one client entrepreneur issue is about one client is no client logic the Dutch Government applies. What is that about? Is that a problem? It depends, but we think it does not need to be a problem.

One client entrepreneur

You found an employer abroad who is willing to hire you, but is not willing to employ you. In other words, the foreign employer is willing to accept you as an employee, but very hesitant to become exposed to or subject of a foreign country tax regime.

The most common reply in this case by the foreign employer is: invoice us. Instead of being an employee, you become a contractor. I am rather certain that if we look at the agreement made, we will see an employment agreement. In that agreement the word employee has simply been replaced by contractor.

You are now a contractor with one client only. Is that a problem?

That depends who you ask. If you ask the Dutch Chamber of Commerce (KVK) it is indeed a problem. Such a problem, the KVK is not willing to register your company if you present one client only.

You need to ask us, before you ask the Dutch Chamber of Commerce. Most likely then you do not have a problem and a company registration.

One client entrepreneur issue
One client entrepreneur issue

What could be the problem?

The problem is a domestic problem, not international problem. The domestic problem is as follows.

You are employed by a Dutch employer. You terminate your employment on let us say on a Friday and you return to the same office the following Monday. On that Monday you perform the same job, same clients, but now you send an invoice for your services instead of being paid a salary.

Your former employer who now contracts you is very happy, as much less social premiums are to be paid for you. You are very happy as you pay both less income tax and less social premiums.

Solidarity of social premiums

The problem is with the social premium system based on solidarity. If we all do like explained above, not enough social contribution will be paid to fund the system we have in place. A system very much appreciated by the Dutch population. Protecting this system is key, hence the Chamber of Commerce and the Dutch tax office is keen to terminate a deemed employment.

International contracting

As I stated above, a domestic problem. The foreign employer did not employ the Dutch tax resident before a contract was offered. The foreign employer is not willing to become part of the Dutch tax system. This is a very common fear under foreign companies.

The next best thing is the following: The Dutch tax resident prefers employment. The foreign ‘employer’ is not willing to comply to that. The suggestion is to invoice the ‘employer’. For the Dutch tax resident this is the next best thing to do to contribute to the Dutch system.

One client is no client

Is the phrase ‘one client is no client’ true? Of course that is true. If you only have one client, the moment this one client terminates the agreement, you have no more income. Hence we always motivate the one client companies to find more clients. To think outside the box they are currently thinking in. To go for it. Just do it, as Nike states.

Nonresident employment payroll

Before we assist these type of so called one client companies, we suggest them that we can process a payroll. A payroll where there is no exposure to anything else than this employment only.

A one client company may look like fantastic at the start, less tax, more to spend. Over the years people become aware of possible unemployment, maybe getting disabled or not able to work due to hobby’s like skiing or cycling.

Is the old age pension set in place? These worries are not for the employee. An employee working in the Netherlands for a foreign employer falls under Dutch rules and regulations. This employee is socially insured for unemployment and disability. The pension contributions is something that needs to be negotiated.

Tax is exciting

We think tax is exciting. Running the Dutch payroll of a foreign employer is exciting. We also get excited about a company with one client only. As long as Dutch rules and regulations are accepted and executed, we will be pleased to assist.

Contact us for our fixed fee quotes. Our quotes are the same for everybody.

Start company: do I need three clients?

Do I need three clients before I can start a company, is an often asked question. Of course not.

Do I need three clients to start a company?

It is of course a perfect start when you have immediately three clients, but this is not a requirement.

The origin of the three clients question

We are asked if you need three clients, because you have heard about that. Maybe you do not fully understand the origin of this question.

We have a social system in the Netherlands that is based on everybody contributing. The more that contribute, the better the system works, as there is more money to spend on social welfare. 

When you are an employee, then your employer contributes to the Dutch Government social premiums for you. That enables you to benefit from the unemployment benefit, disability benefit and other social system related aspects.

When you are not an employee, but you are self-employed, you are not insured for unemployment. Nor are you insured for disability. If you are not insured, you do not need to pay the social contribution, hence you pay less ‘tax’.

Paying less tax triggers in general human beings from becoming creative. So what do they do, they terminate their employment. The next day they return to the same office, same desk. You do the same job, but now they invoice their “employer”.

The employer is happy as the ‘employee’ is no longer protected by labour law. Not sure if the ‘employee’ understood this part as well. And the employer no longer needs to pay social contributions on top of the invoice of the ‘employee’.

The ‘employee’  sends an invoice, claims entrepreneurs deductions and pays much less income tax.

I have to place between brackets the employee and the employer, as basically nothing has changed, even though they think they are more clever than the system. But if you work full time for 1 client and you have employee look alike conditions, then you are an employee. The tax office is keen to gross up the invoice amount including VAT, and charge the employer with wage tax. Plus penalty naturally.

Therefore one client is no client.

Do I need three clients
Do I need three clients

Why is three enough?

It is not said that three is enough, because if you spend 80% of your time on one client and two times 10% on others, where one is affiliated with the 80% client, you still have not proven to be an independent entrepreneur.

Is this about being an independent entrepreneur?

Yes indeed. It is assumed that if you have a number of clients, and for practical reasons the number three is being used, you run true risks. Risks that come with being an entrepreneur. The risk of losing a project, the risk of not being paid. You make investments, you do what an entrepreneur in general is expected to do.

Do I then need three clients?

Of course not. If every starting entrepreneur immediately had three clients, we would have had nearly no entrepreneurs. Often it starts with one client or even no client. It starts with your desire to start your own company, your own business.

The tax office is sharp on the three clients issue, but also gives you a three year holiday to get to the three clients point. The tax office might ring your doorbell to ask about your activities, make sure you do your best to acquire new business and explain that to the tax office.

So you can start your own business with no or one client, but you need to make sure it develops to a business with more clients and enough to support yourself.

What if I start with only 1 client and it will only be 1 client?

Under conditions, this is not a problem. And we know one situation in which you have no issues, and one situation only. It is a common situation.

You moved to the Netherlands and you foreign employer asks you to work from your Dutch home for that company. But the company is afraid to set up a Dutch payroll for the exposure to the Dutch tax office and what that may imply.

You contacted a foreign company to work for them from your Dutch home, but again they do not want to become exposed in the Netherlands.

This fear for the Dutch tax office is strong, especially in the USA. We understand that fear, we try to explain there is no need to have this fear, but not all companies you can convince.

So here you are, you finally have a source of income, you want to pay Dutch tax over the income in line with the tax treaties, but your employer does not want to set up a payroll in the Netherlands, what do you do?

Indeed, you register a company and start invoices the foreign employer for your services. That is the best you can to be able to comply. The tax office can start asking questions, but this solutions was not related at all to reduce your social premiums payment, not at all for getting more tax benefits, it was within limitations the best you could to do comply. That the tax office cannot argue.

Tax-is-exciting

We think tax-is-exciting and we are very much aware of the three client rule. We always encourage entrepreneurs to get more clients, as that is also good to be more independent from that one client.

Foreign employers we try to facilitate the best to our ability with a Dutch payroll, but some foreign employers we cannot convince that they are not more exposed in the Netherlands than the payroll for their employee. In those situations we will be glad to support the ‘employee’ with the one man company with the one foreign client, to make the Dutch tax contributions.

Sorry for the dashes in the middle of the word tax-is-exciting. Apparently Google has a dirty mind and sees only a three letter word that we refer to when we practice to reproduce ourselves. Anything related to that word is spam, hence this devout solution.