In the Netherlands you can start rather easily your so called one man company. After the Chambers of Commerce registration this company is reported with the Dutch income tax return. The one man company is regarded a source of income, hence the result needs to be reported in the income tax return and entrepreneurs discounts could be applied.
What is a source of income for the one is regarded a hobby for the other. A hobby is not regarded a source of income, hence you do not need to report this income if any. The Dutch tax office has the opinion that if the company has never made a positive result or very marginal positive result over the past years, this is no longer regarded a source of income, but a hobby.
Why would the tax office classify a company being a hobby?
The reason is rather simple. If a company only makes a loss since its existence basically, it was never a source of income in the first place. How can you maintain this situation? Most of the time the same person has employment income which supports the losses made in the so called one man company. However, if you set off the losses against the employment income, this tax payer receives tax back, as the loss will reduce the base over which was already withheld wage tax with the employment.
That is the reason why the tax office is keen to put a stop to hobby’s being financed by the tax office.
Recently a court decision was about the case of a person that incorporated in 2006 his one man company: Inspired on your way through Europe. In every single year more costs were made then there was income. In fact, the court made clear no turnover whatsoever was made over the years at all. And no turnover was to be expected. Hence it was determined that this could no longer be qualified as a one man company, but as a hobby. Consequently, the loss deduction is terminated, and the tax refund due to the employment had to be paid back.
What if you are a starting entrepreneur?
If you are a starting entrepreneur it is very likely that you make a loss the first year, maybe even the second and the third year. But if you can show what you are doing and there is income only not enough to cover the costs yet. However, your situation is improving every time, then the tax office will not allocate this as a hobby. That said, a three year window is being used. So you have three years time to proof that you can make your company a source of income.
Can the tax office dictate how to run a company?
Never. The Dutch tax office can never sit on the seat of the entrepreneur and make the decisions for the entrepreneur.
A 5 year old Ford focus could be a good company car. Running costs can be expected to be within the normal parameters. However, the entrepreneur has the opinion that a 20 year old jaguar fits the purpose much better in respect to what the company should look like to its potential clients. From the jaguar you can expect it to be much more expensive to run than the Ford. Lower costs is higher profit, hence the tax could argue that the entrepreneur has made the wrong decision. But is it? We will not know, but the tax office cannot influence the choice of the entrepreneur how to run the business.
Is there a limit to how far you can go?
Certainly. The example is the dentist. This dentist tends to visit its clients. For means of transportation a lot is possible. The Rolls Royce is always mentioned as being over the top, but not for the tax office. Over the top was the airplane. The dentist maintained a plane and its full running costs to frequently visit his clients in another part of the Netherlands. That was not accepted by the tax office.
Orange Tax Services
We can assist you with the administration of your company. We will be able to inform you which costs are deductible and which not. And if the occasion occurs that also we have the opinion that your business is indeed a hobby, we will inform you and assist you in terminating this business. If you would like to fly a plane to your clients, we will be glad to inform you that a Rolls Royce might be more appropriate.