A company is a source of income, not a source of loss. If too much loss, your company is regarded a hobby for income tax purposes.
A company is a source of income
A company is always started at some point. Often in the set up phase of the company there is maybe no turnover, or at least more costs than turnover. A company needs to become exposes to attract clients. This often implies the first year is a loss year.
The second year could be a loss year, the third year can be a loss year. However, if the fourth year does not show a profit, the company is no longer allocated as such by the Dutch tax office. Your efforts are then labelled as hobby.
How is a loss financed
A company making losses implies costs are being made. These costs are paid somehow. Either you have enough savings, or you have other income. The other income is the problem.
The other income is often income from employment. In the income tax return all is reported in Box 1. That implies the loss is set off against the employment income. That creates the refund. That refund the tax office is eager to challenge after a three year period.
A company is a source of loss – court case
A Dutch tax resident operated a loss making company since 2008. This was financed by employment income and later pension income. He had all kind of activities in his company such as advice about human beings, nature, technique. He operated a rose growning business and a poffertjes kraam. None of these activities yielded more income than the costs made.
The tax office denied the loss claim, that resulted in the wage tax withheld over the employment income and pension income to be refunded to him. The Dutch tax resident appealed with a claim that Zalando, Andrie Rieu and Telfoft made only losses and those are still accepted as companies.
The court denied his claim. Was he right with his claim? No. He confuses a one man company over a BV company vehicle. The one man company with side income creates a tax refund when a loss is being made. A yearly loss making BV company does not yield a refund, as there is simply no more tax to be refunded.
Tax is exciting
We think tax is exciting, some think a company is exciting, while it actually is a hobby. A hobby can be a source of income, often it is not. We do get clients in the office that proudly present their company. We have then to inform them it is not actually a company, it is a hobby that made losses for many years. Our suggestion is to treat the hobby like a hobby and terminate the company, but please continue the hobby.