#BUSINESSTAX
You are Director & Shareholder of a Dutch BV. What is more tax efficient: to pay yourself a salary or dividends?
You are a director and a shareholder (a stake of 5%+) of Dutch BV (directeur en groot aandeelhouder, hereinafter referred to as "DGA"). In this article, we dwell upon DGA’s salary in comparison to dividends and provide other tax-related tips to business owners in the Netherlands.
What taxes does BV pay?
When opening a BV, we often think about the advantages of the corporate tax regime over the personal one (in the status of an individual entrepreneur (ZZP)). To understand and, moreover, to calculate everything correctly, you need to take into account that generally BV pays the following taxes (in addition to VAT):
- 1salary taxes (loonheffingen, hereinafter also referred to as "LH")advance withholdings from the employee's salary, which are later offset against the employee's income tax (see point 6 below);
- 2employee insurance premiums (werknemersverzekeringspremies, hereinafter referred to as "Insurance Premiums"),which the employer adds up to and withholds on top of the employee's gross salary;
- 3health insurance premiums (bijdrage Zorgverzekeringswet),one part of which the employer adds up to and withholds on top of the employee's gross salary (werkgeversheffing, hereinafter referred to as "ZVW employer's premium") and the other - withheld the employee's salary (eigen bijdrage) (hereinafter referred to as "ZVW employee's premium");
- 4Corporate income tax (vennootschapsbelasting, hereinafter referred to as “Corporate Tax”),payable after deduction of the operating expenses, the salaries, taxes and premiums above (see points 1-3 above);
- 5dividend tax (dividendbelasting, hereinafter referred to as "Dividend WHT"),which is offset against DGA's income tax (see point 6 below);
- 6In addition to this, DGA pays:personal income tax after the reporting year end (inkomstenbelasting, volksverzekeringspremies, hereinafter referred to as "IB").
- 1salary taxes (loonheffingen,
hereinafter also referred to as "LH")advance withholdings from the employee's salary, which are later offset against the employee's income tax (see point 6 below); - 2employee insurance premiums
(werknemers-verzekeringspremies,
hereinafter referred to as
"Insurance Premiums"),which the employer adds up to and withholds on top of the employee's gross salary; - 3health insurance premiums
(bijdrage Zorgverzekeringswet),one part of which the employer adds up to and withholds on top of the employee's gross salary (werkgeversheffing, hereinafter referred to as "ZVW employer's premium") and the other - withheld the employee's salary (eigen bijdrage) (hereinafter referred to as "ZVW employee's premium"); - 4corporate income tax
(vennootschap-sbelasting,
hereinafter referred to as “Corporate Tax”),payable after deduction of the operating expenses, the salaries, taxes and premiums above (see points 1-3 above); - 5dividend tax (dividendbelasting,
hereinafter referred to as "Dividend WHT"),which is offset against DGA's income tax (see point 6 below); - 6In addition to this, DGA pays:personal income tax after the reporting year end (inkomstenbelasting, volksverzekeringspremies, hereinafter referred to as "IB").
What taxes does BV pay with DGA?
Good news first. DGA may be exempt from adding up to and withholding on top of his/her gross salary:
- insurance Premiums (max. total tate of 17,90% in 2024);
- and ZVW employer's premium (6,57% in 2024),
Now for the bad news. DGA is obliged to pay salary taxes (loonheffingen) and subsequently personal income tax (IB) on the salary attributed to him (gebruikelijk loon), even if he/she does not actually accrue/pay it to himself.
DGA is attributed an annual (gross) salary, the amount of which, as a general rule, must be set at the level of the highest of the following values:
- the maximum salary that is accrued to any employees within the DGA's group of companies;
- the standard salary of an external (employed) director in a similar position in the industry;
- €56 000 (2024).
In the case where the DGA's salary is at least €56 000, the burden of proof of the non-market salary lies with the tax authority.[1] The tax inspector must demonstrate, by indicating the criteria used to determine a similar position, why he/she believes that the "market salary" is higher than the salary set by the company.[2]
[1] Kamerstukken II 2014/15, 34 002, nr. 3, p. 13 en Kamerstukken II 2014/15, 34 002, nr. 14, p. 10.
[2] Art. 12a lid 8 Wet LB.
Suppose you are the DGA of a large industrial holding company with millions of euros in turnover. Then, most likely, the tax authorities will be able to prove that the DGA should receive a salary at a level much higher than €56 000. We know of cases where additional payments were made, for example, from €100 000 to €200 000 in salary. Not everyone wants to pay an additional €49 500 in imputed taxes. This is why it is important to agree with the tax authorities in advance on the amount of the DGA's salary, by submitting a request for a ruling (read a separate article on how to submit a request for a ruling). A starting point for determining the market salary can be special salary comparison services, such as Salariskompas and searching for vacancies for similar positions.
Why might it be interesting for me, as a DGA, to pay myself a high salary?
To obtain the 30% ruling (in December 2023, it will become clear whether the 30% ruling will be significantly reduced (especially for those who received it after 2023)), an expat DGA must enter into an employment contract with their own BV (and preferably do so by the end of 2023). The minimum salary in this case, as a general rule, cannot be less than €42 000 (2023). However, the higher the salary, the greater the tax savings (30% discount). By law, the maximum tax savings can be achieved with a salary of €233 000 (2024), resulting in an effective overall tax rate of:
What is more tax-efficient: paying yourself a salary or dividends?
If a DGA does not have the 30% ruling, then it is less profitable to pay yourself a salary of €75 000 per year than to pay a salary of €56 000 and distribute the rest as dividends after paying corporate income tax.
When to switch from ZZP to BV?
Interestingly enough, for a private entrepreneur (ZZP) with a net annual income of €75 000, it is still more prudent tax-wise not to switch to BV. However, with a net annual income of €100 000 or more, a switch to BV may be recommended, especially if the ZZP has been in existence for more than 3 years and is losing some of its tax benefits.
Naturally, the maximum savings in the absence of the 30%-ruling occurs in a situation where the tax authorities have approved a DGA salary of €56 000 and allow the rest to be distributed as dividends.
Naturally, the maximum savings in the absence of the 30%-ruling occurs in a situation where the tax authorities have approved a DGA salary of €56 000 and allow the rest to be distributed as dividends.
Arguments for lowering the salary of a DGA below market level
What to do if you have nothing to pay a salary with, except out of your own pocket? For example, BV is incurring an operating loss due to product development and is not yet generating revenue. Or the revenue is still very small due to the fact that the DGA combines a startup with a main job? And then there are illnesses, covids and other troubles leading to structural losses. The tax authorities have developed a position on all of the above points.
1
Startup
In the first 3 years after the establishment of a BV, a startup that is in the stage of operating losses is entitled to request a reduction in the level of the DGA's salary from the tax authorities in proportion to the number of hours that the DGA is employed in the BV. The hourly rate, however, cannot be lower than the minimum wage (€13,27 in 2024). The exemption will not apply if, along with the establishment of the BV, assets from a ZZP that was registered 3 years or more before that were transferred to it.
2
Part-time
Let's say you have proved to the tax authorities that the market level of your full-time salary is €65 000. Then, you can, by referring to your part-time employment, proportionately reduce the agreed-upon salary with the tax authorities. You shall bear in mind that temporary disability is not in itself a significant argument.
3
Systematic losses
In some cases, a DGA may try to prove that the company is in a difficult financial situation that follows from losses or a decrease in revenue in the current year, as well as a negative forecast for future periods. Payment of the DGA's market salary in this case could have a negative impact on the company's ability to repay other obligations. The hourly rate, however, cannot be lower than the minimum wage (€13,27 in 2024).
Do I need to pay a DGA salary in every company where I am an DGA?
In general, yes, if the exception (doorbetaaldloonregeling) for a group of companies is not applicable, in which one company (the employer for the purpose of LH) receives amounts from other group companies for the account of DGA's salary. For example, if you are a shareholder-director of a personal holding BV (hereinafter referred to as "PHC"), which is a director-shareholder of an operating BV (hereinafter referred to as "OpCo"), and you are still employed as a director/employee in that OpCo (which may be necessary, for example, to obtain R&D benefits and consolidate intellectual property rights on OpCo), then, generally, both OpCo and PHC must withhold DGA salary taxes, the level of which salary must be agreed with the tax authorities. In such a situation, we recommend agreeing with the tax authority to:
a DGA salary for OpCo at level X and a DGA salary for PHC at level 0, since all work is carried out on behalf of OpCo, and PHC is only needed for ownership;
or if the DGA salary will be imputed to both companies, then:
PHC pays its part of the DGA salary to OpCo and OpCo withholds taxes and pays the salary out to the DGA.
Is it beneficial for a DGA to place a new car on the balance sheet of a BV?
Yes. Despite the fact that the imputed income for driving a company car for personal purposes is always included in the salary of an employee, in the case of a DGA, this income is included in the DGA's salary. As a result, the DGA does not need to pay himself more salary.
At the same time, the BV will have the ability to:
- annually amortize the cost of the car on the balance sheet of the BV and deduct the corresponding expenses from the base for Corporate Tax;
- deduct the costs of insurance and maintenance of the car from the base for Corporate Tax;
- deduct / claim VAT paid for the purchase of the car, components, for maintenance (with subsequent correction for private use).
What if the PHС receives a management fee from OpCo?
In this situation, you can use the exception above (doorbetaaldloonregeling) and pay a DGA salary only at the level of the personal holding, provided that the DGA is not appointed as the director of OpCo.
At the same time, when agreeing on the salary of a DGA with the tax authorities, it is not recommended to negotiate the salary level taking as the starting point the level of remuneration of PHC defined under the management services agreement with OpCo (managementvergoeding). Previously, a DGA could agree with the tax authorities a favorable methodology for determining the salary of an DGA, based on the level of "management fee" of PHC, reduced by the amount of business expenses and PHC’s profit margin. For the past 7 years, the use of such a methodology has been prohibited in various judicial instances - the Supreme Court in 2016, the Appeals Court of The Hague in 2019 and Arnhem-Leeuwarden in 2022.
Therefore, the structure of the management fee does not help to reduce the size of the DGA's salary - first you need to determine its market value, and then - use such benchmark when calculating the size of the management fee.
At the same time, when agreeing on the salary of a DGA with the tax authorities, it is not recommended to negotiate the salary level taking as the starting point the level of remuneration of PHC defined under the management services agreement with OpCo (managementvergoeding). Previously, a DGA could agree with the tax authorities a favorable methodology for determining the salary of an DGA, based on the level of "management fee" of PHC, reduced by the amount of business expenses and PHC’s profit margin. For the past 7 years, the use of such a methodology has been prohibited in various judicial instances - the Supreme Court in 2016, the Appeals Court of The Hague in 2019 and Arnhem-Leeuwarden in 2022.
Therefore, the structure of the management fee does not help to reduce the size of the DGA's salary - first you need to determine its market value, and then - use such benchmark when calculating the size of the management fee.
May I issue loans to myself without agreeing on the salary of a DGA?
Issuing a loan from a BV to oneself as a DGA may seem to be a tempting optimization tool, as it does not itself require the BV to withhold any taxes. However, it is not recommended to issue loans to yourself as a DGA without agreeing on the size of the salary of a DGA with the tax authorities. Otherwise, the tax authority may requalify such loan payouts as DGA salary payments, leading to LH and ZVW employee's premium withholding obligations.
Our next post will dwell upon the tax tips related to loans between a DGA and a BV.
Our next post will dwell upon the tax tips related to loans between a DGA and a BV.
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