Example: legal entity and structure advice

The case:

A business would like to set up in the Netherlands. This business will deliver consulting services, provide training and create digital content in the Netherlands and the European market. The projected revenues for the first year are around €100.000 for the first year and are expected to gradually go up.

The main costs will be in R&D, salaries for employees and a few other basic costs. The profits are therefore expected to be zero or slightly negative in the first year and positive after the second year and beyond, as the investment start paying off

Sources of financing will be own money (around 25k), one or more private investors and perhaps a bank loan.

The main shareholder-director is currently located in Germany but can set up in another jurisdiction.

Advice

Choosing the right entity: Sole proprietorship or BV
Given your business' profile and size, you have basically two options here: a sole proprietorship ('eenmanszaak') or a limited company (BV, 'besloten vennootschap'). It can make sense to start with a sole proprietorship, because it has very little startup and maintenance costs and has a few interesting tax advantages that will give you a +/- 15-20k tax-break. These are called the zelfstandigenaftrek, startersaftrek en MKB-winstvrijstelling.
So in your startup scenario it could make sense to use the sole proprietorship. There are a few reasons to choose a BV over the sole proprietorship:
  • The sole proprietor has to be a resident of the Netherlands, this is not a formal requirement for the shareholder of the BV.
  • You are personally liable for company's risk and losses in the sole proprietorship (because you and the business are one entity from a tax perspective). In the BV you are not personally liable.
  • In the sole proprietorship, everything that is left after you deduct your costs from your revenue is seen as personal income and therefore will be taxed at the relatively high personal income tax level. Once you start making a more serious profit, the sole proprietorship will not be as tax-friendly as when you operate at a loss or make a small profit.
  • A sole proprietorship is not very investor-friendly. It is linked to your person and therefore hard to invest in. Any serious investor will demand to invest in a BV entity.
  • If your thinking of a serious and long-term profitable business, it makes sense to choose the BV over the sole proprietorship, because shifting from a sole proprietorship after year 1 or 2 will cost time and can be a relatively large administrative burden.
Looking at your situation, I think it makes sense to start a BV immediately, instead of starting with a sole proprietorship. The startup costs are higher (+/- 1000-1500 euros vs. 50 euros) and the maintenance will be a bit higher (in addition to a quarterly VAT tax return, the BV also has to file for corporate income tax and deposit annual accounts). That will make the annual costs +/- 1000 euros more in the BV. These are rough estimates and depend on the specifics of your administration, but it gives you an idea. Despite this, it makes sense to set up everything up correctly so you do not run into issues later on. On top of that, an investor will require you to have a BV.
Choosing the right structure: Single BV or BV holding structure
Once you choose the BV, you may choose between a single BV with you as the 100% shareholder personally. The most common structure given your situation is the BV holding structure. This is a personal BV holding company owned 100% by you that in turn owns an operating company (also a BV). This operating company is where the actual business' main activities take place (sales, marketing, operation, HR etc.). Any employees would usually be employed by this operating company, not by the holding. The main advantages are summed-up below:
  • Multiple tax benefits. The holding company offers two important tax benefits. Under the Dutch tax rule "participation exemption" any profits on the sale of shares or dividend payments are received tax free in the holding. Because the profit is received tax-tree in the holding, you may use their full amount for further investments. This is a big cash advantage.
  • Solid foundation to work from. If you intend to set up several bv's in the future, a holding company is the perfect base. This allows you to use tax facilities such as the tax unity for the purposes of both corporate tax or vat. You may invest the profits of one BV tax-free in the other BV or offset any losses from the one with profits from the other, lowering your corporate tax bill.
  • Extra protection of operating assets. Another benefit is the spreading of risk. Important assets (such as cars, business premises, surplus cash, IP) are placed in the holding company and the actual activities are carried out in the operating company. If the operating company goes bankrupt, the valuable assets are safe in the holding company. Since you are creating IP, it makes sense for you to 'store' that IP (and other valuable assets) in the holding. Particularly in the field of software, it is very common to place the intellectual property in a holding company. The operating company can sell a software product on the basis of a license obtained from the holding company. The holding company sends an invoice to the operating company for this.
  • Providing a mortgage from the holding company. Another major advantage of a personal holding company is the ability to provide a mortgage loan from the holding company to yourself. This means that you do not have to visit a bank. The interest will be paid to your BV, which in the end benefits yourself instead of the bank. The interest you receive in the BV is added to the profit and then taxed at the low corporate tax rate. The interest you pay to your holding is deductible from your taxable income.
The general goal is to "move money and assets up" from the operating company to the holding. Once the operating company starts running at a profit, you can transfer profits to the holding tax-free (you have paid profit tax in the operating company, but you will be exempt from dividend tax at these sorts of payouts). The holding will be the place where you can save up or invest for your pension and from where you can virtually tax-free re-invest any profits back into the operating company.
In addition to that, in your case the holding company could hold the IP you mentioned. An advantage is that you could attract a shareholder who invests in the operating company without actually having a share in your built-up IP. It will also be much easier to give an employee a share of the company if you know that the share is only in the operating business and not in the actual IP or other important assets. In case of an investor it is often exactly the IP that interests him or her, so in that case it would be less appealing to store it that way. The main advantage is that in case of bankruptcy of the operational company, the IP and other assets are safely stored in the holding and shielded away from any creditors. You can create license agreements to formalize the way the operating company will be using (and paying for) the IP from the holding BV.
In my opinion, a holding structure would be the preferred structure. The only negative is that your startup costs and maintenance costs are a bit higher. We do charge a lower fee for the second BV in a holding structure. If your have a holding structure with one shareholder (you), you can benefit from the fiscal unity system which will keep your administration fees lower.
Possible tax advantages
  • One of the lowest corporate income tax rates in Europe. The corporate income tax rate is set at 15% for profits under 245.000 euros.
  • Participation exemption. As explained above, no taxation of intercompany dividend payouts.
  • The 30%-ruling. This gives a 30% tax break on wages in certain cases. This can be quite a process, but it could be worth investigating. Check out this link for more information.
  • Lower corporate tax rate for innovative businesses (Innovation Box). The rate is set for 9% instead of the regular corporate tax rate. You do have to prove that what you are doing is highly innovative, which more often than not, not the case. More information here. The content/services you are creating do most likely not suffice, but perhaps you are using some sort of groundbreaking technology, that would change things.
  • Fiscal unity system that provides tax consolidation within a group (holding and operating BV). This is in fact another advantage of the holding structure. In general, every BV is independently liable to tax for the tax authorities. This means that the profit that the BV makes itself is also taxed in the same way. At the fiscal unity for corporation tax, two or more BVs are seen as one taxpayer by the tax authorities. Because the tax authorities see only one taxpayer, mutual results are offset against each other. Furthermore, it will in most cases save you the costs of a double corporate income tax return and double annual accounts.
A few additional notes:
  • We recommend you to be a resident of the Netherlands or at least appoint a resident director in your structure. This makes opening a bank account a lot easier. You will need that Dutch bank account if you want to be fully compliant. The tax authorities also appreciate an actual operation in the Netherlands and not an entity that is managed and operated from abroad.
  • Officially there is a 47k per year minimum salary you should pay out to yourself (the main-shareholder/director). Since your business will be running at a loss or a very limited profit at first, this salary requirement will not be any issue. Once your company starts generating profits, you are not allowed to pay out profits as dividend, but you will have to pay this out as salary. In case of a limited profit, you will not be required to pay out a lot. This can also be reduced at the tax authorities at request. This is a rule to prevent major director-shareholders (you) from evading taxes by paying out the entire salary at the much lower dividend tax rate.

BV incorporation

The BV is a limited liability company and preferred legal form for foreign entrepreneurs in the Netherlands. That is because the BV is flexible, easy and affordable to set up. On top of that, the overall tax pressure on a BV in the Netherlands is one of the lowest in Europe. Finally, your BV will shield you from personal liability of your company’s actions, debt and bankruptcy.

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