Dutch Income Taxes: Small Business Owners
If you live in the Netherlands and earn income from freelance work or self-employment, it needs to be declared to the Dutch Tax Office (‘Belastingdienst’) in your annual income tax return.
When first starting a business in the Netherlands, the sole proprietorship (‘eenmanszaak’) structure is usually a favourable option. If the income is insignificant and you do not regard or present yourself as a business, you can declare it as ‘other income’, also referred to as freelance income. This is the simplified way of declaring such income in the Dutch Income Tax return and normally has no VAT consequence. When the income is more substantial and more permanent in nature, then a limited liability company (BV) may be a better business structure for you.
Since the majority of expat business owners in the Netherlands choose the ‘sole proprietorship’ structure to start, we offer the following overview of Dutch taxation as it applies to this business format.
The sole proprietorship is commonly associated with being a ZZP’er, but the two are not exactly the same. A ZZP (‘zelfstandige zonder personeel’) means you are self-employed with no staff, while a sole proprietorship can have employees.
To register a sole proprietorship business, you first make an appointment at a local office of the Chamber of Commerce (‘Kamer van Koophandel’).
The KvK will then inform the Belastingdienst of the registration and an account will be established for VAT (BTW) purposes.
Once the business is active, you will need to submit a VAT return every quarter, accounting for your VAT on both the sales and purchase/expense side. Most businesses in Netherlands must charge a value-added-tax of 21% for their services. Some services are taxed at a lower rate of 9% or in rare cases may even be exempt from VAT.
Expenses related to running the business are deducted from the gross income (some restrictions apply). At the end of each fiscal year, an annual business statement needs to be drafted and the figures entered into the digital income tax return form.
At the start of 2020, the government introduced the ‘Kleineondernemersregeling‘ (small business owner scheme). It allows business owners earning less than €20,000 a year to forego charging their customers VAT tax or filing the usual VAT tax statements at the end of each quarter.
The scheme simplifies business administration and reduces the time needed for it. The drawback is that the entrepreneur is not entitled to a refund for BTW paid over the course of the year.
DUTCH SMALL BUSINESS TAX ALLOWANCES
The sole proprietorship and the partnership business structures both have a number of facilities which reduce taxable income. Below is a summary of these allowable deductions.
SELF-EMPLOYED DEDUCTION (Zelfstandigenaftrek)
You are entitled to the self-employed deduction (Zelfstandigenaftrek) if you meet the criterion of being an independent entrepreneur (i.e. independence of clients, continuity, entrepreneurial risk) and meet the hours criterion. The hours criterion means that you spend at least 1,225 hours on business related activities. The amount of the self-employed deduction in 2023 is €5,030.
START-UP DEDUCTION (Startersaftrek)
When you have started your business, you may be entitled to the start-up deduction (Startersaftrek). This is an additional amount on top of the self-employed deduction. For 2023 the start-up deduction amount is €2,123.
To qualify for this deduction, the following conditions must be met:
- over the past 5 years you were not an entrepreneur for at least 1 year
- during the past 5 years you have not used the self-employed deduction more than twice
It is possible that the amount of the self-employed deduction and the start-up deduction together is higher than the profit. This will result in a loss, which is applied to other tax years with a positive income.
CO-OPERATING PARTNER DEDUCTION (Meewekaftrek)
The Meewekaftrek deductible can be claimed if your fiscal partner works also in the business. The following 3 conditions must be met:
- You are a business owner;
- You have worked a minimum of 1,225 hours on your business during the year;
- Your fiscal partner works 525 hours or more in the business or your partner receives a compensation of less than €5,000.
Depending on the number of hours your tax partner works, you may deduct a percentage from the profit. It is important to record your partner’s hours on business activities.
DISCONTINUATION DEDUCTION (Stakingsaftrek)
In the event you end your business, you may be eligible for the discontinuation credit against your discontinuation profit (maximum amount is €3,630). You can only use this deduction once during your lifetime, but if the full amount is not used, the balance can be carried over.
Calculating the discontinuation deduction (Strakingsaftrek) is complicated so it is recommended to seek professional advice.
SMALL BUSINESS PROFIT EXEMPTION (MKB-Winstvrijstelling)
After applying the above deductions, 14% of the remaining profit is tax exempt and therefore deducted from the taxable income. This is the MKB-Winstvrijstelling deduction.
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