InsightsJanuary 16, 2020
Exactly how high should the compulsory salary be?
Since starting your BV (private limited company), you’ve probably heard something about the compulsory salary or minimum director’s salary. How high should it be? Is it €47,000? Can it also be lower than that? Or should it, in some cases, be raised?
If you own more than 5% of shares in a BV, you’re a substantial interest holder. If you also work for this BV you’re wearing two different hats. Firstly, because you’re a shareholder which gives you the authority to participate in the decision-making process in the BV. And second, because you’re an employee of the BV. This is often called DGA (director and major shareholder).
The compulsory salary: how high is it supposed to be?
Because of the two different roles within the same company, there are also two different ways to receive money from the BV:
- Salary payment. This is the reward for the work you do for the BV. The salary of the substantial interest holder is subject to the regulations for the compulsory salary.
- Dividend payout. This is a profit distribution. Theoretically, this is a fee for the capital you’ve invested in the BV.
Paying levies on dividend
In most cases, both options will apply: you’re the owner of the BV and you also work for the BV. When it comes to taxes, there’s a big difference between the options of making money from the BV. In case of salary, you pay income tax (through payroll taxes), up to a 49.5% tax rate. When you opt to pay out dividends, you pay a total of 37.86% on this. This levy consists of several steps:
- You first pay 15% corporation tax on the profit.
- Then you pay 15% dividend tax on the gross dividend.
- Finally, 26.9% in income tax is taxed on the gross dividend, with a deduction of the dividend tax that has already been paid. This income is taxed in box 2. Box 2 covers tax on the benefits your receive from a substantial interest (larger than 5%) in a BV.
Minimal height compulsory salary
As you will understand, it’s more profitable to pay out dividends than salary, something that’s also recognised by lawmakers. That’s why Dutch tax legislation has determined a minimum amount of compulsory salary. The height of this salary is the highest of the following three amounts:
- 75% of the salary of the most comparable employment.
- The salary of the highest-earning employee of the company or of an affiliated company of the employer.
- At least €47,000.
Since you don’t want to set the salary too high, because then the tax burden will rise, you must try to prove that the salary your BV is paying you is plausible. Of course, it’s very difficult to determine which function is really comparable to the one you have within your BV.
For example: How to determine the salary of a lawyer? Your search will have to be very specific, because a lawyer with a year and half experience at a small firm who mainly works pro bono will never be at the same level as a lawyer who’s the director of a large office at Amsterdam Zuidas, in terms of salary.
It’s therefore really important to compare your specific situation with a paid employment that’s comparable to your role within your BV. That’s why we also recommend that you look for vacancies for functions that are comparable to your situation when determining your salary. As a result, you will at least have burden of proof should the Dutch Tax and Customs Administration ever question your salary.
However, it may also be the case that the compulsory salary should be lower than €47,000. In these cases, the salary can be lowered. Situations to which this can be relevant are:
- Parttime employment. When you work parttime, you’re not allowed to just randomly lower the salary. But if you can demonstrate that the wage in the most comparable employment and for the same number of hours worked is lower than €47,000, the salary may be set at a lower amount.
- Compulsory salary is €5,000 or lower. If it’s customary for the salary to be lower than €5,000, e.g. in a BV where virtually nothing happens, payroll taxes can be set at zero.
- Start-ups. A new company is a start-up by law. In this case, the salary can also be lowered to the statutory minimum wage. You’re allowed to do this for a maximum of 3 years from the moment the BV becomes liable for income tax.
- Company suffering losses. Under certain conditions, a company that suffers losses can lower the salary of the substantial interest holder. Again, this can’t be lower than the statutory minimum wage that matches the number of hours you work for the BV.
As you can see, there are quite a few rules regarding the height of the salary when you have shares in a BV. That’s why it’s always important to determine what the best solution is for your specific situation.