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The Netherlands is known for its good startup climate. Self-employed people (zelfstandige zonder personeel or ZZP'er in Dutch) are entrepreneurs who are business owners and working for several different clients. People who want to freelance often opt for either a sole proprietorship (eenmanszaak) or a private limited company (besloten vennootschap or BV). This article will focus on the eenmanszaak (sole proprietorship) and the different steps of setting up.
Disclaimer: This article is not a substitute for legal or tax advice. Please always check official websites or seek legal or tax advice before you take action.
How to register a sole proprietorship in the Netherlands
Since freelancing and independent contracting are not types of legal entity structures in the Netherlands, many contractors and freelancers choose the sole proprietorship as a business model.
The first step of setting up a sole proprietorship is registration at The Netherlands Chamber of Commerce (Kamer van Koophandel, or KVK). This is a mandatory step, and the registration fee is €50. To register, you need to fill in a registration form.
Once you fill in the form, make an appointment with the Chamber of Commerce to finalize your registration. You can schedule an appointment online through the KVK website.
When coming to the appointment at KVK, you will need the following documents:
- the completed registration form,
- your business details
- a valid identification document (ID, passport, or a copy of the residence permit).
The €50 fee can be paid directly with a debit or credit card. If your business address differs from your private address, bring your business premise lease or purchase contract to the appointment.
Sole proprietorship VAT in the Netherlands
When registered, you will be listed in the Commercial Register (Handelsregister). The KVK will communicate your details to the Dutch Tax and Customs Administration office, which assesses if you are a VAT entrepreneur, depending on your activities. In most cases, a freelancer or sole proprietor is a VAT entrepreneur. The Dutch Tax and Customs Administration should then issue your VAT tax number and your VAT identification number within two weeks.
In the Netherlands, almost every VAT entrepreneur must calculate and add VAT to the service or product fees, regardless of the legal structure. Once registered with the KVK, you will receive a number for your business that you will need to state on your invoices and outgoing post. Also, the VAT number should be stated on the invoices.
Sole proprietor's liability in the Netherlands
As a sole proprietor, your private assets and your business assets are not separated, meaning you are liable for all your actions and finances. This means that if you gain debt and don't have enough business assets to cover it, you will have to pay with your private assets, and creditors are entitled to claim them. If your proprietorship is declared bankrupt, you will have to file for personal bankruptcy as well.
Sole proprietor's taxes in the Netherlands
The profit you make as a sole proprietor is subject to income tax. In the Netherlands, income is divided into three groups, called boxes, and each box has its tax rate.
- Box 1: taxable income from work and home-ownership
- Box 2: taxable income from a substantial business interest
- Box 3: taxable income from savings and investments
The proprietorship's profit is considered taxable income from employment and home-ownership, meaning it falls under Box 1.
You must file your tax return online before May 1st of each year. To file tax return in the Netherlands, use tax return or accounts software or a tax intermediary through the Dutch Tax and Customs Administration's website.
Tax benefits for sole proprietors in the Netherlands
If the Dutch Tax Administration recognizes you as a business owner, and you meet a minimum working-hour requirement, you can be entitled to certain tax benefits. You can benefit from the private business ownership allowance (zelfstandigenaftrek) if you:
- are an income-tax-paying business owner
- work for your own company for at least 1,225 hours (800 hours in the case of a long-term occupational disability)
- spend more than 50% of your time working for your own business (This requirement applies if you have been an entrepreneur in the last five years)
If you have reached the state pension age at the beginning of the calendar year, the private business ownership allowance will be reduced by 50%.
Once these allowances are deducted from your profit, you are entitled to an extra 14% tax relief, through the SME profit exemption.
If you do not have an employment relationship, a client does not have to withhold payroll tax and social premiums.
Social security and national insurance contributions
As a self-employed (sole proprietor), you usually have to pay national insurance contributions (volksverzekeringen), and you'll be entitled to an old-age pension (AOW) once you reach the state pension age. The pension equals the minimum income, which you'll have to supplement yourself.
Misclassification risks in the Netherlands: VAR system vs. Model Agreement
Declaration of Independent Contractor Status (VAR)
Before May 1st, 2016, freelancers or self-employed professionals could apply for a Declaration of Independent Contractor Status in the Netherlands (Verklaring Arbeidsrelatie, VAR).
The Declaration of Independent Contractor Status served as proof that the service provider is an independent contractor, mitigating misclassification risks. The Declaration was an assessment from the tax authorities, who either considered the freelancer's activities as employment in the traditional sense or independent trade.
The client (employer) is required to deduct wage tax, social insurance contributions, and insurance premiums from the remuneration paid to an employee (payroll taxes). With the VAR declaration, the client had proof that the contractor was not an employee, eliminating the risk of paying non-withheld payroll taxes with possible corrective fines.
Under this system, there were four different types of VAR declarations. Some of those declarations gave certainty to the client that no payroll taxes were due. The problem was that independent contractors possessed a VAR declaration but were, in fact, employees.
With this system in place, it was reasonably easy to manipulate it and disguise actual employment relationships.
To avoid this, the Dutch Tax and Customs Administration replaced the VAR declarations by general and individual model agreements, as well as model agreements per sector and profession. Model agreements were introduced under the 2016 Assessment of Employment Relationships (Deregulation) Act (Wet deregulering beoordeling arbeidsrelaties, DBA).
In the Netherlands, there are three different types of standard model agreements. For a detailed explanation (in Dutch), check this link.
- General model agreements: created for most business relationships which don't cover employment.
- Sector or profession-specific model agreements: created for a specific sector or profession subject to certain standards or conditions.
- Individual model agreements: created by a particular sector of a profession; anyone working in the same sector or profession may use them.
However, having such a contract does not give absolute certainty about whether a contractor is an employee or not. It is the working relationship a worker has with its client that ultimately defines it. The critical aspects of an employment relationship are:
- a contractor is obliged to perform the work personally
- a client is required to pay wages
- the contractor is in an authority relationship with the client.
If the above three elements are not applicable, the relationship between a contractor and a client is not considered employment.
Although applying a model agreement is advisable, it is not mandatory. You can always compose the agreement and have it assessed by the Dutch Tax and Customs Administration. Tax authorities will always review the submitted agreement and decide whether the agreement indicates an employment relationship or not. Contractors and their clients can request for a model agreement on the Belastingdienst website.
This article was written in partnership with Mark Bastiaans, tax advisor and founder of Dutchtaxadvice.nl