If you want to convert your sole trader business into a private limited company (bv), you will almost certainly come across the terms tax-neutral contribution and taxable contribution. Both methods have an entirely different fiscal effect, and the choice you make has significant consequences for how much tax you pay at the moment of conversion. Below we explain the difference clearly so you know exactly where you stand.
What is a contribution, exactly?
When you contribute your sole trader business into a newly formed bv, you transfer the business assets to that bv. Think of machinery, stock, goodwill and any liabilities. The way in which HMRC’s Dutch equivalent, the Belastingdienst, treats that transfer for tax purposes differs depending on the method chosen. With one approach you immediately settle the tax on the profit you have built up; with the other you do not. That is, at its core, the difference.
Taxable contribution: settling up immediately
With a taxable contribution, the conversion is treated for tax purposes as an ordinary cessation of your sole trader business. In effect, you wind up your business and sell the assets and liabilities to the new bv. This sounds drastic, and from a tax perspective it is.
What do you pay with a taxable contribution?
At the moment of contribution you must pay income tax on:
- The hidden reserves in your business (the difference between the book value and the actual value of assets);
- The goodwill of your business;
- Fiscal reserves such as the retirement reserve or the reinvestment reserve;
- Any other accumulated profits that have not yet been taxed.
This can result in a substantial tax bill all at once. Even so, a taxable contribution is not always the worst choice, because your bv will receive higher depreciation values on the contributed assets. Over the longer term this can yield a tax advantage.
Tax-neutral contribution: deferring the liability to the bv
With a tax-neutral contribution, the fiscal claims on hidden reserves and goodwill are rolled over into the bv. You pay no tax on those accumulated values at the moment of conversion. The bv essentially takes over the fiscal book values of the sole trader business.
What are the conditions?
A tax-neutral contribution is attractive, but there are strict conditions that must be met:
- You must submit the application to the Belastingdienst at least three months before the intended contribution date;
- The bv must not cease or dispose of the contributed business for at least three years;
- You as the entrepreneur must not dispose of your shares in the bv during the first three years;
- A standstill period applies to certain assets.
If you fail to meet these conditions, or breach them at a later stage, the Belastingdienst may still levy tax on the deferred claims. It is therefore important that you are fully aware of the rules.
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprekTax-neutral versus taxable: when do you choose which?
The ‘best’ choice depends entirely on your situation. There is no universal answer, but the following considerations will help you on your way:
- Do you have few hidden reserves or little goodwill? In that case the tax liability under a taxable contribution is relatively modest, and it may be worth settling now so that your bv can benefit from higher depreciation allowances.
- Do you have significant accumulated value in your business? Then a tax-neutral contribution is generally more attractive, as it prevents you from receiving a large tax bill at the moment of conversion.
- Do you intend to sell the bv or the shares in the near future? In that case a tax-neutral contribution may be more complicated due to the standstill period.
- Have you built up a retirement reserve? Under certain conditions this can be carried over via a tax-neutral contribution; with a taxable contribution you also settle tax on this reserve.
A thorough comparison requires you to map out your balance sheet, existing reserves and plans for the coming years carefully. Always consult an adviser for your specific situation, as the fiscal consequences are substantial in both cases.
Retrospective effect: an additional point to consider
With both methods you can have the contribution take effect retrospectively, generally up to a maximum of nine months back. This means that the bv takes on the results from that period from the outset. This makes the timing of your decision particularly important. The earlier in the year you begin, the more flexibility you have around the desired start date. Want to know more about the full process? Read everything about converting a sole trader business to a bv on our overview page.
Administration after the conversion
Regardless of which method you choose, a number of things will change in your administration after the conversion. The bv has its own bookkeeping, its own VAT obligations and is subject to corporation tax. A solid administrative foundation from the outset prevents problems further down the line.
Why Belastingadviseur Eindhoven
The choice between a tax-neutral and a taxable contribution is not one to make lightly. It requires a careful analysis of your business assets, future plans and fiscal position. At Belastingadviseur Eindhoven we are happy to think things through with you, without any obligation on your part. We know the Eindhoven business market and will help you reach a decision that suits your situation. Feel free to contact us for an initial, no-obligation conversation.
Frequently asked questions
What is the biggest advantage of a tax-neutral contribution?
The biggest advantage is that at the moment of conversion you pay no income tax on hidden reserves and goodwill. Those fiscal claims are rolled over into the bv, preserving your liquidity and ensuring that the moment of conversion does not immediately trigger a large tax bill.
When is a taxable contribution actually interesting?
A taxable contribution can be interesting if you have accumulated few hidden reserves, or if you expect the bv to want to depreciate the contributed assets quickly. The higher fiscal book values in the bv then generate additional depreciation capacity over time, reducing the tax burden in the future.
How far in advance must I submit an application for a tax-neutral contribution?
You must submit the application to the Belastingdienst no later than three months before the intended contribution date. If you leave it too late, the option lapses for that date and you will need to choose a new one. Plan this well in advance in consultation with your adviser.
Can I sell my shares immediately after a tax-neutral contribution?
No, a tax-neutral contribution is subject to a three-year standstill period. If you sell the shares or the bv ceases the business earlier, the Belastingdienst may still tax the deferred fiscal claims. Bear this in mind if you are considering any exit plans.
We are happy to think along with you. For advice tailored to your situation we would gladly sit down with you. No rights can be derived from the content of this page and it may contain inaccuracies.
