When are you an entrepreneur in the eyes of the tax authorities?
It may sound slightly weird, but not every entrepreneur has to declare his or her profits to the Dutch Tax and Customs Administration. You can have a Chamber of Commerce registration, pay VAT every quarter, and still only submit a private income tax return at the end of the year. And the opposite is also perfectly possible: you earn money with your hobby, and you’re now wondering if you’re officially an entrepreneur or not. So how can you determine if you’re an entrepreneur in the eyes of the Dutch Tax and Customs Administration?
Before you can determine whether you are an entrepreneur in the eyes of the tax authorities, it’s important to first determine whether you have a business. The Dutch Chamber of Commerce (KVK) has three criteria with which it defines a business: you provide a service or product, you charge a commercial rate and you do business with more people than just friends or family. Have you answered all three questions with a ‘yes’? Congratulations, you’re a business owner!
Turnover tax and income tax
If you meet the criteria the KVK uses to define a business, this doesn’t automatically mean that you’re an entrepreneur in the eyes of the Dutch Tax and Customs Administration. That’s because there are two types of taxes – turnover tax and income tax – both of which have different criteria for an entrepreneurship.
Criteria turnover tax
You’re obliged to file a VAT return if you’re self-employed and you earn money from your business on a regular basis. Whether you meet these criteria is determined when you register with the KVK. If you’re not registered there, but you do meet the turnover tax criteria, you’re still obliged to request a VAT number.
Criteria income tax
Things are different in regard to the income tax, which is filed at the beginning of each new year. In this case, the Dutch Tax and Customs Administration checks on a case-by-case basis whether you’re to be assessed as an entrepreneur. So this is everything but a foregone conclusion.
The tax authorities will use the following criteria:
1. Continuity – you strive to continue doing business, for example by attracting new customers or by saving money for future activities.
2. Business risk – you bear the risk for any possible financial losses, such as non-paying customers or investments that don’t turn out well.
3. Size of business – you work for at least three different customers a year, and over the past three years your profits were larger than your losses.
4. Independence – you’re free to arrange your work the way you want to and to determine your own rates.
You might have noticed that the criteria are not always clearly defined. This means that you, as an entrepreneur, must proactively determine your position. You can use the Check for Entrepreneurs (OndernemersCheck, in Dutch) of the Dutch Tax and Customs Administration for this. Please note that the Tax Authorities can always rule differently once they’ve received your tax return, and that you may be obliged to file either a profit return or a private tax return.
Declaring profit or other income
The most important advantage of being an entrepreneur for income tax is the entrepreneur allowance. This consists of several deductions and allowances, but the most commonly used is the private business ownership allowance. To qualify for this, you must meet the hour criterion of 1,225 hours. This means that you’re working for your business three to four days a week. When the private business ownership allowance is applied, this will save € 6,310 on your taxable profit in 2022. In addition, as an entrepreneur you automatically qualify for the SME profit exemption, which means a reduction of fourteen percent on your taxable profit. Both schemes can therefore make a real difference for your tax return!
If you’re not an entrepreneur for income tax purposes, but you do have an income, you must state this as ‘Other income’. You may still declare any costs that you have incurred in realising this income, but you’re not entitled to the entrepreneur allowance or the SME profit exemption.