Many freelancers and sole proprietors whose profits keep growing year after year run into the same question: do I carry on as a sole proprietorship, or do I switch to a BV? The answer depends on more factors than just the tax burden, yet that is usually where the consideration starts. In this article we explain when a BV can become tax-attractive, which steps are involved in the conversion, and what you should pay attention to before making the decision.
Short answer
For most entrepreneurs, a BV only becomes tax-attractive from a certain profit level, because in a BV you pay corporate income tax on the profit and only pay tax in box 2 at the moment you transfer money from the BV to yourself as a dividend. As a sole proprietor, you pay income tax directly on your full profit, albeit with entrepreneur allowances such as the self-employed deduction and the SME profit exemption. In practice, a rule of thumb is often mentioned of somewhere between €70,000 and €100,000 in annual profit as the point at which a BV can become interesting, but this is explicitly a rough indication. The actual outcome depends heavily on your personal situation, your spending pattern, whether you want to keep the money in the business, and the current tax rates. Always have this consideration calculated based on your own figures before making a decision.
Why does a BV become interesting at a certain point?
As a sole proprietorship, your profit simply counts towards your income tax, in box 1, at an increasing rate. The higher your profit, the larger the share that is taxed at the top rate. As an entrepreneur, however, you are entitled to income tax deductions such as the self-employed deduction, the starter's deduction in the first years, and the SME profit exemption, so that part of the profit effectively remains untaxed.
In a BV it works differently. The BV itself pays corporate income tax on the profit, at a lower rate than the top rate in box 1. What remains afterwards, you can leave in the BV, for example to invest or build up a buffer, without paying any personal tax on it at that moment. Only when you pay out profit to yourself as a dividend do you pay tax on it in box 2. That deferral of taxation is exactly why a BV can become advantageous at higher profits: the more profit you can leave in the BV instead of needing it directly for private use, the greater the tax advantage of that deferral can turn out to be.
On the other hand, a BV also brings obligations that a sole proprietorship does not have. For example, a director-major shareholder generally has to pay themselves a customary salary, stricter administrative requirements apply, and you must file annual accounts with the Chamber of Commerce every year. These extra costs and obligations need to outweigh the tax advantage, otherwise the BV is, on balance, not an improvement.
The tipping point: a rule of thumb, not a fixed boundary
In the market, an amount between €70,000 and €100,000 profit per year is regularly mentioned as the point at which a BV becomes worth considering. However, this is not a statutory or fixed threshold, and the exact outcome differs strongly per situation. Factors that play a role include how much of the profit you actually need for your private expenses, whether you want to build up capital within the business, what pension provision you have in mind, and the rates that apply at that moment for income tax, corporate income tax and box 2. Because these rates and thresholds can change every year, we recommend never deciding this based on a general rule of thumb, but always having a calculation made based on your own turnover, costs and future plans.
Other reasons to switch to a BV
Tax considerations are usually the trigger for thinking about a BV, but other motives often play a role too:
- Liability: with a sole proprietorship, you are personally liable for the debts of the business. A BV in principle has separate liability, although there remain situations in which directors can still be held personally liable, for example in cases of director liability or personal guarantees given for financing.
- Image and professionalism: some clients, especially larger organisations, prefer to work with a BV rather than a sole proprietorship.
- Future plans: do you want to bring in an investor in the future, give staff share certificates, or sell the business? Then a BV structure offers more flexibility than a sole proprietorship.
- Risk spreading: with a holding structure, in which a holding BV is the shareholder of an operating company, you can separate profit and risk, for example by regularly transferring profit to the holding.
How does the conversion work in practice?
There are several ways to convert a sole proprietorship into a BV, each with its own tax and legal consequences. The most commonly used routes are:
Taxable contribution ("ruisende inbreng")
With a taxable contribution, tax is settled immediately on the surplus value (the so-called hidden reserves and goodwill) at the moment of contribution into the BV. This can generate an immediate tax bill, but there are arrangements that can soften or defer this settlement, depending on the situation.
Tax-neutral contribution ("geruisloze inbreng")
With a tax-neutral contribution, there is no immediate settlement with the tax authorities on the surplus value at the moment of contribution. The BV continues the tax book values of the sole proprietorship, and the tax claim is pushed forward into the future. For many entrepreneurs this is the usual route, partly because it does not require direct liquidity at the moment of conversion.
Setting up a new BV without contributing the old business
Sometimes the practical choice is simply to set up a new BV and continue the business activities within it, without formally contributing the existing sole proprietorship. This is simpler, but does mean that existing contracts, assets and any staff must be transferred separately to the new BV.
Which route fits best depends, among other things, on the size of your hidden reserves, the presence of business assets such as business premises, and your personal wishes regarding timing and liquidity. This is very much a part where personal tax advice is wise, because a wrong choice at this point is difficult to reverse afterwards.
Practical step-by-step plan
- Have a calculation made comparing your current situation as a sole proprietorship with the situation as a BV, based on your own profit, spending pattern and future plans.
- Determine together with your advisor which contribution method best fits your situation.
- Set up the BV at the notary, including drafting the articles of association.
- Register the BV with the Chamber of Commerce and notify the Tax Authority, among other things for corporate income tax and, where applicable, payroll taxes for your own customary salary.
- Arrange for current contracts, bank accounts, insurance policies and any business assets to be transferred to the new BV.
- Formally end the sole proprietorship with the Chamber of Commerce at the right moment, in line with the chosen contribution route.
A well-timed switch, for example around the turn of the year, prevents you from having to keep two sets of books side by side in the middle of a financial year. Take this into account in your planning.
A practical example
A self-employed construction supervisor has made a profit of around €90,000 a year for three years running. He has a family with a mortgage, saves little within the business, and needs most of the profit for private use. In his case, a calculation shows that the advantage of a BV is limited, precisely because he can leave little profit in the BV and therefore benefits little from the deferral of box 2 tax. Another entrepreneur with a similar profit, who instead wants to save for a second business premises and wants to keep most of the profit within the business, comes out better with a BV in the same calculation. This example shows why a general rule of thumb can never replace the full consideration.
What should you do now?
If you are considering the switch to a BV, do not start with registering at the notary, but with a proper calculation of your own figures. Map out your expected profit for the coming years, determine how much of it you need privately, and discuss your plans with an advisor who can take the current rates and your specific situation into account. That way you avoid taking a major and partly irreversible step based on a rule of thumb that may not apply to your situation at all.
Frequently asked questions
From what profit is a BV always more advantageous than a sole proprietorship?
There is no fixed amount at which this applies to everyone. A guideline amount between €70,000 and €100,000 profit per year is often mentioned, but the actual outcome depends on your private need for income, your savings plans within the business, and the current tax rates. Always have this calculated for your own situation.
Do I have to pay myself a salary as director-major shareholder?
Yes, as a rule the customary salary scheme applies, which means you must award yourself a market-conform salary as director-major shareholder. Exactly how high this must be depends on the usual pay for comparable positions and the specific rules that apply to it.
Can I contribute my sole proprietorship into a BV without paying tax?
With a tax-neutral contribution, there is no immediate settlement on the surplus value in the business at the moment of contribution, but the tax claim shifts to the future. Whether this is the best route for you depends on your specific situation and deserves personal advice.
Can I later switch back from a BV to a sole proprietorship?
This is difficult in practice and often less favourable from a tax perspective than converting the other way around. It is therefore wise to carefully consider the choice for a BV before taking this step, rather than wanting to go back afterwards.
What does it cost to convert a sole proprietorship into a BV?
The costs include, among other things, the notary fees for the incorporation, which according to the Chamber of Commerce usually lie somewhere between €500 and €1,500, depending on the notary and the chosen structure. In addition, there may be advisory costs for the calculation and guidance, and ongoing costs such as a more extensive annual administration. The exact costs differ per situation and per chosen route.
Read more about converting a sole proprietorship into a BV or see how we organise bookkeeping for BVs.
