I’m looking for guidance on a business structure I’ve recently established. My business partner and I have formed a BV and Holding company. My partner, who lives in the U.S. and is a U.S. resident, shares equal ownership (50-50) with me in this company, and we both serve as directors. I’m curious about the legal and tax implications regarding my partner’s role: Is it possible for my partner to function as an independent contractor (under a 1099 arrangement in the U.S.), or is it necessary for them to receive a regular salary? I would also appreciate any insights on the broader tax considerations and consequences related to providing a salary to my partner in this setup.
Determining whether your partner can operate as an independent contractor (1099 in the US) or must receive a salary as an employee depends on various factors. The nature of the work, the degree of control and independence, and the relationship between the company and your partner are crucial in this determination.
U.S. tax law has specific guidelines to differentiate between an independent contractor and an employee. If your partner is treated as an independent contractor, they would be responsible for their own taxes, including federal income tax, self-employment tax, and potentially state taxes. As a 1099 contractor, they would receive a 1099-MISC or 1099-NEC form for their earnings from the BV.
The Netherlands has specific rules regarding the classification of workers and their tax treatment. Dutch tax laws might have different criteria for what constitutes an independent contractor versus an employee, and these rules need to be considered in conjunction with U.S. laws.
Since you both are acting directors and 50-50 partners in the company, it’s important to consider how the Dutch corporate laws apply to directors of a BV, particularly regarding compensation and tax liabilities.
Generally speaking, one of the partners who is not a resident can perform work for the company as a contractor. This would typically be done by sending management invoices to the entity the work is performed for (usually that would be the operational BV). This would entail having an entity in the US from which your partner can send ‘management invoices’.
First of all, you should check the tax treaty between the Netherlands and the US. These treaties are intended to prevent double taxation. A tax treaty can only determine where taxes may be levied, giving a country the right to tax. Whether the country will actually levy taxes will depend on the local (national) tax laws.
As a U.S. resident, you are generally taxed on your worldwide income, which includes income earned from your Dutch BV. However, the treaty provides mechanisms to avoid double taxation on this income.
The treaty between the U.S. and the Netherlands includes provisions to prevent double taxation. This means that income taxed in one country may be eligible for tax relief in the other. For example, if you pay taxes on your BV income in the Netherlands, you may be able to claim a foreign tax credit on your U.S. tax return for those taxes.
So generally, you are taxed in the country where you live. If you work in another country, you may have to pay tax in that country on the income you earn there. If the right to tax has been assigned to the other country, then the Netherlands should not (be allowed to) levy taxes. To prevent having to pay tax in two or more countries on this income, the Netherlands will grant an exemption. This is called ‘relief to avoid double taxation’. The Netherlands knows two methods, namely (1) the exemption method: this involves taking the ratio between foreign income and total income or (2) the credit method: where the tax paid abroad can be deducted from the tax payable in the Netherlands. However, this tax may not exceed the proportionality limit.
Furthermore, you should also check how social security arrangements are regulated in the respective country. In many cases, you will have to pay premiums in the country where you work. The Netherlands has made arrangements with various countries on this. For activities within the EU, the European Regulation number 883/2004 usually applies.
Finally, the location of the BV (legal entity) can also influence taxation. If the BV is based in the Netherlands, it remains subject to Dutch corporate tax in principle, even if you, as a DGA, work abroad. It is important to keep this in mind. However, it may also be that there is a permanent establishment abroad, for example, if the DGA works at an office abroad for an extended period. In that case, (part of) the profit of the legal entity is taxed abroad.
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