Laatst bijgewerkt op 5 October 2023 door Robin
Starting as a sole trader
Most self-employed people start small. Therefore, a sole proprietorship often turns out to be the smartest choice: you can get started quickly, without high establishment costs or complicated accounting formalities.
The sole proprietorship: ideal for the small starter.
In the following years, your turnover experiences a healthy growth. Unfortunately, you also notice that your tax bills have become exponentially high.
You wonder if in the meantime you would benefit from a limited company structure, as income is taxed differently there.
Why a limited company?
There are many fiscal differences between a sole proprietorship and a limited company. We have listed the most important ones below.
A limited company structure: limited liability and tax optimisation for growing businesses.
Taxes in a sole proprietorship
As a sole trader, your profits taxed in full in personal income tax. Personal income tax in Belgium is collected by 3 parties. The largest chunk goes to the federal government, then the competent region and finally the municipality where you live.
This means you also have to take into account the municipal tax (6-7% on average), also known as the 'opcentiemen' or surcharges. The exact percentage of this depends on where you live.
Finally, you pay social contributions every quarter. These are deducted from your gross income at the end of the year, thus also reducing your taxable base. It is important that you pay the right amount of social security, calculated based on your income. This way, you avoid a big final bill at the end of the financial year.
Personal income tax rates are progressive and go up to 50%.
Assuming a net annual taxable income of around €45.000, this quickly brings us to a average tax rate of 35%.
Taxes in a limited company
Normally, you pay yourself a monthly 'company director salary' from your company. This is your remuneration for the services rendered in the company.
Just like a sole trader, you will pay social contributions and personal income tax. However, both components will be reduced as they are solely calculated based on your company director's salary. The income tax is included in your monthly salary calculation and is therefore prepaid. The social contributions on the other hand remain payable every quarter.
As the manager of a company, you choose how much remuneration you pay yourself, which allows you to drop your tax burden sharply. From the moment your turnover starts to grow consistently, we still recommend paying out at least €3,750 per month. That way, you meet the requirements needed to enjoy the reduced corporate tax rate.
The standard corporate tax rate is 25%, the reduced 20%.
You pay corporate tax on the remaining profit your company makes, after deducting professional expenses and your managerial remuneration.
In addition to the managerial remuneration, there are other, more tax-efficient ways to extract profits from your company. Consider a dividend; an annual distribution from the company to shareholders, or the liquidation reserve.
Would you like more information on the most tax-efficient ways to extract profits from your company? Send us a message, and one of our experts will help you out!
Those who get it right can drop their tax burden to 30% with a limited company.
When to make the switch?
Unfortunately, we cannot give a one-fits-all answer to that question. After all, a lot depends on your personal situation, what your business needs, and how you envision the next 5-10 years.
As a rule of thumb: once your average tax rate (found on your tax return) starts to be around 35%, it pays to consider switching. This corresponds to around €45.000 in taxable income per year.
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