A smooth tax start
Everyone in Belgium pays taxes in one way or another, also as a new entrepreneur. An employee in paid employment does this mainly through the component that their employer pays to the government and through VAT on purchases in shops. However, as an entrepreneur, you yourself are responsible for a correct tax and VAT return.
Difference in taxation between a sole proprietorship and a company
With a sole proprietorship or company, you pay taxes on your income. In the case of a sole proprietorship , this calculation is relatively simple. In the case of a company, you pay both corporate tax and tax on the salary you pay to yourself.
VAT or value added tax is an additional consumption tax on the sale of goods and services. As a self-employed person you also have to deal with VAT.
How exactly does that work?
- As a new VAT-liable entrepreneur, you first apply for a VAT number.
- Then you charge VAT (21%, 9% or 0%) on your invoices and pay the amount to the government. Thus, you receive money from your customers that you are not entitled to keep.
- On the other hand, you don't have to pay VAT on products or services you purchase for your own business. That is the so-called VAT deduction.
- You manage your VAT by means of a periodic VAT return.
Some starters and small businesses are also exempt from VAT.
Your VAT obligations properly taken care of
As an entrepreneur, you must declare the VAT you have received from your customers to the tax authorities. You do that by means of a VAT return.
In this return, you also disclose how much you yourself have paid to suppliers for your professional expenses. The VAT you have paid yourself in the course of your professional activities can be deducted from the VAT received. You pay the final amount to the VAT administration.
As a starter, you are almost guaranteed to file a quarterly return. Companies with an annual turnover of more than €2,500,000 must file a monthly return.
For filing your VAT return, it's best to consult an accountant. This is because your VAT return can quickly become very complex - even if you have only just started your business. And you certainly don't want to incur any fines
Exemption from VAT obligation
In most cases, as an entrepreneur, you can assume that you are liable for VAT. However, some businesses are entitled to an exemption, for example on the basis of their limited annual turnover or the sector in which they operate.
If you are entitled to a VAT exemption, you may not charge VAT but you also don't have to submit a periodic VAT return. This simplifies your bookkeeping considerably.
At the same time, it also means that you cannot deduct VAT for professional purchases. You are considered a private customer for VAT purposes.
Taxes on sole proprietorships
As an entrepreneur with a sole proprietorship, there is no distinction between your professional and personal financial income. You simply pay your taxes through personal income tax on your total taxable income. This is the income that remains after payment of your social security contributions, professional expenses and other possible deductions.
The personal income tax rate for self-employed persons is identical to that of employees. Belgian personal income tax is calculated progressively on the basis of tax brackets, which are indexed every year. The tax rate thus rises as your income increases. Below are the personal income tax rates for the tax year 2021 (income generated in 2020):
- Up to €13,440: 25%
- From €13,440.01 to €23,720: 40%
- From € 23,720.01 to € 41,060: 45%
- From €41,060.01: 50%
Example: You generate an annual turnover of €60,000 with your sole proprietorship. You deduct €20,000 in professional expenses and pay €8200 in social security contributions (in this example, 20.5% of €20,000) This leaves you with a taxable income of €31,800. After paying your personal income tax, you will end up with a net amount of €22,939.5.
Tax-free basic amount
Part of your income is completely exempt from taxes. This is the so-called tax-free basic amount. Depending on your personal situation - marital status, children, disability,... - this amount may be higher. It will further reduce your overall tax burden.
In addition to the annual personal income tax, you must also take into account additional municipal taxes. This is set by the municipality or city in which you live. The rates for the additional municipal tax in Belgium can be found in this overview.
Lower tax burden via a company
As an entrepreneur with a sole proprietorship, it often comes down to the fact that a large part of your turnover is taxed at 50%. Is your business doing well and is your turnover high over a longer period? Then a company can be a tax-efficient alternative for your entrepreneurial career.
Entrepreneurs with their own companies mainly pay corporate tax on their business profits.
Since 2020, the basic rate of such tax is 25%. Moreover, small and start-up companies enjoy a reduced rate of corporate tax on their profits up to €100,000. However, to qualify for the reduced tax rate, you must meet some conditions.
Personal income tax as a business manager
However, it doesn't stop at corporate tax. As a manager of your company, you cannot simply use the financial resources of your company for private purposes. One way to transfer the money to your private situation is to pay yourself a salary. And that is normally subject to personal income tax.
In practice, therefore, you almost always pay both corporate tax and personal income tax. The salary you pay yourself is, in turn, considered as a business expense, reducing your company's profit and lowering your tax bill.
Tax optimisation of your company
A company is in practice more advantageous than a sole proprietorship if you want to achieve a high turnover and focus on possible expansion. A company allows you to build up capital within your business. You can then use that for investments.
Tip: In addition to an own salary, there are also alternative tax-efficient pay-out methods for companies, such as dividends. Another popular way is to save for retirement as a self-employed person. Ask your accountant for advice on all the options and on what is best for you.