Fiscal Issues (2): Corporate Form
Bart Van den Bossche writes:
Depending on your background, self-employed status as a lawyer may be a bit unfamiliar and somewhat strange. Many self-employed lawyers arrive in Brussels only ever having been an employee.
This article looks at two options you have in how you set up your corporate status when practising in Brussels, either by:
- Being a self-employed person; or
- Creating your own one-person company, in which you are the sole shareholder and director.
By knowing the basic advantages and disadvantages of each option, you can decide which form is better when you first start practising and as your professional practice develops over time.
As a self-employed person, you are your own business and so invoices go out in your own name. The advantages and disadvantages of this status are:
- Privacy. Your tax affairs are between you and the Belgian tax authorities only. Unlike with a one-person company, there are no publicly available accounts concerning your professional activity that have to be submitted to the Belgian public authorities (and are open to public scrutiny). One practical suggestion: have separate bank accounts for your professional and private activities. When the tax authorities check your business accounts they have the right to look at your business's bank activities. Your private affairs remain private if you have a separate bank account.
- Less administration and costs. The amount of time, effort and, therefore, cost spent on establishing, running and closing down your professional activity are lower than with a one-person company.
- Income tax rates. You pay the same income tax rates as an employee. In Belgium income tax rates are high. Income for most international lawyers is above the average in Belgium and so you are looking at approximately 50% tax rate on most of your income.
- Social security/insurance. As a self-employed person you are responsible for your own social security payments. You may pay up to a maximum social security contribution (in 2006) of €3,219.44 per quarter based on the level of your professional income. Remember: all professional income you receive is gross and you must deduct a percentage for the social security payments that you are obliged to make. (There is a separate article on Social Security/Insurance later in this series.)
- Personal liability. In the event that your professional business goes bankrupt, then you are personally liable for the losses. For many self-employed international lawyers revenues are fairly predictable, and so as long as you manage your costs correctly, this situation is unlikely to occur.
The Belgian tax system allows so-called 'liberal professionals' (such as lawyers, doctors, dentists) to create one-person companies. These are known as BVBA (in Flemish) or SPRL (in French).
To use this corporate form, you must incorporate a company whose purpose is the provision of legal services. You will be the company's sole shareholder and director.
It is your company (not you) that issues invoices. The income received by the company is used to pay your company's expenses. Your company then pays you, as its director, a salary. Your personal income tax and social security contributions will be based on whatever amount of salary you decide to receive.
This description gives a brief overview of how this corporate form operates and it is a matter you should discuss further with your accountant. The main advantages and disadvantages of this corporate form are:
-Corporate tax rate. Corporate tax rates are approximately 30%, around 20% less than the equivalent for a self-employed person.
- Personal tax rate and social security payment. As the director's salary is a percentage of the company's total income, a lower personal tax rate and social security amount usually arise.
- Limited liability. Unless there has been fraudulent activity or some dubious behaviour allowing the company's 'corporate veil' to be lifted, then you are protected from any losses in the event of bankruptcy.
- Tax planning. Although beyond the scope of this article, one-person companies can be used as part of your tax-planning.
- Cost of incorporation. The company must be created by an act of a notary and published in the Staatsblad/Moniteur Belge, Belgium's equivalent of the Official Journal. The expense of this notarial act is partly set by law and partly by the notary (often around €850-1000) and there are small costs for publicly publishing the company's statutes. But remember: all these costs are deductible business expenses.
- Capital. At the time of incorporation, a one-person company has capital of €18,600 of which €12,400 must be paid in upon incorporation. This paid-in capital is not money that has to sit in a bank account. It can be invested for the company's professional activity (such as a car).
- General time and running costs. There is more administration (and consequent cost) involved in running a one-person business than in operating as a self-employed person.
- Cost of unincorporation. When you stop your professional practice in Belgium, the company is likely to be wound-down. As with incorporating, there are costs (such as the notarial act) incurred in unincorporating. Plus 10% of all the capital remaining in the company at this time is taxed. Once again these costs are deductible business expenses (with the exception of the 10% tax).
Together with your accountant, you should analyse which form is better for you. You can draw up a financial analysis comparing your situation as a self-employed person or using a one-person company and also evaluate factors like how long you intend to practise in Belgium.
Next article: (3) Social Security
Author: Bart Van den Bossche ©
First published: 12 Noember 2005
Last updated: 19 August 2006