As a follow-up to the post about my professional anniversary and to fulfill my promise I’d like to elaborate on my reasons and the path of becoming an entrepreneur. The story is going to be quite long so I’ll split it up.
In fact the very idea of freelancing wasn’t new at all. Many of my expat friends living in Holland have been doing that for years. That mainly concerns IT specialists as they arguably represent the majority of those who came here from the ex-USSR.
However there was a number of considerations, which I’ll start with.
To avoid any possible confusion I’d like to point out that everything here is about the Netherlands.
First of all, it’s simply not allowed to be a freelancer in the status of a “highly skilled migrant” (kennismigrant). A kennismigrant that comes to the Netherlands is initially provided with a temporary residence permit (valid for one or five years), which is subject to extension once about to expire. This residence permit only allows working in an appropriate “highly skilled” area, and only in a salaried employment. In other words you can’t be self-employed or go pluck tomatoes on a farm.
Once you have lived in the Netherlands for five years and cleared a language exam, you can either apply for a permanent residence permit (verblijfsvergunning onbepaalde tijd) or for Dutch citizenship (like I did). In both cases the employment restriction get lifted for you.
Secondly, each kennismigrant gets an incredibly generous tax relief offer from the Dutch government, when as much as 30% of all your income is exempt from the income tax. This so-called 30 percent ruling is currently granted for eight years, back in 2008 it was a full decade. The official explanation for this generosity is that it’s supposed to compensate for the migrant’s extraterritorial costs.
The locals are very grumpy about this rule, and rightly so: in the Dutch progressive tax system IT specialist wages often get taxed at the highest rate of 52%. No one gets delighted about giving away a half of their hard earned money. But if the income is reduced with one third before the taxation, the difference in the resulting sum is substantial and can amount to a few thousand euros on a yearly basis.
Why I’m going into such details about this is because one can enjoy this thirty-percent tax relief even after they have acquired the Dutch citizenship, but only—again—in a paid employment. Freelancers are not entitled to this benefit. Therefore you have the following options: either wait for the ruling to expire (8 or 10 years) or employ some more advanced techniques that allow keeping it (more on which later on).
Now to the most obvious aspect. Freelancing is subject to significant financial risks. You get paid as long as you have work, and get nothing if there’s none. Freelance contracts are always temporary, mostly with the term of three months to a year. If it isn’t extended, you’re left to your own devices.
Next to that, you have to pay yourself for your vacation, sickness leaves, commuting costs (which are otherwise almost always reimbursed by the employer). The same goes for pension premiums. Another item of expenditure are insurances, with disability insurance being the most costly one.
And now about the least obvious. There is a special regulation in the Netherlands called Wet DBA, which means “Employment relationship assessment deregulation law.” This pretty obscure title hosts a bunch of even less comprehensible stipulations, which the Dutch Tax Office is charged to enforce.
In a nutshell this can be explained as follows. Any employer is obliged to pay various social premiums (sociale lasten) for each of its employees, such as insurance premiums for unemployment, illness, disability and so on. These items are quite costly, and being a freelancer is beneficial just because those are exempt from these otherwise compulsory charges.
However, according to this law, one day Mister Tax Inspector may challenge your entrepreneurship on somewhat unobvious grounds: you’re working in the same office as your employed colleagues, he’d say, and doing the same job, but getting paid much more, and all that for years on end. Hence Mister Tax Inspector is getting the impression that it has nothing to do with being an entrepreneur, so please be so kind to repay all your liabilities on sociale lasten over the last N years.
Mind you, this can amount to a four- or five-digit number in euros and be a pretty disastrous scenario. The law has passed not so long ago (in May 2016) and was supposed to come into effect in May this year, but the
shitstormstir it caused among freelancers (who Holland has 1.1 million of—out of 8.3 million working people) made the government postpone its enforcement. For now only until 1 January 2018, but it’s obvious it will have to be relaxed to some extent.
This regulation has most impact on office workers and IT specialists in particular, because it usually makes little sense to hire an IT expert for, say, a month. If you’re a painter or a window-cleaner serving several customers a day, you’ll be above suspicion for the Tax Office. For everyone else accounting wizards invent intricate schemes that can protect their clients from the Tax Office’s scrutiny. I’ll elaborate on that further on.
Of course, self-employment is not only about problems. It has quite a few upsides, too:
You’re your own boss. You’re the only one who decides what and when you’re doing. That is, within the limitations and obligations of your current contract, of course. But even if you’re unhappy with it, you are free to look for something better.
Additionally to the previous one, you also have a full say in various details. And, surprisingly enough, details sometimes are just as important.
Want a top-notch MacBook Pro and a 38” monitor as well? And a genuine leather bag for the MacBook? Plus a 16 terabyte NAS? You want to drive to work or, on the contrary, to go with the train? Need a hotel to save commuting time?
As long as everything you’re paying for is in line with your professional activities, the Tax Office will stay lenient to you, whereas you:
Get everything VAT-free (which usually means 21% off), and
Can deduct these expenses from your revenue.
The previous item also applies to any relevant courses or education, from seminars on taxation to Java certification exams.
If you’ve got work, freelancing is much more lucrative. Hourly rates in IT start at €60-70, which amounts to a pretty pleasant sum for a full 40-hours working week. That sum will have to be reduced by the income tax (up to 52% as you remember) and all the ongoing expenditures (commuting, holidays, illness leaves, your accountant’s compensation etc.). However what’s left of that still provides quite some room. For example, if you’re not determined to earn every possible penny, you may decide to only work 9 months in a year.
A temporary “pro” (and mainly for IT dudes): the Dutch economy is doing surprisingly well at this very moment, showing the fastest growth among the European countries (2.4% year-on-year), and the demand for IT specialists is sky-high. This stimulates the competition among IT employers, which puts us nerds in a very favourable position.
The bottom line?
I have to admit that the arguments are strong on both sides. I myself haven’t made up my mind as of yet. After all, I’m only a couple of months into this business. But I feel I’m getting the hang of being self-employed, so we’ll see.
Next: Entities and persons