What does the extended first financial year mean for your Dutch company?
Updated on 26 June 2023
When you start a Dutch business, you will very often benefit from some startup perks and options. During the first five years of your business, for example, you can opt for the so-called ‘starter deduction’ for three times. This means you will get a discount on your yearly tax return. This is just one example of possible financial benefits, that the Netherlands offers to starting entrepreneurs in order to enthuse people to start a company. Another option is the extended first financial year, that is also created especially for starting entrepreneurs. It means that, during the first year of your business, you will not have to draw up annual accounts and submit the corresponding declarations to the tax authorities. Instead, you can choose to do this one year later. In this article, we will explain some of the advantages and disadvantages of the extended first financial year, making it easier for you to choose whether this is a viable option that will aid your startup.
What is an extended first financial year exactly?
An extended financial year is the first financial year, that can be extended beyond the next filing date of the annual accounts. This happens on the basis of the articles of association, which you set up when you established the company. The main reason to extend the first financial year is when you establish your company later or in the middle of a year, for example in August. Every financial year lasts from the 1st of January until the 31st of December. So if you set up a business in August, you only have a maximum of 5 months left before the year ends. This would mean, that you would already have to draw up your annual accounts after a period of 4 to 5 months, which often is too little to determine whether your company is doing well. Thus, you can make a request to extend the first financial year. This will mean your first financial year will be extended with 12 months. This allows you to wait until the next financial year, before you submit the annual accounts, for a period of 17 months.
The annual accounts and the financial year
It’s probably best if we explain some of the terminology we use in more detail, since not everyone is well-acquainted with accounting and fiscal matters regarding Dutch companies. Especially if you are a foreign entrepreneur, since you don’t know Dutch laws as well as Dutch residents are supposed to. The financial year is basically the period during which the complete accounts of the enterprise are carried out. During this period, you need to draw up the annual accounts of your company, to show the Dutch Tax Authorities your financial data. The annual accounts contain the balance sheet, which reflects the situation of the company at that specific time.
In addition, the annual accounts contain a profit and loss account, with an overview of the total yearly turnover and yearly costs your company has made. Finally, the annual accounts must contain an explanation of, among other things, the persons employed by your company. It also needs to state the manner in which the balance sheet is drawn up. How extensive this explanation should be, depends on the size of the company. If you would like to know more about the way you should draw up your annual accounts, then you can always contact Intercompany Solutions for in-depth information. We can also assist you with the entire process of your yearly tax return, so you can focus your attention on important matters, such as your daily business activities.
More details about the financial year
A financial year is the period over which the financial report is created. This report consists of drawing up the annual accounts, the annual report and filing returns. The financial year usually lasts 12 months and in most cases runs parallel to the calendar year. Every calendar year starts on the 1st of January and ends on the 31st of December of each year. This is considered to be the clearest timeframe for most companies. If you decide to deviate from the calendar year, then the year is called a 'broken financial year'. This is also why entrepreneurs decide to extend the first financial year, due to the fact that a broken financial year is sometimes very short.
When you know that a financial year will last shorter or longer than a regular calendar year, you will need to submit a request to the tax authorities to arrange this. In general, information about when the financial year ends is included in the articles of association of your company. If you want to adjust the length of the financial year in any way, then you need to take into account that the articles of association must also be amended. You also need to keep in mind, that it is not permitted to change a financial year for the sole purpose of obtaining a tax advantage in a particular situation. Please make sure you always have a solid reason to amend the regular financial year. An extended first financial year is possible for a Dutch BV, but also for a partnership and a sole proprietorship.
Does the financial year differ from a regular calendar year?
For almost all companies it is advisable to keep the calendar year as a financial year, but for some organizations it’s more convenient to proverbially ‘close the books’ at a divergent time. For example, if you run a company that provides goods and services to schools and universities. A school year is different from a regular calendar year, since schools start each year in August or September and end in June or July. Oftentimes, when the schools start again, new boards are elected and changes are made to institutions and companies. The board is responsible for the proper delivery of an annual report, so that the new board can start well-read and informed regarding finances. Hence, for companies that are heavily involved in the school system, it can be more beneficial to have the financial year run parallel to the academic year.
A broken financial year
As we already discussed above briefly, a broken financial year is a year that contains less than 12 months. This is due to the fact, that a company can be started anytime during a calendar year. If this has happened, we speak of a broken financial year. The financial year then starts at the time of incorporation, and runs until 31 December that same year. When you want to extend the first financial year, the extension will always be a period of 12 consecutive months. So, the year will be exactly one year longer than usual, the amount of extra time depends on the date you established your business. This can be one single day (if you incorporated your company on the 30th of December), but also almost an entire year, for example, when you founded your business at the end of January that same year. In such cases, your first financial year will actually last almost 2 entire years in reality.
When to request an extended first financial year?
In general, you request an extended first financial year when there is a broken financial year. We already explained this phenomenon in detail above. The main purpose of an extended financial year is the fact that companies that have only existed for a few months, must already draw up annual accounts and submit declarations. The financial year for these companies with an extended first financial year then runs until the 31st of December the following year. You can easily apply for an extended financial year via the website of the Dutch Tax Authorities. There are as good as no requirements for postponing this first financial year. If you like, Intercompany Solutions can also help you with extending your first financial year, simply contact us for more information and assistance.
What are the advantages and disadvantages of an extended first financial year?
One main benefit of an extended first financial year, is the fact that you save yourself a lot of work during the first stages of your business set-up. Drawing up annual accounts actually takes a lot of time, which you can definitely put elsewhere when you are still in the starting phase of your company. Next to saving time, you also save money since you don’t have to outsource your administration during the entire first year of your business. This saves considerably in costs for the administration and the preparation and auditing of the annual accounts by an accountant. The corporate tax rates in the consecutive year can also be a reason to opt for an extended financial year. During the past years, the corporate income tax in the Netherlands fluctuated a lot. Depending on when your financial year ends, this can mean that you save money because you will have to pay less taxes. There are also certain tariff brackets with limits, but in practice, you won’t reach these limits in the first months of opening your company. Thus, it can be profitable for you to opt for an extended first financial year when you set up your company during the second half of the year.
One main disadvantage is directly linked to the previously mentioned advantage of possibly lower tax rates, when you extend the financial year. When tax rates can drop, they can inevitably rise too. So, a disadvantage of an extended first financial year is the uncertainty about the possible amount of the (corporate) income tax rate one has to pay. If there is a tax increase in the following year, you will not only have to pay more tax on the profit generated in that year, but also on the profit from the previous year, because it is 'booked' in the same year. If you have to pay corporate income tax over an extended financial year and therefore several years, it may be that the rate has changed in the meantime, if it increases you pay the increased rate. Another disadvantage is that you have to wait longer to draw up the annual tax return, which causes you to have less insight into your own financial data. The success of a company can be measured by its profits during the first year. If you extend the first financial year, you will simply have to wait a bit longer before you draw up the report.
Which types of companies can ask for an extended first financial year?
There are many different legal entities to choose from in the Netherlands, each with its own benefits and disadvantages in some cases. In our experience, by far most entrepreneurs choose for a Dutch BV, which is the same as a private limited company. But some people also choose a sole proprietorship, or partnerships. Each type of Dutch company has to do with a financial year. However, you can only apply for an extended first when you established either a Dutch BV, a general partnership or a sole proprietorship. The other legal forms are not eligible for an extended first financial year.
Intercompany Solutions can assist you with opting for an extended first financial year
An extended financial year can be advantageous for many starting entrepreneurs. If you set up your Dutch business during the latter part of the year, and you expect to stay below the future rate bracket of 19% with your accumulated profits, we advise you to opt for an extended financial year. This will make the first year a lot easier for you, also due to the fact that you extend your fiscal responsibilities for a while. WE also advise you to invest in solid accounting software, which will automatically track data for you and your company. It will also enable you to look at your data before you actually have to file the annual tax return, making it possible for you to gain insight into your company’s success.
If you want to include an extended financial year in the administration, you can do that well via this type of accounting software. Are you in doubt, or do you still have questions? Please feel free to contact one of our advisors, or use the contact form on the website to contact Intercompany Solutions. We aim to answer your query as soon as possible, with clear and efficient solutions to your questions. Of course, we are also able to take some work off your hands, making it easier for you to focus on your core business.