The fiscal retention obligation according to Dutch law
When you start a Dutch business, you will need to adhere to all Dutch laws that regulate the business environment. One of such laws is the so-called fiscal retention obligation. This essentially tells you, that you need to archive your business administration for a certain amount of years. Why? Because this allows the Dutch Tax Authorities to check your administration whenever they see fit. The tax retention obligation is a legal obligation that applies to all entrepreneurs in the Netherlands. If you are used to work with rather old files and ways of archiving your administration, this can prove to be quite the challenge. There is even a good chance that, without knowing it, you are not complying with the retention obligation.
In essence, the fiscal retention obligation states, that all entrepreneurs in the Netherlands are legally obliged to keep the administration of their company for seven years. Please note, that for some documents, the retention period of seven years applies, but for others ten years. The documents also need to be stored in a way, that allows inspectors of the Dutch Tax Authorities to easily check the administration within a reasonable period of time. In this article, we will outline what the fiscal retention obligation means for your company, how you can adhere to it and what pitfalls to look out for.
Information about the fiscal retention obligation
As we already explained above, all Dutch business owners have the legal obligation to offer the Dutch Tax Authorities the opportunity to check the administration up to seven years ago. This applies to basic data about your financial spending and earning, such as the general ledger, your stock administration, accounts receivable and accounts payable, purchase and sales administration and payroll administration. So all the money that goes out and in during any particular fiscal year, which runs from the 1st of January until the 31st of December. You need to keep in mind, that this means that every single Dutch entrepreneur must be able to show all data from the past seven (or ten) years, during a random check by the tax authorities. Random means, that they can come by unannounced, so you generally always need to be prepared.
There are many possible reasons for a check to happen, although sometimes it just happens as a general audit. The tax authorities might simply decide that you need a periodical check, in order to make sure that you are doing everything legally and have your administration up to date. These checks happen randomly, but not very often. In other cases, there is mostly a clear reason why the tax authorities decide to check up on you. For example, you submitted returns that the tax authorities find suspicious. Or you could think of an investigation, that the tax inspector performs at one of your suppliers, or a business partner or other involved third party. The inspector then requests access to your administration, and sees if he can detect errors or irregularities. This is why bookkeepers and accountants often point out to their clients that it is very important to run a well-designed and concise administration.
Not just because the tax authorities can come and dive into your administration, but because of other benefits specifically for you and your company. If you run a solid administration, then this provides you with insight into your financial figures. You can somewhat see it parallel to a household book: you monitor all money that is coming in and going out. This means you know exactly where there are issues, for example, when you spend more on assets than you actually make in profits. Despite the fact that the chance may not be great that an inspector will knock on your door, it is still wise to have the administration in order. For entrepreneurs, accounting is also a reliable source of figures to make informed decisions. This means it’s easier to decide when to invest in something new, as opposed to investing less and making more money for a period of time instead. It gives you an overall outlook of the profitability of your company, which is very important if you want to achieve genuine success.
When do you apply the retention obligation period of 10 years?
As we briefly mentioned above, the regular period of retention is 7 years. In some cases, entrepreneurs will need to store information and data for a few years longer, namely 10 years. One of the situations in which this prolonged retention obligation applies, is when you own or rent an office building, or other type of business premises. The data on immovable property is subject to a retention obligation of ten years, so if you own any kind of property via your company, you are subject to the longer retention period. The same applies, when your company provides, or is involved in providing, radio and television broadcast services, electronic services and/or telecommunication services, and has also opted for the so-called OSS-scheme (One-Stop-Shop). Keep in mind, that it is actually entirely possible to make agreements with the tax authorities about certain regulations or arrangements, such as:
- How detailed the administration should be
- The way in which the records are kept
- Keeping data other than the basic data for a shorter period of time
Also keep and update, if applicable, the "basic data" time registration for the yearly entrepreneurial tax deduction. This is also true for keeping a good mileage registration. You should keep one for using your private car for business, or the other way around: when you use your business car only for business and never privately.
Who should keep an administration, exactly?
One of the first questions you might ask, is who is obliged to keep an administration for at least 7 years? In reality, every single business owner is required to do so. It doesn’t matter how large or small your business is: the obligation rests with every Dutch entrepreneur. You don’t only need to keep an administration, but the administration must also be kept in a way that allows the tax authorities to check it. So, there are some rules and regulations involved, meaning that your administration has to be proper according to Dutch law. You need this administration to correctly submit a VAT return and declaration of intra-community supplies (ICP), but also to be able to conduct your business properly. In general, this means you need to keep all the original documents, so you will be able to show them to the tax inspector when he/she performs a check.
Who is exempt from keeping complete VAT records?
There are some entrepreneurs, who do not have to keep complete VAT records:
- Entrepreneurs who only supply VAT-exempt goods or services
- Legal entities that are not entrepreneurs, but do have a VAT identification number
Additional administrative obligations
Do you own a company that trades in margin goods? Then additional administrative obligations apply to you. What are margin goods? Margin goods are generally used (secondhand) goods, that you have purchased without paying VAT. Under certain conditions, the following items can also be regarded as margin goods:
- Collectibles that you purchase or import with VAT.
What falls under the category used goods?
Used goods are all goods, that you can use again, whether or not after repair. Please note, that all goods that you buy from a private individual are always used goods, even if they have never been used. Used goods also include goods that have been bred in-house or, as in the case of horses. When you trade margin goods, you need to keep records. This is due to the fact, that trade in margin goods is subject to general administrative obligations. In addition to this, different rules apply to your administration of margin goods. The purchase and sale of margin goods must, of course, be kept in your records. For these goods, there are two different methods to achieve this:
- You calculate the VAT per individual good, and keep track of purchases and sales per item in your administration. The tax authorities call this the individual method.
- You calculate the VAT on the total profit margin in a declaration period. We call this the globalization method.
Both methods are subject to additional administrative obligations. So which method do you use? This question can be answered by stating, that it depends on the type of goods which method you are allowed to use. The globalization method is mandatory for the following goods:
- Means of transport, such as cars, motorcycles, bicycles, mopeds and caravans
- Books and magazines
- Photo, film and video equipment
- Videotapes, DVDs, music cassettes, CDs, LPs, etc.
- Musical instruments
- Household appliances
- Electrical appliances
- Art, antiques and collectibles (under certain conditions, as previously mentioned)
The globalization method is also mandatory for the parts, accessories and supplies used in these goods, since they form an integral part of the margin goods themselves. So, even if you put a new exhaust tube on your used car, it will be part of the margin good (the car).
Goods that are not qualified as margin goods
Do you trade in other goods than margin goods? Meaning that your goods are not qualifiable as used? Then you need to apply the individual method, as opposed to the globalization method. The globalization method allows you to offset negative profit margins against positive profit margins. This is not allowed with the individual method, though. In any case, it is entirely possible to ask the Dutch Tax Authorities to change methods, whenever you believe this will be the right fit for you. Only in the case when you are an auctioneer, or an intermediary acting on behalf of you as an auctioneer, you may not apply the globalization method. This may be due to the fact, that an auctioneer functions as an intermediary between buyers and sellers, and can thus not be seen as the owner of the item. Also, you can sell margin goods with VAT. You can actually choose to sell margin goods with VAT. You can read what you need to do in your administration under Administrative consequences when selling under the normal VAT scheme.
The exact documents you need to keep during a certain timeframe
As we mentioned previously, you need to keep all basic data of your company’s administration for a period of 7 years, for the tax authorities to be able to check the data. The period of 7 years starts when the current value of any good or service expires. To be able to explain what ‘current’ means in this context, we can use the example of a car lease contract. Imagine you lease a car during a period of 3 years. As long as the contract is active, the good or service is seen as current. With the termination of the contract, however, the good or service is no longer being used at that moment and, thus, qualifies as being expired. The same applies to the situation, when you make a final payment to pay something (off). From that moment on, you need to store data regarding this good or service for 7 consecutive years, since this is when the retention period actually begins. Of course, you would like to know which documents and what data you will need to archive. Basic data consist of the following in general:
- The general ledger
- The stock administration
- The purchase and sales administration
- The accounts receivable and accounts payable administration
- The payroll administration
In addition to the abovementioned basic data, you need to take account of the fact that you must also keep all master data. Master data relates to subjects such as information about your debtors and creditors and article files. Please note, that all mutations in the master data must be traceable afterwards.
The correct way to store invoices
An important part of the retention obligation is the specific way in which data is received and stored. According to the legal provisions covering this particular subject, you must keep books, documents and data carriers that are important for taxation in the exact same way, as you have received them. So, in its original state, meaning the primary recording of the source data. This means, that a digitally received document also needs to be stored digitally, which can seem counterintuitive in the beginning, as storing data physically used to be the norm for so long. This does no longer apply. For example, a quote or invoice that you receive via e-mail, needs to be stored as a digital file, since the original way in which you received it, is digital. According to the rules of the retention obligation, you may only store this quote or invoice digitally.
Another thing you should do, is storing the source of the file you received, next to storing every digital file digitally. Just saving the invoice itself is not enough, because the tax authorities want you to be able to prove that, after receipt, the invoice has not been adjusted by you by hand. So, you realize this by not only storing the invoice itself, but also, the e-mail in which the invoice was attached. This allows the inspector to see, that the invoice that you have saved as a PDF or Word file, is really the same as the one originally received via e-mail. The data in the information system, the so-called derived data, must be traceable back to the source data. This audit trail is an important condition when it comes to digitally storing the administration. You are also allowed to ask your customers for identification. What is not allowed, according to the GDPR rules, however, is that this form of identification is copied and, for example, stored in an administration. This is only allowed in cases that this is mandatory, such as when you are hiring an employee, or people need to prove their identity in order to become a subscriber of (some) of the services you offer.
The correct way of keeping a physical administration
An invoice or other document that you receive by post on paper, and that must be kept, you may actually digitize and digitally store according to the tax authorities. So in essence, you replace the source file, which is the invoice on paper, with a digital file. This is called conversion. But keep in mind, that in this scenario you also need to retain the original file, as we mentioned above, for the legally binding period. When digitizing, there are some important factors you should be informed about. Business owners often digitize by scanning invoices, taking a photo of documents, or by having a digitization tool linked to their accounting program, which is also called 'scan & recognize'. Only through this last way of digitization, is it possible to digitize invoices not only more easily, but also according to the correct procedure.
In a brochure about the retention obligation, the Dutch Tax Authorities refer to the conditions that a conversion must meet. It is important, here, that the security features of the original document are not lost. This means, that you always keep paper invoices physically (in paper form) for the period of seven years. Especially cash-paid receipts are difficult for the tax authorities to check for authenticity. On the other hand, there are also examples of accounting firms that have made agreements with the tax authorities about this. For example, offices have collectively received permission for all their customers to store physical invoices digitally, so that they no longer have to keep anything on paper. It is wise for you, as an entrepreneur, to explore your options and possibly talk to the tax authorities about your specific wishes. They often are willing to be flexible and help you out in certain ways, as long as you keep everything clean, transparent and legal.
The proper way to store digital data
There are several ways to properly store digital data. The most important condition is, of course, that the data must be stored for 7 (or 10) years. Do you store all your data and work on your own server? Then Dutch fiscal law dictates, that you need to have a good backup procedure, whilst you also need to perform these backups consistently. Next to that, these backups must be stored on a different location, than the location where the digital administration is located. You could, for example, use an external hard drive to this end. It is also allowed and possible to opt for a cloud solution to store your data. Did you know, that cloud-based accounting software has many advantages, such as the following:
- You and your bookkeeper or accountant can access the data from any device
- Your data is kept safe and cannot be lost or damaged if a computer or other device crashes
- You can inform yourself and steer your company based on real current data
- You can also link other programs to the accounting software
When you keep these rules in mind, you are pretty secure of storing your digital administration in the correct way. We will outline some more interesting details regarding a digital administration further below.
Extra conditions and requirements regarding digital storage of files and data
Do you have stored data on old-fashioned equipment? The retention obligation also means, that the retained data must be accessible. So, you will need to be able to access and open the original file. This means that, for example, old equipment that allows you to access data must be preserved, if certain digital files can only be consulted in this way. You can think of old storage media, such as an old floppy disk, or an earlier Windows version. Furthermore, most accounting packages support the so-called audit file financially. The audit file is an excerpt from the general ledger. Please note, however, that it is not sufficient to keep only the audit file, because it does not include all administrative entries. Moreover, keep in mind all the electronic means of communication, such as your calendar, apps and SMS. All messages via e-mail, WhatsApp, SMS and even Facebook should be kept as far as they are considered falling under the category ‘business communication’. In the event of an inspection, this information must be made available in the form requested by the inspector. This rule also applies to a keeping a digital agenda.
More about the conversion of paper file to digital or storage medium
Under certain conditions, you may transfer data from one storage medium to another. For example, scanning a paper document or the contents of a CD-ROM to a USB stick. Of course, there are certain conditions in order to be able to do this, which are as follows:
- The conversion is done correctly and completely
- The converted data is available throughout the entire retention period
- You are able to reproduce the data and make it readable and controllable within a reasonable time
If you succeed in realizing this, you will not be obliged to keep paper documents anymore. So if you manage to meet the aforementioned conditions, you no longer need to keep the original document. This will save you time and space, since you won’t have the need for a physical administration anymore. So basically, the digital version will take the place of the original. In principle, conversion is possible for all documents, with the exception of:
- The balance sheet
- The assets and liabilities statement
- Certain customs documents.
Without a physical administration, you can actually save a lot of office space and yourself plenty of extra work. No more looking in old archives, or shoeboxes in stuffed closets. When you look at the digital developments of the past 10 to 20 years, it is wise to make the step to a fully digital administration. It is almost impossible to ever lose a file that’s stored digitally, especially when you use a cloud-based solution. Also, it’s a lot easier and faster to loop up digital files. Also help your accountant. Talk to your accountant now and then, and try to set up the administration in such a way, that you comply with the statutory retention obligation. Online accounting programs not only provide more controllable administrations. With well-guarded firewalls and secure keys, good online accounting programs automatically store your administration in the cloud. You can see it as a digital safe, in a safe place, that no one else can access apart from you and your accountant. Or: the tax authorities, when the inspector has to check your books.
Intercompany Solutions can inform you further about the fiscal retention obligation
As you can see, there is quite a lot involved with the fiscal retention obligation. It is wise to always stay informed about the latest legislation regarding the topic, so you know as an entrepreneur that you are operating in conformity with all applicable Dutch laws. Your accountant should actually inform you about this, as well as about all the options to comply with this law in a proper and safe manner. If you don’t have an accountant and don’t know how to comply, or maybe you just started your own business and are new to such topics: in all such cases, you can always contact Intercompany Solutions. We can provide you with extensive financial and fiscal advice, including the best way for you to keep a proper administration. We can also offer support and advice when it comes to paying taxes and drawing up your yearly tax return. Don’t hesitate to contact us directly for more information.