Recently, the Dutch Court of Appeal Den Bosch, issued a judgment on the tax liability for personal income tax and VAT. This judgment is especially important for participants in Multi-level marketing (MLM).

The MLM concept

Typical for the MLM Industry is that an MLM company sells products through a network of independent private individuals, also called "members, associates or distributors" (hereafter referred to as "member"). A member can earn commission if another member in his/her network buys products from the MLM. In short, this means that the more successful one is in building a network, the more commission can be earned. The question is whether all these commissions are taxable for Dutch personal income tax and VAT.

Dutch personal income tax

A member could have two different forms of income within an MLM company: income from selling products their selves and income from commissions. According to Court of Appeal Den Bosch, these two activities are closely connected. Therefore, the two incomes should be assessed as one activity for the Dutch personal income tax.

For the Dutch personal income tax there needs to be a source of income. The following three criteria are applicable for benefits to be assessed as a source of income:

  • Benefits are intended. This member started building an intensive private network early on, so this criterion is met.
  • The benefits are reasonably expected. This was clearly to be expected in this case, due to the extensive network.
  • Participation in the course of trade. The member also acts outside of the private environment and therefore, this criterion is met.

Commission is a source of income

The Court concludes that the commissions are a source of income. This judgment differs from the judgment from the Dutch Supreme Court in 2004 (the WIN case). In that case, there was a member who did relatively little and earned little commission. The Supreme Court then decided that the income could not be reasonably expected and therefore, the revenue could not be assessed as a source of income. The revenues were mainly dependent on the recruited members that had to meet a minimum sales threshold and were of a speculative nature.

And also profit from business

Essentially, personal income tax is owed if there is a source of income. This source of income can be a result from other activities or profit from business. In the last case, various tax deductions can be used. Profit from business is acknowledged if a company with sustainable organisation of capital and labour is involved in the production process with the aim of gaining profit. This is tested to the following criteria:

  • Sustainability of the income. In this case there are multiple years of activity.
  • Expectation of profit. In this case, profit has been made for several years. This reasonably also can be expected for the coming years.
  • Investments have been done to gain profits. In this case, investments in website, relation management and company resources, like a car, were done.
  • Entrepreneurial risk. The member participates in the course of trade for its own costs and risk, and the profits can fluctuate every year.

Summarized income tax

Because of all these circumstances, the Court states that the requirements of profit from business have been met. This means that income tax is owed for the income, but that the member can profit from the available tax deductions.


Unlike personal income tax, other criteria apply to VAT. Taxation is applicable if the member regularly performs transactions (services or deliveries of goods) in the course of trade against remuneration. In this case it was not disputed that the member was an entrepreneur for the VAT for the sale of products. The question was, whether the commissions were liable to VAT.

According to case law of the EC Court of Justice, there must be a direct link between the service and the compensation received (commission). According to the Court, in this case there is a direct link between the (advertising) service and the commissions received. If the members make effort to expand their network, it is expected that the benefits will grow as well.

Summarized VAT

VAT becomes chargeable on commissions when the member regularly receives commissions. Luckily for the MLM company, VAT can be reclaimed upon declaration, which does not make it inconvenient. The member can deduct the VAT on costs and investments, such as a computer, car etc., so that on balance, a benefit can often be obtained in the form of a VAT refund.

What to do?

We do not exclude that the Tax Authorities will be reluctant honoring entrepreneurship for VAT for that reason. But can the Tax Administration take such as position after this judgment and earlier jurisprudence in respect of private individuals' entrepreneurship with solar panels? For many members, the application of the Small Business Exemption, can offer a practical solution to minimize the VAT administrative burden. Individual members are advised to discuss with Dutch tax authorities their personal tax liabilities in this respect.