timing - use flywheel or crank pulley ?

1997 Jetta 2.0 , motronic mp9 - non US car. Using vag-com and going into basic setting 01 lifts the engine speed to +- 1500rpm , I then hook up the timing light to cylinder no.1. point the timing light to the hole in the gearbox , I can see the mark on the fly wheel , I then set the mark in the middle of the hole , next I point the light to the crank pulley and the mark is ahead of the notch on the timing cover - which is correct ? Also , does basic setting 01 bring the timing to 0 deg ? reason Im asking is that my timing light has a advance dial on the back of it , do I then set this advance dial to 7 deg. and then line up the marks or do I leave it on 0 deg. and then line up the marks ? if so do I use the flywheel mark or the crank pulley mark ?

last work done on the car: replaced knock sensor , coolant sensor in upper rad hose , manifold vacume / temp sensor. Car WAS driving real bad , huge loss of power and bogging down on acceleration but after the above parts where replaced it is going much , much better now.

just the timing and mixture needs to be sorted out ....then its time for a cam and chip.