The Private Wealth & Private Client Review: Netherlands

Introduction

The Netherlands is a relatively small country with roughly 17.5 million residents. It is home to many families and individuals with significant wealth. Historically, the Netherlands is focused on international trading and innovation. This affects the business environment and legal and tax system for both individuals and companies. It is known for being reliable and progressive with a structured government and a competitive business climate.

The World Happiness Report is released annually and surveys the state of global happiness. The World Happiness Report 2021 has ranked the Netherlands within the top 10 countries in this regard. Primary reasons for this could be educational, overall wellbeing and health, safety and the health system.

Tax

i Personal income tax

Subject to the levy of Dutch personal income tax are individuals who are resident in the Netherlands (resident taxpayers); and non-resident individuals enjoying domestic income (non-resident taxpayers).

For Dutch tax purposes, a person is resident in the state where the centre of his or her personal and economic interests is situated. This position is determined based on all relevant facts and circumstances. For the sake of clarity, we note that the Netherlands does not count days in this respect.

Both resident taxpayers and non-resident taxpayers are subject to personal income tax, which is divided into three Boxes.

Box 1

Box 1 taxes income from work and home ownership (among others, business activities, employment and other activities). The tax rate is as follows:

€0 to €68,507: 37.10 per cent; and

€68,508 and above: 49.5 per cent.

Box 2

Box 2 taxes income, such as dividends and capital gains (at market value – cost price), from a substantial shareholding in a company in the Netherlands and abroad (at a flat rate of 26.9 per cent (2021)). A taxpayer, in short, has a substantial shareholding in accordance with Dutch tax law if he or she holds, directly or indirectly, either alone or together with his or her partner, at least 5 per cent of the share capital of a company (Dutch or foreign), or option rights on 5 per cent of the share capital.

Gifts and inheritances of Box 2 shares are taxable disposals in the income tax (even though there is no consideration). If they concern an active business, business succession facilities may apply by means of which the transfer should not trigger immediate capital gains tax. Recipients then take over the cost price of the former shareholder.

If an individual moves to the Netherlands with a substantial shareholding, a step up of the cost price to the market value is granted. On the other hand, an emigration (if the individual has lived in the Netherlands for more than eight years) is considered a deemed disposal of the shares at market value. The capital gain tax does not have to be paid immediately, but a protective assessment is issued that does not expire. This protective assessment will be collected in certain events, such as the sale of the company or a dividend.

Note that for non-resident taxpayers, Box 2 only taxes substantial shareholdings in Dutch companies.

Box 3

Box 3 taxes income from savings and investments. Under this system, a fixed annual fictitious yield of the wealth is taxed, whereby a (fictitious) distinction is made between wealth held as savings and as investment. Whether wealth is savings wealth or investment wealth depends on the total value of a taxpayer's wealth. Thus, Box 3 does not tax the actual income of savings and investments.

The wealth, which serves as a base for calculating the fictitious yield, is calculated to the fair market value of all capital and assets minus liabilities (e.g., consumer loans), all measured on 1 January of the taxable year.

The current (2021) fictitious yields are as follows:

Wealth exceeding But below*Savings wealth 0.03%Investment wealth 5.69%Fictitious yield
050,00067%33%1.898%
50,001950.00021% 79% 4.501%
950.0010%100%5.69%

* The first 50,000 (in 2021) of the taxable base is tax-free (doubled in the case of tax partners)

The taxable base multiplied by the joint fictitious yield will be taxable at a rate of 31 per cent. The effective tax rate on the value of the assets in Box 3 for 2021 is then calculated between zero per cent and 1.76 per cent.

Expat regime

Non-resident taxpayers becoming resident taxpayers may opt for a specific tax regime called the 30 per cent facility. The facility could apply for five years. To be eligible for the 30 per cent facility, one must:

  1. be recruited outside the Netherlands;
  2. be an employee of an employer that withholds Dutch wage taxes. It is possible to be an employee of a personal substantial shareholding;
  3. have a special skill or expertise that is hard to find on the Dutch labour market. This criterion is deemed to have been met if a certain threshold in wage is exceeded; and
  4. have lived outside the Netherlands and at least at 150 kilometres from the Dutch border for more than 16 months out of the two years before the first working day.

We note that an application must be filed to apply the 30 per cent facility and that specific rules may apply when changing employer. The advantages of the 30 per cent facility are twofold:

  1. first, in short, 30 per cent of the salary is exempt in Box 1; and
  2. second, the taxpayer may opt to be taxed in Box 2 and Box 3 as a non-resident taxpayer. This means, in short, that passive non-Dutch source income is exempt.

Trends

Box 3 is being discussed widely. In fact, the Dutch Supreme Court has previously stated (in 2019) that the Box 3 system may constitute an excessive burden where the fictitious yield of Box 3 is (too) hard to realise. The pressure to alter Box 3 to tax actual gains rather than fictitious yield is therefore high.

Due to the Box 3 system, many taxpayers have chosen to contribute their portfolios into a legal entity they control, thereby placing their assets in Box 2 rather than Box 3. The advantages of Box 2 are numerous and, in relation to that, a considerable part of parliament seems displeased by the advantageous rules Box 2 offers and the increase of taxpayers in Box 2. Thus, a rebalancing act of Box 2 and Box 3 is on the political agenda. One of the first measures that has been introduced per 2023 is that a substantial shareholder is subject to tax in Box 2 for debts to a company over €500,000 based on a deemed dividend.

ii Gift and Inheritance tax

In the Netherlands, gift and inheritance tax is levied from the recipient. However, the connecting factor to determine whether a gift or inheritance is taxable is the place of residence of the donor or the deceased.

Gift and inheritance tax is due on anything of value acquired on the account of a person's death or donation as a (deemed) resident of the Netherlands. For both gift and inheritance tax, deeming provisions apply whereby a person can be deemed to live in the Netherlands for gift and inheritance tax purposes:

  1. a Dutch national who has lived in the Netherlands and makes a gift or passes away within 10 years of having given up his or her residence in the Netherlands is deemed to have lived in the Netherlands at that time; and
  2. anyone who has lived in the Netherlands (and is not a Dutch national) and makes a gift within one year of having given up his or her residence in the Netherlands is deemed to have lived in the Netherlands at the time of making the gift.

As from 2010, the Netherlands no longer taxes the transfer by means of a gift or inheritance of Dutch situs assets, such as real property, with Dutch gift or inheritance tax.

Tax rates

The tax rates for gift and inheritance taxes for partners and children are as follows:

Taxable acquisitionRate
€0–128,75110%
€128,751 and more20%

For grandchildren and greatgrandchildren, percentages in the above-mentioned table should be multiplied by 1.8.

The tax rates for gift and inheritance taxes for other beneficiaries are as follows:

Taxable acquisitionRate
€0–128,75130%
€128,751 and more40%

Relief of double taxation

The Netherlands has concluded several treaties for the avoidance of double taxation with regard to gift and inheritance tax with Switzerland (1951),2 Sweden (1952),3 Finland (1954),4 Israel (1974),5 the US (1969),6 the UK (1979) and Austria (2001).

The Netherlands does, under certain conditions, provide unilateral relief to prevent international double taxation on gift and inheritance tax. As gift and inheritance tax law and the connecting factors differ greatly across jurisdictions, double or multiple taxation remains a risk.

Exemptions

The applicable exemptions for inheritance tax are as follows:

  1. for partners, €671,910. From this amount, half of the cash value of pension rights derived by a spouse from the death of the deceased is deducted. A minimum allowance of €173,580 always applies;
  2. for children, whose cost of living was for the greatest part paid by the deceased and for whom it is expected that within the coming three years they will not be able to earn half of the income a physically and mentally healthy person would earn, €63,836;
  3. for other children and grandchildren, €21,282;
  4. for parents, €50,397; and
  5. for others, €2,244.

The inheritance of pension rights is exempt from inheritance tax.

The most important exemptions that apply to gift taxes are as follows:

  1. for gifts, children receive from their parents, €6,604 (annually). A one-time increase of this exemption is allowed if the child has reached the age of 18 but is younger than 40 at the time of the gift. The increase is permitted up to an amount of €26,881 or €55,996 if the donation was made for an education that has above-average costs;
  2. for others, €3,244 (annually); and
  3. a temporary exemption of €105,302 applies to gifts to a donee if the donation was made to acquire, renovate or pay off a loan contracted for the purchase of a principal dwelling.

Gifts made by or to partners are aggregated for gift tax purposes. For the purpose of the tax rates, the closest relation between two parties (one donor and one donee) is taken into account.

All the amounts mentioned apply for 2021.

In the case of a transfer of business assets by means of a gift or inheritance, substantial exemptions could apply.

The exemption entails that, upon request and if the conditions are met, the effective rate (above the exempt business assets of €1.119.845 (2021)) is lowered to 3.4 per cent instead of 20 per cent (for parents and children), and that for the remaining taxes conditional extension of payment can be obtained. The most important condition is that the business must be continued for a period of five years after the transfer by the donor or deceased. For gifts, the transferor must have carried on the business for his or her own account for at least five years preceding the gift. In the case of an inheritance, this term is only one year instead of five. If the business is discontinued within five years, the facilities are rejected and taxes will be collected. If the business is discontinued partially, the rejection of the facilities relates only to that part. Conditional exemptions become unconditional after five years if the business has not been discontinued.

Trends

The Dutch rules on succession of business assets have been a source of political debate for a long time. Opponents of the substantial exemptions state that there is no meritocratic basis for lenient rules on business succession and often propose to merely allow for a payment extension. Proponents state that the continuity of businesses and family businesses is at stake when they are confronted with a high tax bill when transferring a business within the family. The facilities are currently being reviewed and owners of businesses tend to use the current facilities as much as possible (because the facilities will presumably not get any better when they are altered).

Academically, the lack of international coordination regarding international double taxation of gifts and inheritances has often been addressed. The recent OECD report 'Inheritance taxation in OECD countries' proposes harmonisation of unilateral relief as a possible solution to this. This report could also be a reason that the overall tax burden on gifts and donations will be raised.

iii Corporate income tax

Corporate income tax is due on profits made by, among others, the following type of entities:

  1. public limited liability companies;
  2. private companies with limited liability;
  3. cooperatives;
  4. mutual guarantee companies; and
  5. associations and foundations conducting a business.

The corporate income tax rates are progressive. As of 2021, a 15 per cent corporate income tax is levied on the first €245,000 profit. The profits exceeding €245,000 are taxed at a rate of 25 per cent. In 2022, this threshold is expected to be changed to €395,000.

An open economy is encouraged in the Dutch corporate income tax system. It contains a 100 per cent participation exemption for active and ordinarily taxed subsidiaries in which at least a 5 per cent participation is held, a corporate consolidation scheme as well as a patent regime for innovative activities. The Netherlands currently has no source taxes on interest and royalties, except when they concern an abusive, low-taxed structure.

We note that, in recent years, the corporate income tax has been updated with the necessary provisions to make it compliant with European directives such as the Anti-Tax Avoidance Directive.

The dividend withholding tax rate amounts to 15 per cent. Previously withheld dividend withholding tax is deductible in the personal income tax return.

Generally, intercompany dividends paid by a Dutch company are exempt from Dutch dividend withholding tax if certain conditions are met. For example, such is the case if the shareholder is located in an EU Member State (or a country with an applicable tax treaty), and the Dutch participation exemption would apply if the foreign entity is located in the Netherlands.

However, if certain anti-abuse measures apply, Dutch dividend withholding tax is levied nonetheless over the proceeds at a current tax rate of 15 per cent. One of the anti-abuse measures applies when the following criteria are met:

  1. the main purpose of the beneficiary for holding the substantial shareholding (at least 5 per cent) via the structure is to avoid Dutch dividend withholding tax (subjective anti-abuse test), and
  2. an artificial arrangement or transaction is present (objective anti-abuse test).

This anti-abuse rule in particular has a significant impact on family-owned businesses when the shareholder lives abroad and holds the Dutch participation via a non-Dutch holding company. At this moment it can be hard to prove the structure is not abusive in the meaning of the abovementioned tests. So-called relevant substance could help in that respect as it shifts the burden of proof to the Dutch tax authorities.

Succession

i Matrimonial property law

Both heterosexual and same-sex couples can get married in the Netherlands or enter into a registered partnership. It is possible to draft a marriage or registered partnership contract before or during the marriage or partnership.

If no marriage contract is drafted, a limited community of property exists for anything acquired during the marriage except for gifts and inheritances. Property owned before the marriage generally remains private property. Spouses are equally entitled to such a community. If the community is dissolved, for example due to a divorce or death, each spouse shall be entitled to 50 per cent of the community. If a matrimonial community of property is dissolved on the death of one of the spouses, half of the community belongs to the surviving spouse. Inheritance tax is only levied in respect of the passing of the inheritance.

Before 2018 the default system was a full community, including pre-marital assets, donations and inheritances, if no marriage contract was drafted. Spouses can still opt for the full community but must do so in a marriage contract. They could also opt into a marriage contract for total separation of property. Entrepreneurs often make use of this possibility. Periodical and final netting covenants can be added to ensure that when the marriage is dissolved by means of divorce or death of one of the spouses, the settlement is predetermined.

Finally, it should be noted that the rules of the EU regulations on (matrimonial) property regimes of international couples apply in the Netherlands.

ii Inheritance law

Dutch inheritance law divides heirs into four groups. The groups and group order are as follows:

  1. first group: spouse and descendants;
  2. second group: parents, brothers and sisters and their descendants;
  3. third group: grandparents (and their descendants); and
  4. fourth group: great-grandparents.

If a deceased person had relatives in the first group, his or her spouse and children will inherit equal shares. When someone of that group is pre-deceased, the children of that child (the grandchildren) will take the place of their parent (substitution). To protect the surviving spouse, the Dutch inheritance law dictates that – in the absence of a last will – all property of the estate goes to the surviving spouse. The children will receive a claim on the surviving spouse equal to their share in the estate. This claim is only enforceable under certain conditions (such as the passing away of the surviving spouse).

This statutory division applies automatically unless the deceased has provided otherwise in his or her last will. Drafting a will can be highly beneficial in the Netherlands, both from a tax perspective and a governance perspective. Governance is often arranged via the appointment of an administrator. An administrator represents and supervises the heirs until a certain age. Taxes can be lowered, for example by limiting the portion of the surviving spouse, without that spouse losing control of the wealth (by means of including certain bequests for the spouse). Significant savings can be achieved that way. The spouse is not a forced heir, whereas the children are.

Finally, it should be noted that the rule of the EU Succession Regulation applies in the Netherlands.

Wealth structuring and regulation

i Transfers

Donations and inheritance under Dutch law are flexible. For example, gifts can be revoked if the deed of gift contains such a clause. If a gift is revoked, the paid gift tax can be received back from the Dutch tax authorities.

Another useful instrument in the Dutch regime is the fidei commis. When a fidei commis is applied to a transfer, the recipient of the transferred assets is obliged to transfer (part of) the assets again to a third party. It is possible to attach certain conditions to the fidei commis to create flexibility. In this way it is comparable to a trust, but in practice it is always less flexible.

ii Trusts and foundations

The Netherlands is a civil law country without the trust concept. We are a party to the Convention on the law applicable to trusts and on their recognition of 1 July 1985, by virtue of which we legally recognise trusts under certain conditions. To deal with trusts and similar concepts in tax law, the Netherlands introduced the concept of segregated private wealth in 2010. These provisions were introduced to combat 'floating wealth' and result in the tax-transparency of irrevocable discretionary trusts towards the settlor. Hence, the trust assets of an irrevocable discretionary trust are deemed to be property of the settlor for Dutch income tax and gift and inheritance tax purposes.

If a beneficiary has a (deemed) current or future interest in a trust, the tax treatment could be different. If a beneficiary has a (legally) enforceable right or entitlement regarding the income or principal of the trust, then – generally – the trust is considered fixed or mixed. Fixed entitlements are taken into account directly for tax purposes. This means that the establishment of a fixed trust by a Dutch tax resident entails a (taxable) gift of the settlor to the beneficiary.

The foundation is known in the Dutch legal system. The stichting administratiekantoor (STAK) especially is used to arrange the governance of businesses at shareholder level. A STAK is a flow-through entity from our tax perspective. It becomes the legal owner of the shares against the issuance of depositary receipts. The holders of depositary receipts are entitled to the proceeds of the business, whereas the board of the foundation has the voting rights. Privately owned businesses regularly arrange their governance via a STAK because it allows for flexibility and the appointment of a successive board, and therewith longevity of the structure.

iii Popular facilities

Planning opportunities that are popular within the field of private wealth include the following:

  1. the 30 per cent facility;
  2. business succession facilities;
  3. will planning; and
  4. gift planning (to benefit from the annual exemption and tax brackets).

Please refer to our remarks about these topics earlier in this chapter.

The contribution of personal assets into a closely held company is also popular in the Netherlands from a tax perspective, as the taxpayer is then no longer subject to Box 3. From a governance perspective this could also be beneficial, especially with interposing a STAK. However, from a privacy point of view these structures need to be carefully addressed and reviewed. The reason for this is that the Dutch ubo-register, which applies to Dutch companies, is publicly available. Shareholders that hold more than 25 per cent in an existing Dutch company need to be registered, ultimately in March 2022, and directly in the case of a newly incorporated company. There are certain structures to minimise the impact of the ubo-register – primarily non-transparent partnerships – but these structures are now under review of by government.

Outlook and conclusions

As in most countries, political debate about the tax system has shifted towards stricter rules on combating tax evasion. We note, however, that in recent years, the legislator has mainly focused on combating the tax planning practices of multinational companies. One of the rules in that regard on the dividend withholding tax, however, also heavily affects non-Dutch shareholder companies with a participation of at least 5 per cent in a Dutch company. In addition, the country's business succession facilities are under pressure, as are its personal taxes on wealth (Box 3). We expect that the government will soon propose an alternative system for the current fictitious yields in Box 3.

We expect that the recent OECD report 'Inheritance Taxation in OECD Countries' will have a significant impact globally, and that for the Netherlands it could have an impact on its business succession facilities.

Footnotes

1 Frans Sonneveldt is a partner and Mike Vrijmoed is a director at Mazars Private Clients.

2 Does not apply to gift taxes.

3 Does not apply to gift taxes,

4 Does not apply to gift taxes.

5 Does not apply to gift taxes.

6 Does not apply to gift taxes.

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