Introduction
Although the Netherlands have never been a low tax jurisdiction, it was and to a certain extent still is a favourable jurisdiction to establish the global or regional headquarters of a multinational company. Important factors in this respect have always been its strategic location, stable economy and the possibility to conclude advance tax rulings (“ATRs”) with the Dutch tax authorities (“DTA”) to get upfront certainty about how the tax legislation works out in a specific situation.
Depending on the exact circumstances, the Netherlands were also an attractive destination for (ultra) high net worth individuals (“HNWIs”) and a country where the effective tax rate (“ETR”) that individual taxpayers experienced was such that HWNIs did not feel compelled to consider relocating abroad. Recent shifts in legal and economic policies have however changed this. In this article we will analyse current trends, new legislation and potential challenges HNWIs face in the Netherlands, offering strategic insights.
Enhanced tax enforcement for HNWIs
Approximately ten years ago, the Netherlands, following the example of the UK’s HMRC, formed the ’Zeer Vermogende Particulieren’ (“ZVP”) unit within the DTA. This unit focuses on HNWIs, clustering knowledge and expertise to ensure that the unit’s tax inspectors are well-equipped to handle the complexities associated with high-net-worth taxation. This specialized approach aims to enhance compliance and ensure equitable tax contributions from HNWIs.
So far, our experience has shown that the establishment of this team has resulted in HNWIs being subjected to stricter scrutiny and increased questioning of the structures set up by these taxpayers. In this context, we believe that it is more important than ever to engage with the tax authorities in an open and transparent manner. In our view, this inter alia means that one, when setting up a structure, should assume that all facts and circumstances will be known by the DTA.
Escalating tax rates: strategic adjustments needed
The Netherlands have a classical tax system, in which legal entities, among which companies, are independently subject to taxation, to corporate income tax (“CIT”). The profits distributed by a company are subsequently independently taxed at the level of the shareholder/natural person.
Dividends received and capital gains realized by a shareholder/natural person, holding at least 5% of the shares in a company (a so-called substantial shareholding or in Dutch ‘aanmerkelijk belang’), are taxed with 33% personal income tax (“PIT”). The rate increased from 26.9% to 33% starting 2024.
In conjunction with the CIT, which imposes a 25.8% rate on profits exceeding EUR 200,000, as from 2024 HNWIs therefore face a cumulative effective tax burden of 50.3% on their business profits. For comparison, from 2011 to 2020, the cumulative maximum effective tax burden was 43.75%.
In connection with that (a) the business succession facility (in Dutch: ‘bedrijfsopvolgingsregeling’) in the Dutch inheritance and gift tax (“IGT”) only applies to business assets (in Dutch: ‘ondernemingsvermogen’) and not to assets, held by a company, which are not needed in the primary business, and (b) the IGT rates for the acquisitions by children is 20%, this necessitates strategic estate and tax planning and sophisticated wealth management to preserve wealth over generations.
This might include (i) taking a holistic view at the family’s investment portfolios, (ii) utilizing tax-efficient structures (insofar as this is still possible) and (iii) transferring wealth to the next generation as early as possible, while parents retain full control.
In the introduction, we noted that until recently, HNWIs did not feel compelled to consider the implications of relocating abroad. This is gradually changing since the introduction of the ‘excessive borrowing’ regulations, the increase of the PIT rate for income from substantial shareholdings to 33% and the frequent media reports suggesting that HNWIs pay relatively little tax. Relocating can be seen in this respect as a deferral strategy, where taxation over the (latent) capital gain in a substantial shareholding at the time of relocation can under certain conditions be postponed to ultimately one’s demise.
It is, in this respect, however important to consider that the DTA has not only formed a team focused on HNWIs but also a team specialized in investigating whether an individual should be considered a tax resident of the Netherlands. For Dutch tax purposes, individuals are deemed residents of the Netherlands much more quickly than one might expect. In a significant decision frequently referenced in lower courts, the Supreme Court ruled that a person who spent 10 weeks per year in his former rental property in the Netherlands and 42 weeks per year in his country of origin with his second spouse and minor child was still considered a resident of the Netherlands.
Supreme Court ruling: redefining fair taxation
On 6 June 2024, the Dutch Supreme Court ruled that the current system for taxing income from investments and savings (box 3 of the Dutch PIT system) was in breach of the European Convention on Human Rights. According to this ruling, taxpayers are only required to pay personal income tax on actual realized returns, not deemed returns. This landmark decision aligns taxation with actual economic performance, providing relief to taxpayers during periods of low returns.
Anticipated reforms: preparing for 2027 and beyond
Already prior to the aforementioned landmark ruling of the Supreme Court, the Dutch government has announced plans to significantly amend box 3 of the PIT system by 2027. The new system will tax actual realized returns instead of deemed returns. To prevent lock-in effects unrealized capital gains will already be included in the taxable base. Over the course of an investment one might, as an example, therefore in total have to report a gain of 100, whereas in some years a gain of 200 will need to be reported and in other years a loss of 100. These reforms aim to create a more accurate and equitable tax system but require HNWIs to make proactive adjustments in their investment strategies and tax planning to navigate these changes effectively, particularly where the adage ‘asset rich, cash poor’ applies
Anticipated reforms: business succession facility
The Dutch business succession facility in the IGT and PIT act is likely to be further reduced in the coming years. In anticipation of these changes, many business owners are expediting the transfer of family businesses to the next generation. This trend underscores the importance of timely estate planning and strategic utilization of existing tax reliefs to minimize future tax liabilities.
Political landscape: wealth tax debate
Several political parties in the Netherlands advocate, also referring to international initiatives (see below), the introduction of a wealth tax in addition to the PIT. While these parties are not part of the current government, the debate continues to influence the political discourse. HNWIs must monitor these developments closely, as the introduction of a wealth tax could significantly impact their tax planning and overall financial strategy.
International coordination on taxation: a new paradigm
Internationally, within the OECD, but also in the Netherlands, more and more politicians argue that in an increasingly interconnected world, where many businesses operate and sell their services and products globally, the need for a harmonized approach to taxation has become paramount. Significant progress has in this respect already been made in the taxation of multinational enterprises.
Recently, attention has also begun to focus on the taxation of HNWIs. A recent report, commissioned by the Brazilian G20 presidency authored by Gabriel Zucman, proposes an internationally coordinated minimum effective taxation standard for USD billionaires and potentially centimillionaires. It recommends that individuals with more than USD 1 billion (and potentially USD 100 million) in wealth should pay a minimum tax of 2% of their wealth annually. The report suggests that this standard could be implemented flexibly by participating countries through various domestic instruments. The rationale behind the proposal is the significant revenue loss and increased wealth concentration due to the failure of current tax systems to effectively tax HNWIs. These are also arguments used by Dutch politicans.
A 2% tax on billionaires is estimated to raise USD 200-USD 250 billion per year globally, and extending this to centimillionaires could add an additional USD 100 – USD 140 billion.
For now, most European countries, including the Netherlands, place great importance on their sovereignty in tax matters. In the aftermath of the financial crisis, however, these countries managed to implement internationally coordinated measures within a few years, significantly limiting the ability of multinational enterprises to mitigate their tax burden.
In our view , the manner in which individuals are taxed and the amount they owe is closely tied to how countries choose to organize themselves. From this perspective, one could argue that the Brazilian G20 presidency’s initiative has little chance of success, at least in the short term. As the number of taxpayers affected by these proposed measures would however be relatively limited, we believe it is crucial for all taxpayers potentially impacted by these measures to closely monitor all developments.
Legislative changes in partnerships
As of 2024, the legislation regarding partnerships has changed, with transitional laws in effect this year. By 2025, all partnerships will be considered transparent for Dutch CIT and PIT purposes. Previously, non-transparent partnerships were used to keep wealth held via companies from being publicly recorded. The new regulations require restructuring existing partnerships and devising new structures going forward to ensure compliance and maintain privacy. Luckily, this can be achieved.
Conclusion
The evolving tax landscape in the Netherlands presents both challenges and opportunities for HNWIs. Staying informed about international proposals, national legislative changes, and significant court rulings is crucial for effective planning and wealth management. By proactively adjusting their strategies to these developments, HNWIs can navigate the complexities of the Dutch tax system, ensuring the preservation and growth of their wealth for future generations. Strategic foresight, informed decision-making, and agile adaptation are and will remain key to thriving in this dynamic environment. By staying ahead of the curve, leveraging expert advice, and being prepared to continuously adapt your strategy, it should be possible to mitigate risks and capitalize on opportunities.
Please find the original article on Chambers & Partners website (https://chambers.com/content/item/5491)
