Capital gain selling your home – tax free with conditions

Capital gain selling your home – tax free with conditions

These days it is common to make a capital gain selling your home. One of the upsides of the Dutch tax system: no capital gain tax. But there are conditions.

Capital gain selling your home

Selling your home is a fortunate event these days, purchasing a home is a nightmare. Both are very much in balance. The fortunate part: the asking price is being overbid. The nightmare part: you need to overbid the asking price in order to be able to purchase.

At our home we have the best constructor for setting the tiles. He told me he sold his house with the same profit he had to overbid the house he purchased. Basically he has a bigger house for the same monthly costs.

Capital gain selling your home – tax free with conditions

No capital gain tax?

Indeed, in the Netherlands there is no capital gain tax for private individuals. That is also the reason why nearly no company purchases a home. A company selling such a home is subject to capital gain tax. In some countries there is a tax advantage to purchase property in a vehicle, not in the Netherlands.

That said, in this housing market where the employee cannot afford the purchase of the house, the employer helps. We now see employers actually purchasing a property in the name of the company to house the employee. The advantage for the employee is that the rent being charged by the employer cannot exceed 18% of the annual salary. Free tax advising bonus material!

What are the conditions?

The Dutch Government learned from their mistakes. In the past there were no conditions, so you had your house financed for 100%. Actually 120%, as in those days you could finance also the purchase costs.

You sold the house, made a gain, purchased the Porsche with the gain and financed the next house for the full amount again.

Now there are rules. The rule is that you need to invest the gain made in your next house, that is your main residence. The penalty for not doing so, is that you cannot deduct the mortgage interest for the part of the mortgage you took out too much.

Example

You purchased for EUR 350.000 your home 10 years ago, 100% financed. Paid back on this loan EUR 120.000, hence today the loan on the house is EUR 230.000.

The house is sold for EUR 550.000 and you purchased the next house for EUR 650.000. You took out a EUR 650.000 loan for the next house.

The capital gain is EUR 550.000 minus EUR 230.000 remainder loan is EUR 320.000. That implies that for the next house costing EUR 650.000, you can only take out a tax deductible loan of EUR 650.000 minus EUR 320.000 gain is EUR 330.000.

In your tax return EUR 330.000 loan for the house is tax deductible and EUR 320.000 is not.

Fine tuning

The above example is a rough example. Some non-deductible costs influence the capital gain in a lower amount. Plus most people want a new bathroom and kitchen in the next home, these refurbishments are taken from the capital gain amount if no loan was taken out for these costs.

You need a professional mortgage advisor, as you can find with expat mortgages. During the intake they explain you how the possible gain of your current home is taken into account in the finance report of the house you would like to purchase.

It is good or bad, this condition?

It depends who you ask. My experience is that the man is eager to purchase the Porsche while the woman is more relaxed with less mortgage debt. I can related to both the man and the woman. The Porsche as you do not know how long your life will last, not sure if a fast car influences this period. On the other hand, if economics get worse, a low debt is handy.

Tax is exciting

We think tax is exciting. Accurately calculating the capital gain to be invested in the next home is what our team get excited about. This is a service that is part of the tax return filing service.

Box 3 debacle – Dutch asset tax contrary to EU-law – Explained for dummies

Box 3 debacle

Box 3 debacle

As most of you most likely heard, the Dutch box 3 assets tax is currently being debated.  Last year, on 24-12-2021 the High council ruled their decision regarding the Box 3 asset tax. The High council ruled that the Dutch box 3 asset tax is contrary to the EU-law, the right to enjoy your assets. This has never happened before and therefore raises a lot of questions and concerns. What will happen to solve it, how will my assets get taxed, what do I need to do. All questions we fully understand, but not all of them can be answered just yet.

Why is Dutch box 3 asset tax contrary to the EU law?

In order to further understand the issue, it is first important to note the current way of taxing assets in the Netherlands.

Currently, this is done over the value per 01-01-of the relating year, so for 2020, per 01-01-2020. Over the value per 01-01-relating year, the notional income has to be calculated. This is done via the following brackets (2020 rates):  

BracketYour (part of) taxable assets(Savings)
Percentage
0,07%
(Investors)
Percentage
5,28%
1to € 72.79867%33%
2from € 72.798 to € 1.005.57321%79%
3from € 1.005.5730%100%
Box 3 debacle

The result of this bracket is called the notional box 3 income. This income is taxed for 30% (2020 rate).

As you can see, there are 2 percentages in box 3, the lower savings percentage and the higher investors percentage. However, you cannot state how much you save and how much you invest, this is decided by the Tax authority.

This means, that if you for instance have EUR 1.000.000 in savings but EUR 0 in investments, you will be taxed over 33% of EUR 72.798, 79% over EUR 932.775 and over 100% of  EUR 5.573 as an investor. However on savings, you are not expected to have the same gains as an investor, hence it would not be fair if you are taxed as an investor, without the related gains.

This is now deemed unfair.

Box 3 debacle

What will happen now?

Currently, the Dutch government and the Dutch Tax authority are trying to find a solution. A permanent solution is expected to take place in 2025. This means that the years 2017-2024 do not have a solution yet. For these years, the Tax authority expects that a regular tax return is filed, so with assets valued per 01-01- of the relating year. In order to correct the current box 3 asset tax, an objection needs to be filed. This objection is not a regular tax objection, but this is a class action objection. This means that all objections will be considered at once, instead of each separately.

How will I be taxed in the years 2017-2024?

At the moment of writing this article (11-02-2022), this is not known yet. It is expected to receive a final say in May, 2022.

We do already know that the gains will be taxed. It is not sure yet whether realised gains or unrealised gains will be considered.

What happens if I do not object?

This is also not know yet. This is currently being debated by the Dutch government and Tax authority. For now, only if you object, the result of the tax return will be adjusted. In May, 2022, it is also expected to know more details regarding what happens if you do not object!  

A very strange period for us as Tax advisors, but most likely even more confusing for you as an Expat.

We understand that the box 3 asset tax is something that you have questions about. We currently unfortunately, do not know more than above.

Tax is exciting

We think tax is exciting. My name is Kelly and I think tax is exciting.  

If you would like us to investigate whether filing objection would be beneficial for you, feel free to reach out and we will investigate once the final rules are in place!

If you have other questions, feel free to reach out!

Box 3 debacle

Rental property in Box 3: reduced valuation

Rental property in Box 3: reduced valuation

Rental property in Box 3 implies you pay Dutch wealth tax over the property you own in the Netherlands. The value is based on the WOZ value, how to reduce that?

Rental property in Box 3

Property and the place of taxation is determined in the tax treaties. If there is no tax treaty between certain countries, in this case the general accepted rule is not much different than the treaty.

The rule is that property is taxed in the country where the property is located. For us that is a logical rule. The property is a burden on the soil of a country. That country makes costs of facilities like electricity, water etc. In return the same country should be able to tax that property.

In your own country, if that is different from where the property is located, you can claim a double taxation relief.

What value is taxed?

To avoid all kind of creative calculations, assumptions and reports, the Dutch tax office sets as value the so called WOZ value. The WOZ value is a value determined by the city in which the property is situated. It is based on recent transactions in the neighborhood.

Via the website www.wozwaardeloket.nl you can look up your WOZ value, or that of your neighbors if you think that is interesting. In the tax return the value is taken of a year before. Example. In the 2021 income tax return the January 1, 2020 WOZ value is taken into account.

Rental property in Box 3: reduced valuation

What reduces the property in Box 3 taxation?

A debt taken out to purchase the property or to refurbish the property. That debt is a debt actually taken into account for your Box 3 property. This value reduces the WOZ value.

As per which date is the debt taken into account? It is always the January 1 value. Example. In the 2021 income tax return the January 1, 2021 or December 31, 2020 debt value is taken into account.

How to reduce the Box 3 WOZ value?

The moment the property is rented out for a period exceeding two years, the tenant receives rental protection. Rental protection implies you cannot terminate the rental agreement, unless very specific occasions occur. Not paying the rent, arguing the rent are not clear reasons to terminate the rental agreement. A procedure is involved.

There are examples that a tenant argues the rent based on the point system some counties have. They are entitle to pay a much lower rent to you, lower than agreed upon….for the rest of their lives!

You could state that the rental protection reduces the value of your property. And that fact we use. If the two year rental agreement condition is met. Based on the actual rental income a complex calculation can be made. This will then be the new value for the income tax return. A substantial lower value than the WOZ value.

The tax office will contact you after the tax return was filed to check if in fact the conditions of the reduced value were met.

Tax is exciting

We think tax is exciting. Paying too much tax is never exciting. Helping you to file the property you hold in the Netherlands in Box 3 is exciting. Our fee to assist you is EUR 390. After July 1, 2022 our fee goes up to EUR 410 instead.

Crypto taxed in box 1 or box 3?

Crypto taxed in box 1 or box 3?

Crypto currencies are popular. A question we often get is how will my crypto be taxed? Is crypto taxed in box 1 or box 3? Will I pay capital gain tax on the crypto?

Crypto taxed in box 1 or box 3?

We have a boxing system in the Netherlands to simplify the tax system. Box 1 is for sources of income such as employment, self-employment, freelance. The house that is the main residence is also in this box. It is seen as a source of income, negative income that is. Suddenly the house is fun!

Box 2 is for persons that hold at least 5% of the share capital in a company, or persons who are strongly related to a person that holds at least 5% of the share capital in a company.

Box 3 is for the world wide assets. We tax your world-wide assets, exceeding the threshold of EUR 50.000 a person (2021).

30% ruling holders do not need to worry about Box 2 and Box 3 if their tax return is properly done. Read: have us do your income tax return.

Capital gain tax

First of all, the Netherlands does not know capital gain tax, hence the capital gain will not be taxed in the Netherlands for private individuals.

Crypto taxed in box 1 or box 3?
Crypto taxed in box 1 or box 3?

Box 1 income

Crypto taxed in box 1 if work, effort or knowledge is required to make a profit. What is considered work, effort or knowledge is a grey area. The official line is: when more time is spend on trading than is done for normal asset management. What is normal asset management? The question of this decade. The tax office needs to proof you exceeded normal asset management.

In general, it will be considered work if you spend quite some time trying to get the highest exchange rate possible. Then again, a normal asset manager would do the same. That is the point of being an asset manager.

Box 3 Assets

The normal situation is that your crypto currency is part of your Box 3 assets. In Box 3 you report your worldwide assets like bank accounts, shares, options, property. Crypto is in fact a bank account with a different currency than the EURO currency.

If we replace a crypto by USD and you trade in USD currency, you get a result. If you do that all day and night, it is an effort that makes the result taxed in Box 1.

It is the Dutch tax office that needs to proof your efforts exceed that of normal asset management. If you keep that in mind and you try to act as a normal asset manager, the Crypto is in Box 3.

Box 3 is value is determined per the value per 01-01- relating year, so for 2021 per 01-01-2021. Rough tax rate for 2021 is 1,4%.

Tax is exciting

We think that is exciting. We are excited to assist you with the crypto currency filing in the Dutch income tax return. That said. Each situation is different. Whether your crypto is taxed in box 1. Or is taxed in box 3 is not answered easily without background details. Please reach out to us if you are uncertain how your crypto will be taxed. We would happily explain more about your situation!

Usufruct in Box 3

non resident

Usufruct in Box 3 is never seen. Usufruct has been more or less abandoned from regular Dutch tax returns. What is this about?

Usufruct in Box 3

Usufruct implies you own something, often a property. That property you then give fully in control of another person, while you keep the owners’ rights. You would be stupid if you do so, not when family is involved.

Exemption Box 3

Exactly that is the article about. Your parents transfer the owners’ rights to you under the condition they can stay in the property till they die or go to elderly home. Article 5.4 sub 3 of the Dutch income tax makes an exemption for the following situation:

Not part of the Box 3 worldwide assets are the goods subject to usufruct for the married partner of a deceased parent of the owner of the goods. This is only the case if the usufruct is based on last will of the deceased parent or based on foreign inheritance legislation.

This asks for a court case example.

Usufruct in Box 3

Usufruct in Box 3 court case

A French woman, being a tax resident in the Netherlands. She receives by notarial deed the ownership of the house of her parents. The house is in France and the condition of the deed was that her parents were fully in control till the day they will die. The value of the property is EUR 200.000.

The French woman filed her Dutch 2014 and 2015 income tax returns. She claimed zero value for the French property in Box 3. She claimed the French property was based on article 5.4 sub 3 of the Dutch income tax act not part of Box 3 assets. The tax office denied this request.

She appealed in court and the court rules as follows. The usufruct had not found its origin in the French inheritance act, but was a notarial deed not influenced by the inheritance act. That made the usufruct was not based on foreign inheritance legislation. Neither was the transaction based on a last will. That made the article 5.4 sub 3 claimed was not applicable.

Double tax treaty

We think the French woman started her battle at the incorrect place. She should have started with the Dutch French tax treaty. Such a tax treaty determines which country can tax what. Clearly article 6 of the French Dutch tax treaty states that properties on the French soil are to be taxed in France.

This French property you report in Box 3 as your property. You claim in the same income tax return a double taxation relief for this French property for the full amount. This is based on the French Dutch tax treaty. No tax was to be paid in the Netherlands in Box 3.

Maybe the French woman tried to be more clever than the system. The house would not be reported in a French tax return. The house would be in the Dutch tax return and then under article 5.4 sub 3 effectively not taxed in the Netherlands. If that was the idea to avoid paying tax in both France and the Netherlands, it failed.

Tax is exciting

We think tax is exciting. We can also get excited about claiming tax credits for you. The property article is in every tax treaty the Netherlands has signed with another country. We also think it is logical to have a property that is a burden on the soil of the other country to be taxed in that other country.

No more 30% ruling, what has changed?

Entrepreneurs deduction (zelfstandigen aftrek)

No more 30% ruling is the situation that occurred to many internationals on January 1, 2021. The 30% ruling period has been updated and all periods have been reduced to max 5 year period. The one date on which this all came together was December 31, 2020.

No more 30% ruling, what has changed?

On December 31, 2020 the 30% ruling holders that still had a 12 year period, 10 year period, 8 year period have been reduced to 5 year period on December 31, 2020. Most of them had as per that date no more 30% ruling.

The immediate change was the net salary of the January 2021 salary specification. Not the best start of a new year. The net salary is only one part of the changes.

World wide assets are now taxed

The question we receive a lot these days is what to do with the world wide assets, now there is no more 30% ruling.

The timing of that question early 2021 is not good. The world wide assets taxed in the 2021 income tax return are valued on January 1, 2021. In other words. If you were going to take action, you are already too late for the 2021 income tax return.

But then we wonder what is it you would like to do? The only method to reduce your wealth is spending it or giving it away. Paying the tax over your assets is then cheaper.

No more 30% ruling

What wealth is actually taxed?

Taxed is your world wide wealth, such as your:

  • world wide bank account balances,
  • your share portfolio,
  • properties you own around the world,
  • receivables you have on your company or friends and families.

The bank accounts is a fixed number. The tax offices around the world communicated with eachother, if you ‘forget’ to mention your foreign bank account, the tax office will remind you in the next 12 years, plus a 300% penalty. The 300% penalty is taken over the tax you should have paid, and you can see that as an incentive to report properly.

Pension value

The share portfolio is not always straight forward. If you are a US national and you have a brokerage account for your 401K or IRA, then this 401K and IRA value is not part of the Box 3 taxation. Your instantly reaction will be a relief, but then you wonder why is it not taxed.

The reason why the 401K and IRA are not in Box 3 is that the actual pay outs of these funds will be taxed in Box 1 at the 38% to 49% brackets. This applies to all pension situations. A true pension is not taxed in Box 3, but taxed in Box 1 the day you start receiving pension benefits. The exemption to the rule is state pensions. If you were a civil servant, in the military or embassy, this pension is taxed in the state you served for only.

You see me mention the word ‘true’ in front of pension. That implies there are also not true pensions. Indeed. A non true pension is a pension fund that might carry that name, but you are entitled to touch the capital before the pension date had actually been reached. That is according to Dutch rules not a pension capital. Consequently, such a ‘pension’ capital is taxed in Box 3.

The IRA roth is also taxed in Box 3.

Property abroad

If you own property abroad, or like is common in Russia, part of the family property abroad, then this property value is mentioned in Box 3. Mentioned implies it is reported, but not taxed.

The tax treaties around the world often mention in article 7 how property is taxed.  All treaties stated that the property is taxed in the stated where the property is actually situated. Logic solution, as it is that state that has the burden on their soil of such a property, hence they should be the state to tax the property.

The purpose of the exercise of mentioning the property in the Dutch Box 3 tax return and then claiming for the same amount a double taxation relief is as follows. Should the property be sold at any given moment and the income is received in your bank account, you can explain where the money came from. The Dutch tax office then do not need to assume you had hidden bank accounts abroad.

By the way, the double taxation relief on the property is not a 100% double taxation relief. The calculations are not pure, the tax free amount is taken into account, causing less value to be corrected.

Tax is exciting

We think tax is exciting, we do understand that paying tax again over your assets that were already taxed when you obtained them, is not exciting at all.

You have choices what to do in this situation. You can decide to enter in a ‘construction’ that promises you a more nice yield than the interest you receive, if any, in the bank. But will you ever see your money again?

You can invest in property abroad, value could go up, can go down.

You can also accept that part of being a Dutch tax resident is paying tax over your world wide assets. Nobody likes to pay this tax, but gambling with your assets to avoid taxation might cost you more.

What to do with my assets?

“Soon I will no longer have the 30% ruling.” “The bank will charge me negative interest if my combined balances exceed EUR 250.000.” What to do with my assets?

What to do with my assets

That is a question we receive a lot. Our first reply is that we are no financial planner nor do we want to become one.  Therefore we cannot answer your questions what to do. Still we like to address the topic, but note, this is not a financial advice.

What to do with my assets – Step one

If you like to have peace of mind, please schedule a meeting with your tax advisor. Then with your tax advisor you determine what exactly are your assets. If property abroad, if pension value build up abroad such as 401K or IRA then this is not part of your Dutch taxable base.

However, when you think to have secured the family assets in a trust ran by yourself, we have to disappoint you as the concept of trust is not accepted in the Dutch income tax return.

What to do with my assets – Step two

Then you have choices to make and before you make the choice you need to have calculated roughly how much Dutch income tax you actually will pay over your worldwide assets. That is to put it all in perspective.  Maybe the outcome is that you pay EUR 500 annual in tax or you pay EUR 50.000 annual in tax. With the first you need to wonder if you should make changes. With the latter you certainly advise of an expert. Or should you?

Indeed a rough indication not exactly as soon the tax calculation of the Box 3 worldwide assets will change.  The expected yield on Dutch property will be taxed at a higher expected yield rate, the same will apply with your stock exchange portfolio. This change is caused by both markets developing very well and the Dutch Government want to cash on that. Cash in the bank yields no more interest, hence tax on cash will be reduced.

Before you make changes in your assets build up to avoid Dutch wealth tax you need to investigate if these changes do not costs you more than the actual tax due over these assets. For instance, selling part of your portfolio to move money elsewhere might costs you a yield in increased value, or costs you transfer costs. Maybe the portfolio earns you an income via dividend, interest or capital gains, that you no longer have when you move away from this strategy. Therefore we ask you not to focus only on saving tax alone, but look at the full picture.

What to do with my assets?

What to do with my assets – Step three

Wisdom comes with age. You could decide to reduce your combined bank balance with one bank to less than EUR 250.000, to avoid negative interest. You can use the excess money maybe to reduce your mortgage on the house or other debt.

Calculate how much will be the negative interest amount charged to you. You might learn it can be so much as EUR 50.  Eur 50 is not a reason to jump to conclusions to change your strategy, it is more an annoyance.

You can repay part of your mortgage, if more than 10% you get a penalty. The penalty is still tax deductible, but you only receive a partly tax refund. The balance is lost in bank charges. Even if you have no mortgage deduction as the WOZ value is so high compared to the interest due over the debt, it could still be interesting to keep on the mortgage.

Some might think EUR 250.000 or more in the bank is enough, but that depends on the person owning this amount and the period in life you are at. Maybe you have 3 children that soon start university. Or one child you want to support with housing. Or you want to surprise yourself with a holiday home at the beach.

Finally – cash is king

The oldest phrase in the business is that cash is king. Cash can also be your bank balance. In times of crisis and your assets are tied up in investments that are hurt by the crisis as well, you cannot pull out the cash or refinance due to such a crisis. Then cash is king and gives you freedom. The wealth tax due is then the price of this freedom.

Tax-is-exciting

We think tax is exciting and we understand that you find the opposite when your assets are being taxed. Assets you already paid tax over when you obtained them either via employment income, profit income or inheritance. An now it is taxed again, on an annual basis.

Even though paying this tax is annoying, please place in perspective the taxable amount before you take drastic actions that might costs you more than the actual tax due. We have no wisdom what is best for you, but we can help you put it more in perspective the tax burden to help you make a decision yourself.

Sorry for the dashes in the middle of the word Tax-is-Exciting. Apparently Google has a dirty mind and sees only a three letter word that we refer to when we practice to reproduce ourselves. Anything related to that word is spam, hence this devout solution.

Asset management Box 3 or Box 1 taxable income?

Due to the 30% ruling period being reduced significantly, we receive more and more the question if income from assets are taxed in Box 1 (progressive tax rate) or Box 3 (more or less 1.2% taxed income)?

Asset management Box 3 or Box 1 taxable income

This is a difficult subject to touch as it is as gray as the sky in the Netherlands during Autumn. There is a lot of jurisprudence on the subject, but all is very case specific.

The rule is that normal asset management activities are regarded Box 3 activities. So when you have a portfolio and you trade a number of times per year, that is regarded normal asset management. When you hire a professional to do the trading for you, that is regarded normal asset management.

The moment your assets are not traded on a stock exchange, but you own property that is not your main residence, this property is taxed in Box 3. Even if you have the so called 30% ruling where you do not need to report your worldwide assets, exception to the rule is property situated in the Netherlands.

If you have or do not have the 30% ruling Dutch property is taxed in the Netherlands. Property you own abroad is reported in the Netherlands, but a credit is provided as tax treaties state the property can only be taxed in the country where it is actually situated.

So you own property in the Netherlands that is not your main residence. Maybe you rent the property maybe not, what you do with the property is not so relevant. Even if you have your parents live in the property for no rent, it is an asset that is subject to tax.

Asset management Box 3 or Box 1 taxable income?
Asset management Box 3 or Box 1 taxable income?

The tax office has the opinion that when you start painting for instance the gutter yourself, you already do more than normal asset management. In other words, the property you manage has then moved to Box 1. I think it is debatable, but please hire a company to paint the property for you. It would be terrible to see that the capital gain you make on the house that is basically tax free, as we do not know capital gain tax, this income is taxed in Box 1 because you needed to paint the gutter yourself.

Asset management Box 3 or Box 1 taxable income – source of income

Recently clients contact me that they are trading on the stock exchange themselves and they are worried their efforts are taxed in Box 1 instead of Box 3. Such a message is often send in the early days of trading, when success is still part of the operation. I have done some trading a ‘blue Monday or two’ and it became very clear in which area my expertise is lacking. I could cut lose break even barely.

My reply to my clients is to give it some time. One sunny spring day does not imply summer has started. Trading on the stock exchanges makes people create poetry, maybe to soften their sorrow in their losses. Poetry like ‘cut lose when you are ahead’, ‘sell in May and go away’. Over time your luck might change as the markets can be unpredictable, and then your profit has turned into a loss.

The Dutch tax system is rather hypocrite in this field. If you trade yourself and you gain a profit, the Dutch tax office is keen to state this income is taxed in Box 1. However, the moment you trade yourself and you lose more than you invested, nobody with the Dutch tax office will accept your loss in Box 1. A bit of a one way system.

What amount is the source of income?

The moment you do some trading on the stock exchange yourself and you make some money, what is the threshold it to be regarded source of income money? Does it start with EUR 1 gain, or EUR 1.000? Box 3 tax rate is based on the assumption you make a certain percentage of income. See the brackets below.

Tabel berekening rendement op vermogen over 2019

Asset management Box 3 or Box 1 taxable income?
Asset management Box 3 or Box 1 taxable income?

The first bracket starts at zero up to EUR 71.650 and if there is a yield the expected taxable result is 1,935% income over your assets. Does that imply if you make 1,935% profit or less over your investments, it is not regarded Box 1 source of income as this is already the bases of Box 3 taxation? I think it very well might be. Again gray area and the tax office is keen to state your income on your assets are taxed in Box 1.

Example of source of income

I have post an article about bitcoins and the result was that bitcoin holders contacted me to ask about how or if they should report the bitcoin. A silly question, because if you read my article my answer is crystal clear.

But this bitcoin holder was able to share with me that he trades every night and last night he gained EUR 8.000 in 20 minutes trading. That was at the time the bitcoin value went through the roof.

He was able to inform me that in those 20 minutes he earned more than he does in a month gross salary with his employer.

That is for me the moment to inform him that the proceeds are a source of income subject to the progressive tax rate in Box 1. Of course not the answer this person was looking for, hence we never learned from him again. The poetry would be: do not play with dogs you cannot run with.

Orange Tax Services

Asset management Box 3 or Box 1 taxable income is a gray subject. The costs you save by painting the cutter of the house you rent out or the accidental profit you make playing Mr Buffet can make this income subject to the progressive tax rate in Box 1, or can it. Again gray area as the tax office is not keen to accept losses you make in Box 3.

So why this article, to make you aware that the possibility exist that your massive yield in Bitcoin income, stock exchange income or the capital gain made with the sale of the rented house, might be taxed in Box 1. It all depends on facts and circumstances.

Box 3 wealth tax – payment to notary escrow account / VVE deposit

A Dutch resident tax payer is subject to Box 3 wealth tax of about 1.2%, what if the wealth is transferred to the escrow account of the notary?

Box 3 wealth tax

If you are a Dutch resident tax payer your world wide income is taxed in the Netherlands, but also your world wide assets. Except when you are under the so called 30% ruling, then if you chose wisely, no world wide assets are to be reported.

The general response of mainly the elderly tax residents who actually have assets is that they find this a very unfair tax, as they already paid tax over the assets while they generated the assets. Whether a tax can be fair or not, it funds the BV Netherlands for its expenses.

Box 3 wealth tax – notary escrow account – court case

A creative Dutch tax resident incorporated a BV company, which was not ready till spring the next year. As the Box 3 wealth tax is calculated on January 1 of every year, he transferred already 1.5 mln to the escrow account of the notary  for the deposit to be made in the BV company, just before January 1.

The Dutch tax office challenged the income tax return of this creative Dutch tax resident as the payment made to the notary was a voluntary payment, not a payment to meet an obligation. Hence the amount has not left his possession and was part of his Box 3 wealth tax base. The amount deposited was open to be withdrawn and that made the difference.

Box 3 wealth tax
Box 3 wealth tax

Box 3 wealth tax – VVE deposit

When you purchase an apartment in a building, then you and the other owners are liable for the maintenance of the building. The roof etc needs large maintenance every about 30 years and on a monthly basis you contribute to this future cost.

Should you sell your apartment, you cannot contact the VVE, who is in charge of the bookkeeping of this maintenance, and ask them to pay back your deposit. That is not possible due to the house rules which make the payment made once to be owned by the VVE forever.

However,  at the end of the year the same VVE shows you an overview of your deposit for the purposes of the Box 3 wealth tax return. This is dictated by the Dutch tax office.

How strange is that?

In the court case with the escrow account of the notary it is clearly stated that because the tax payer is free to collect the money from the escrow account as it is not an obligation, the money never left his Box 3 wealth tax base. But the VVE deposit has also left your account due to a future obligation, but you will never be able to collect that and spend on something outside the VVE of your choice. We feel this escrow account court case is a good argument against reporting the VVE deposit.

Orange Tax Services

Box 3 wealth tax is part of our system and even though creativity is a bless, uncertainty is a crime. Hence we file for you the Box 3 assets without being creative,  but with being as precise as we can. Feel free to contact us to learn more about the Box 3 wealth tax. Especially if you have the 30% ruling, because if you accept the tax return the Belastingdienst set ready for you, it has been set ready not in your best interest Box 3 wealth tax wise.

Tax consequences of renting out your house

In the current housing market it can be worth keep your house in the Netherlands while you leave the Netherlands, but what are the tax consequence of renting out your house?

Owning a house in the Netherlands

If you own a house in the Netherlands often you took out a loan (mortgage) to pay for the house. The house is regarded a source of income for the Dutch tax office. Against this source of income you can deduct certain costs. The source of income is 0,75% of the WOZ value, that is added to your income.

You can deduct against this source of income the mortgage interest, the notary costs related to the mortgage, the mortgage advisor costs, the valuation of the property for obtaining a mortgage and the building survey if demanded by the mortgage provider.

A quick calculation learns you that the costs exceed the income, hence the Dutch tax office may consider the house to be a source of income, but in fact it is a deduction for you.

Tax consequences of renting out your house
Tax consequences of renting out your house

Tax consequences of renting out your house

The condition of the mortgage deduction is that you are living in that house. Hence the moment you are no longer living in the house, but renting it out, you would assume it to have become a true source of income, but not according to the Dutch tax office. The house is then no longer a source of income and will move to Box 3. That implies you can no longer deduct the mortgage interest.

The house has moved to Box 3 and in Box 3 the actual income is not taxed. That implies the rental income is not reported (and the mortgage costs not deductible). However, taxed is the value of the house minus the debt you took out to purchase the house. The value is determined by the city via the so called WOZ value. The debt is the debt with the mortgage bank.

Tax consequences of renting out your house
I have the 30% ruling – no assets to be reported  – not?

Indeed not. The exception to the 30% ruling rule that you do not need to report your worldwide assets is property situated in the Netherlands. Hence even a 30% ruling holder needs to report Dutch property.

Tax consequences of renting out your house
I have left the Netherlands – no Box 3 – not?

Indeed not. The moment you leave the Netherlands and you still own a property in the Netherlands, you have become a non-resident tax payer for that property and for that property only. So you pay Box 3 tax as described above. But if you also still have Dutch bank accounts, those you do not report as a non-resident tax payer cannot be taxed for bank balances kept on in the Netherlands.

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Being a home owner can imply multiple situations in the Dutch income tax return. If you live in the house, you can deduct the costs, if you rent out the house, the house is taxed in Box 3 and if you have left the Netherlands but still own a property, you are still taxed in the Netherlands. We can help you file a correct income tax return. Feel free to contact us.

Profit sale house taxed in Box 3 wealth tax?

The capital gain of the house you sold is not taxed, but money in the bank is taxed in Box 3. What if you temporarily have the yield of the sale in your bank and you have not spend it on the next house. Is that yield taxed?

Box 3 wealth tax

In the Netherlands we tried to simplify the system by putting everything in boxes. Box 1 for your income, Box 2 if you own shares in your own company and Box 3 wealth tax box.

I have written about Box 3 in the past, basically around 1.2% of your worldwide assets you have on January 1 is taxed in the income tax return of that year. Due to the fact that ‘Joe the Plumber’ understood that the tax of 1.2% is more than the interest received, the system has been made very complex but with the same outcome, to stop Joe the Plumber from understanding and complaining.

If you have EUR 100.000 in the bank and you have  a tax partner, then EUR 60.720 (2019) is tax free, hence over the difference around 1.2% box 3 taxation is due.

Box 3 wealth tax – temporary money in the account

It does happen outside your influence that you have a sudden amount in your bank, which is intended for a future investment. If that money is in the bank on January 1, it is part of the Box 3 wealth tax calculation, even when the money is taken out on January 2.

Box 3 wealth tax – court case

In November 2016 the house was sold of a Dutch tax payer and the yield of the sale was EUR 168.089. That made that his total assets on January 1, 2017 amounted to EUR 440.654 and he was due EUR 4.701 Box 3 wealth tax. However, the money of the yield of the house was to be used for the purchase of the new house in May 2017.

The Dutch tax payer made a complaint against the EUR 4.701 Box 3 taxation. The argument was that the taxation should be done pro rata for the period the amount was actually on the account.

There are two problems with this complaint.

  • Not address by the court, but it is a bit silly to fight the law. It is like arguing you can drive 150km/h at night even though max 130 is allowed. The law is the law and you can only argue the law when it is being made.
  • The Box 3 taxation is a rigid taxation is what the court replied. Rigid implies that it is for everybody the same, who has assets on January 1 is taxed for the assets regardless how long these has have been in possession. That is a choice law makers have made in 2001 when this law took its effect. At the time law makers were well aware of the rigid effect it could have and still chose to implement this type of legislation.

The profit of the house was taxed and the tax payer felt very disappointed with the outcome and even suggested to be able to deduct the tax over this profit as purchase costs of the new house. Again a silly suggestion, as it is clearly determined which costs are tax deductible when a house is purchased and Box 3 wealth tax costs are not among them.

Box 3 wealth tax – is there a construction to avoid taxation?

The word construction on its own makes the tax office red flags go out. Construction stands for doing something that is basically not possible. And that is also the answer. If you think I pay up front the notary the money for the house I am going to buy in May, then we expect the notary to send back the money, but if the clever tax payer paid the notary December 30th while the notary was skiing, it is still an asset in the Box 3 tax reporting. At that time there was no obligation to pay the notary, so the money has not left the equity of the tax payer.

Orange Tax Services

In the Netherlands we have a rather detailed tax legislation where most groups in society are being met with their needs and every year the Government invents more needs to be added to the list. The same Government complains that our taxation has become so complex. In the field of Box 3 wealth tax this path has not been followed, which is correct. Tax is unpleasant, nothing much you can do about that. Then again, taxation makes us live in a country with infrastructure and social benefits.

If you then have EUR 440.654 in the bank and you complain about the tax to be paid, should make you understand that we have agreed that persons who can bear more contribute more for the person who can contribute less. Nothing much that can be done about that other than changing the law, but as our Government needs money, new law will result in the same outcome.

30% ruling cut is partly postponed

The Government announced a rather rigid cut in the 30% ruling period last month. Now this rigid cut is softened for a part of the 30% ruling holders.

30% ruling cut

The 30% ruling makes that your 100% gross salary is taxed for 70% and 30% is paid out to the employee tax free. This is a ruling that does not cost the employer anything and it makes the employee chose to work in the Netherlands over the United Kingdom.

Part of the tax measures for the future was to cut the maximum period that the 30% ruling could be used from 8 years to 5 years regardless.

The Dutch Government works with budgets, and to pay for the dividend tax to be abolished, certain measures were taken, one of them this cut in applicable years.

30% ruling cut
30% ruling cut

No deal multinationals

The reason for the dividend tax to be abolished was to keep the headquarters of multinationals such as Unilever and Shell in the Netherlands. This was a deal made many years ago. Only a few weeks after the Government has met their part of the deal, abolishing the dividend tax, the multinationals announced that they do not keep their part of the deal. Unilever is moving their headquarters to the United Kingdom and soon Shell is expected to follow.

That made our Government lose face as they say in China. Part of losing face is apparently acting quick on the new information, hence the dividend tax is not being abolished. As this measure is not taken, we have 2 billion a year more budget to spend. This will be spend on the corporate part of the Netherlands.

30% ruling cut is partly postponed

Due to the multinational deal falling through there is budget to be less rigid on the 30% ruling cut, hence the ruling partly postponed. What does that imply?

That implies that the persons who would have been affected by the ruling no longer be applied in the years 2019 and 2020 can still continue to use their ruling in these years.

Who are these persons? That are the persons whom 30% ruling was used for more than 5 years in 2019 and or 2020. So the persons in their 6th, 7th or 8th year.

30% ruling cut not postponed

That implies that others, the persons whom ruling would not be affected in the years 2019 and 2020 still are entitled to use the ruling for a maximum period of 5 years. For instance an employee that obtained the ruling in 2017 for an 8 year period is indeed cut to a max 5 year period.

Orange Tax Services

We have the opinion that the Government has not been the trustworthy Government you would expect from the Dutch Government in this aspect, the 30% ruling issue. We, tax advisors, knew already a year ahead that the ruling would be cut to 5 years. But as the Government was not taking this stand point till late September, all expats trusted the change would shield existing holders from being cut. Only last week it started to sink in that this was never going to happen. Hence some expats took action and are soon moving away.

Now this week suddenly there is for some of the existing expats a softening in the rigid change, but so late in time this is being communicated, that for some expats who already took action to leave, or who shuffled their Box 3 assets, taking a loss, only to minimize taxation, are already affected.

Casualties of tax war? Maybe so, but no good showcase for the Government in place. Regardless of the change announced this week, such a rigid change to 5 years as announced before is never a good deal.