Reduction of wealth tax in Box 2?

Reduction of wealth tax would be a welcome relief for some private individuals, is this possible? Maybe yes.

Reduction of wealth tax

In the Netherlands we have a boxing system, only to make the rules a bit more chewable for private individuals. We have box 1 for income sources like employment, self employment, the home being the main residence is seen as a source of income. The tax rates are 38-49,5% (2021).

Box 1 implies we have Box 2 and in Box 2 are the private individuals that own at least 5% share capital or voting right in a limited liability company. The tax rate is 26,9%.

Finally Box 3 is the most feared box, in this box the world wide assets are taxed. The tax rate is roughly 1,4%

What are world wide assets?

We work with internationals only and sometimes we notice a misunderstanding of what world wide assets are. World wide assets are world wide assets. A question that came up recently was: should we move our cash from abroad to the Netherlands before or after January 1. January 1 is the valuation date of the Box 3 taxation. But world wide assets implies the cash abroad is already supposed to be part of this Box 3 calculation. Hence the question is a little strange. That is caused by misconcept of the Box 3 taxation.

ALL your assets are taxed and a double taxation relief, not a 100% relief I must admit, is provided for property abroad.

I have been taxed all my life already and now again?

That is the common phrase we learn from the old Dutch ladies. They rebel against this Box 3 taxation as they find it unfair. They worked all their life, saved money for the old age as the pension benefits are clearly not enough and now the Government wants to take some of that hard earned money as well.

Internationals are not much different from these old Dutch ladies, as basically they state the identical phrase. Is there a solution?

Reduction of wealth tax in Box 2 via Granny BV

Box 2 opportunities

In the past couple of years notary’s in the Netherlands have been busy in the elderly homes, as Dutch old ladies asked them to visit them and while they enjoy a tea, incorporate a Dutch BV for the old lady. The old lady then deposit as share capital all their assets in the Granny BV. By doing this the money hopped from Box 3 to Box 2. No more Box 3 taxation.

What is the consequence of hopping to Box 2?

In Box 2 the tax rate is 26,9% (2021) and that is charged over dividend income and capital gains made with the sale of shares. Repayment of the share capital itself, is not a taxable event.

That implies the amount of cash paid for the shares is sitting in the BV bank account. If a profit is made it is taxed. As long as no profit is realized, it is not taxed.

How to pay the share capital if your assets are invested?

Let us assume you are a wealthy man or woman and your assets are stuck in a share portfolio. The notary incorporates a BV company. Ask the notary to accept as payment of the share capital the transfer of the portfolio. Then you do not need to sell your portfolio, but you transfer the portfolio.

What to do with the cash in the BV?

The cash in the BV can be used in the same manner as before. Only a realized capital gain in investments is actually taxed with corporate income tax. A payment to yourself is a dividend payment taxed at 26,9%, unless this payment is a repayment of capital. That is tax free.

You can even invest in other companies, and proceeds received from those other companies are under the participation exemption. That implies, not tax is charged until you pay yourself.

Swapping back to Box 3?

The moment it is time for you to use your cash, you liquidate the BV, have the capital paid out to you. The share capital is paid back to you tax free. The premium generated is taxed at 26,9% Box 2 tax.

However, if for some reason you return back to Box 3 too soon. Too soon is a couple of months’ time, the tax office will disregard the box hop to Box 2 at all. We also have the opinion that the set up costs, maintenance costs and liquidation costs are part of a long term engagement.

Tax is Exciting

We think tax is exciting. Some think it is exciting to challenge the system. We will be glad to assist, as long as we stay on the correct side of the rules and regulations. The financial advice question if this is a good move for you, that we cannot answer. We know about tax, not what is financially best for you.

Trust and tax

Trust and tax is a combination often referred to by US and British tax payers. Then we explain that the concept of Trust is not accepted in the Dutch tax system, suddenly tax is not so exciting anymore for these tax payers.

Trust and tax

Apparently in more exotic parts of the world you can set up a Trust and if you put money in the trust, it disappears from the face of the earth. Nobody claims the bank account is his or hers, the Dutch tax office does not accept this and looks through  a trust.

The Dutch tax office approaches a trust as this vehicle being transparent, the persons who are entitled to these funds, need to put the value in in their Dutch worldwide wealth when they are a Dutch tax resident. In this time and age that big data makes the world small, this also applies to the Dutch tax office.

Trust and tax – court case

The stepfather of two sisters deposited in a Trust company on Panama held by the Mossack Fonseca & Co company a substantial amount of money. The sisters were no longer part of the inheritance of their stepfather, but the stepfather set up arrangements with his son, their half-brother, to keep the sisters financially sound.

The stepfather died, to the Swiss bank accounts of the sisters was transferred EUR 200.000 and EUR 500.000 and in the news came that all the clients of Mossack Fonseca & Co were made public. This news was adopted by the Dutch tax office as very much relevant information. Based on these so called Panama Papers leaks the Dutch tax office contacted the two sisters.

Trust and tax
Trust and tax

The two sisters claimed never to have known about the trust and that they were not aware they should have reported the money in the Swiss bank accounts. The Dutch tax office disagreed with their statement, as the half-brother provided them since 2006 with funds, so the fact that a sum of money was made available by their stepfather must have been known to them.

The Dutch tax office demanded to receive the full bookkeeping of the two trust companies that the stepfather set up from 2006 onwards. The court agreed and put a EUR 2.500 per day penalty on the request for every day the sisters would not provide the details after the deadline expired. The sisters appealed this decision as this information request would jeopardize their civil law suit the Dutch tax office started as well. The court in appeal did not meet the sisters demand.

Trust and tax – consequences

The court case shows many aspects of taxation, but among them two aspects we think are important. One is that again the concept of trust is not accepted in the Netherlands. That implies the person who is entitled to the funds, needs to report them, and you cannot hide behind vague trust vehicle deed or rules and regulations.

The other aspect is how long you need to keep the bookkeeping on file. We know a five year period, but now the tax office is demanding the bookkeeping from 2006 onwards. In international situations the tax office can go back 12 years and in this 2018 case they are using the max of their rights. So please keep your bookkeeping on file, even if 5 years have passed.

Orange Tax Services – tax is exciting

Tax is exciting implies that we are excited to work with you within the rules and regulations known in the Netherlands. We are absolutely not excited when you think you do not need to comply with the Dutch rules by simply using the vehicle of trust and after that a Swiss bank account. Using a Swiss bank account is also so 1980’s. The Swiss are now actively communicating with other tax offices.

Stating you were not aware where the money came from, as in this case, or that you did not think it is strange to use a Swiss bank account instead of a Dutch one, is naïve. If money is transferred to you over the years, of course you ask how that is possible. And setting up a Swiss bank account with huge costs, much more than Dutch costs, is strange behavior.

Keeping your life simple and accepting that part of living in a first world country as the Netherlands comes at a price and that is the tax due over your worldwide income and assets.  That we are excited about.

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.

AMEX credit card account & Dutch tax office

Credit card company American Express (AMEX) has been told by the American court to provide the credit card details of accounts connected to a foreign  bank account to the Dutch tax office.

Is that a problem?

The Dutch tax office has started the process in order to force any AMEX card holder that is a Dutch resident tax payer, to provide his AMEX details as per January 1 of any given year in that year’s income tax return.

amex credit card account

The AMEX balance is then part of the so called Box 3 worldwide assets reporting. Up to and including 2016 the tax due over the world wide assets after deduction of the tax credit was 1.2%.

Yes, that could be  problem

Not the actual balance of the AMEX card, that is most likely negative and will not result in a Box 3 taxation, is the problem. It is about the foreign bank account the AMEX card is connected to. If that account is not part of the Dutch tax return, the Dutch tax office would very much like to learn more about it.

For instance, where did the balance on that bank account come from? Basically that is the question.

Furthermore, what was the balance of that connected bank account on January 1 of any given year?

Amex credit card account penalty

If the bank account was not reported and there was a positive balance to be taxed. Then the penalty is the actual tax due, plus 300% of that amount as penalty for not reporting in time. Per tax year. The maximum period currently the tax office will look at is the five past years, but that will change in the future to the past twelve years.

Orange Tax Services

If you have the so called 30% ruling, you can have a connected foreign bank account that you have not reported in the Netherlands. But then again, you do not need to report your worldwide assets in the Netherlands.

If you are without the 30% ruling, also your tax partner, and you have not reported the foreign bank account, you will be treated as a criminal from a tax point of view. As the legislation is such that your tax advisor more or less committed the same act as you did, he or she is liable for your fault as well. Hence not many Dutch tax advisors can assist you in solving this issue. If we have not filed your tax returns before, we might be able to assist you. If we did file your tax return, we need to have an urgent talk.