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?
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.