Netherlands: New System for Inheritance Tax

Inheritance tax is in itself a strange tax. Why should the relatives of a person be taxed for the value of what the deceased has left after being taxed with income and/or wealth taxes during his lifetime? Seen from the perspective of the heirs, one can conclude that a lump sum tax on the net after tax assets is a form of double taxation. Seen from the perspective of the state, one can see that it takes a fair share of the net after tax wealth accumulated during a lifetime. The inheritance tax must be looked upon from the perspective of allocating taxing rights over the available sources of wealth and income. The Netherlands' system of inheritance tax goes back to the post-Napoleon period, 1805, when the taxation sources moved from land and the fruits of land to businesses, personal belongings, stamp duties and inheritance tax. In more recent times taxation sources have been moving further away from immovable to movable assets. Taxation of inheritances was seen as taking a fair share of whatever was left over and inherited by the heirs. The state pretended to have similar rights as heirs to the net wealth. 

The system of inheritance tax (and gift tax) as it has been developed in the Netherlands is based on the residence of the deceased person or the donor of the gift. In other countries it can be based on the residence of the heir or donee. The basis for the tax is the amount of money a specific heir would receive, although the tax is levied from the heirship. In other countries the tax is based on the value of the estate and then the tax is levied upon the transfer to the heirs. 

Today there is much opposition to various forms of annual wealth tax and lump sum inheritance tax. The feeling is that the person should be taxed during his lifetime and that he should be free to spend his after-tax income in the way that he desires, whether by way of gift, charity or death benefit. Following this new idea, many countries now have either cancelled the inheritance tax (e.g. Sweden, and recently Austria) or have substantially reduced the rates of tax (certain cantons in Switzerland, regions in Spain, etc). It is felt that the rich can avoid tax and that the poor have to settle the bill. The Underminister for Finance in the Netherlands has openly blamed the poor collection of inheritance tax on the tax intermediaries that use existing ways of circumventing the payment of the tax, so that it is only those who can afford to pay the expensive advisors that can escape the tax. He has argued that a better drafted law will increase the out-turn and will therefore be more socially acceptable than the present law.  

In April 2008 the Underminister for Finance announced his plans to substantially reduce the rates of tax and improve the quality of the law. He reconfirmed his intention to combat tax avoidance schemes in this sphere. He suggested that the liability be shifted from the deceased person to the beneficiary. This is in order to attack schemes with trusts and foundations that were mainly set up to avoid the residence test and residence-based tax liability. The draft bill that was approved by the Council of Ministers on 24 October 2008 does not so far contain any provision that materially changes the concepts of the law. The draft bill foresees a reduction of the tax rates that will lead to a loss in earnings of €250 million.  As the bill must be earnings-neutral, additional measures will be introduced that aim at collecting taxes (not necessarily inheritance taxes) from foundations, trusts and similar structures. The new law must be in place by 1 January 2010. 

The main features of the proposed legislation are as follows. 

•   Exemption for partners (spouses, husbands/wives, partnerships) is set at €600,000 (€523,667).
•   Exemption for children is set at €19,000 (€4,479).
•   Rates for partners and children go down to 10 per cent on the first €125,000 and 20 per cent on the remainder (2008: up to 27 per cent for heritage of €894,948), but this is only a serious reduction for heritage of more then €1 million.
•   Rates for brothers/sisters and non-related persons go down to 30 per cent on the first €125,000 and 40 per cent on the remainder. This is a substantial reduction, especially for the non-related persons (2008: rate for children goes to 53 per cent for heritage above €894,948 and rate for non-related goes to 68 per cent for heritage above €894,948). Also here, the rate reduction is only significant for heritages of more than €1 million.

I cannot foresee how the additional measures will be construed in order to achieve the same level of collection. The rate reductions are not substantial enough to attract a winding-up of the foreign avoidance structures. As more and more countries repeal the inheritance tax, those countries that will maintain the tax must not be surprised if the persons concerned choose a more appropriate country of residence. We will report further on any new developments.

[1] Rates for 2008 in brackets.

Leo Neve LL.M
Owner & Managing Partner