After the example of some well-established single family offices, set up many decades ago by some Dutch entrepreneurial families, an increasing number of Dutch families are establishing a single family office. Often one of the main goals of these single family offices is to maximise the net return on its investments, within the investment mandate and the asset allocation defined therein. Because taxes are an important factor in determining the net return, they are a major concern for many single family offices.
In this article we discuss two important current tax trends for Dutch family offices, the first being that the investment structure is overhauled, the second that entrepreneurial families are assessing whether they can bring forward in time the transfer of their business to the next generation. We will focus on personal income tax (PIT), corporate income tax (CIT), and inheritance and gift tax (IGT).
Personal And Corporate Income Tax
In the aftermath of the financial crisis, Lux Leaks, Pandora Papers and Paradise Papers, the Dutch media focused its attention more on the ins and outs of wealthy Dutch entrepreneurs and families, with the narrative that the investment income of these families, under the system that we had and to some extent still have, is taxed against a relative (or too) low effective tax rate. General opinion is that this was caused by three factors:
The Dutch PIT system employs a three-box system to determine the taxation of individuals' income. This system categorises income into three distinct boxes, each with its own tax rates and rules. In the context of this article especially, boxes 2 (ie income from substantial shareholdings) and 3 (ie income from savings and investments) are important.
Box 2 pertains to income derived from substantial shareholdings in a company. If an individual owns at least 5 per cent of the shares in a Dutch or foreign company, the income generated from those shares falls under box 2. Currently the tax rate is 26.9 per cent, but this rate will increase to 31 per cent in 2023.
Unlike boxes 1 and 2, box 3 taxes individuals based on a deemed return on their net assets (assets minus liabilities) rather than the actual income generated. Individuals are due 32 per cent (rate 2023) over the deemed return on their net assets. Until 2016, taxpayers were deemed to have generated a return of four per cent. Since 2017, the deemed return is based on a complex formula that involves the running average return on a certain basket of investments over the last 15 years.
Over 2023, a taxpayer is generally deemed to generate a return of 6.17 per cent on its net investments, irrespective of the actual return realised on these investments. This means that when a taxpayer makes a return of more than 6.17 per cent the effective tax rate is less than 32 per cent, whereas if he makes a return of less than 6.17 per cent the effective tax rate is more than 32 per cent, which rises to 100 per cent and more if the taxpayer realises a return of less than 1.97 per cent.
Moreover, since the deemed return was until 2022 only calculated over one’s net assets, it encouraged taxpayers to leverage their investments as much as possible, especially, since the businesslike interest rate that had to be paid to one’s own company was relatively low. At the level of the company, 25.8 per cent CIT is due over the interest income. In combination with box 2 of the PIT system, the cumulative effective tax rate is 45.8 per cent. Assuming a businesslike market interest rate of one per cent, structures could be set up where annually only 0.458 per cent (CIT and PIT) would be due over the fair market value (FMV) of the investment at the start of the year, irrespective of the actual yield realised on these investments.
As noted above, in 2023 new legislation was introduced combatting (excessive) borrowing from one’s own company. All debts in excess of EUR 700,000 that an individual has on 31 December 2023 to a company in which he holds a substantial shareholding are deemed to constitute income from a substantial shareholding taxed against 26.9 per cent.
An extensive discussion of this measure is beyond the scope of this contribution. It is primarily important for this contribution that this measure has forced many single family offices to make plans to change their existing investment structure, whereby investments are no longer made by the individuals with money borrowed from companies in which a substantial shareholding is held. The easiest way to adjust the investment structure is to use the investments to pay off these debts in kind, after which the capital is invested from the company instead of privately. If the investments consist of resources that can be easily transferred, this is a solution.
If and insofar as the investments consist of immovable property located in the Netherlands, real estate transfer tax (RETT) will be incurred, which has been increased to 10.4 per cent in 2023 (due on the FMV of the transferred immovable property). Solutions are being sought for this in consultation with various single family offices, whereby these solutions may include converting receivables/debts into cumulative preference equity, and making use of the fact that the market interest rate is now often (much) higher than the interest rate at which many loans were made, which causes the FMV of many receivables to be lower than the face value.
Inheritance And Gift Tax
Under Dutch legislation, inheritance or gift tax is due by the beneficiaries, irrespective of where they live at that moment, if they receive something from somebody who was deemed a tax resident of the Netherlands at the time of his death or of the donation.
Whether someone is a tax resident of the Netherlands needs to be determined based on all relevant facts and circumstances. Although a Dutch national may have stopped being a tax resident of the Netherlands based on this test, for inheritance and gift tax purposes he is deemed to (have) remain(ed) a tax resident during the 10 years immediately following his emigration from the Netherlands.
Inheritance and gift tax is due over the FMV of what is received. The spouse and children are due 20 per cent over anything they receive in excess of EUR 138,642 plus the specific exemption they are entitled to. The spouse is entitled to an exemption of inheritance tax of EUR 723,526. Children are entitled to an exemption of EUR 22,918.
With the exemption being relatively modest, wealth families and entrepreneurs look at other options to mitigate the IGT due in the case of a death or donation. Other than moving abroad, the only real option is to assess whether they can make use of the business succession incentive (in Dutch: ‘bedrijfsopvolgingsregeling’ or BOR). Under the BOR, and certain specific circumstances, up to 83 per cent of the FMV of a business is exempt from IGT, reducing the effective IGT rate to a maximum of approximately 3.4 per cent.
Two amendments to the BOR in 2024 have been announced by the government. Firstly, a provision will be introduced stipulating that real estate rented out to third parties is deemed not to form part of the business’ assets (in Dutch: ‘ondernemingsvermogen’), as a result of which the real estate can no longer benefit from the exemption. Secondly, the exemption will most probably be lowered to 70 per cent (from 83 per cent).
In order to still benefit from the current exemption, some families are trying to transfer their business assets to the next generation before Budget Day on 19 September 2023.
After many years in which the attention of the media and politicians mostly focused on multinational companies and their tax structuring, more recently, in the aftermath of the financial crises, Lux Leaks, Pandora Papers etc, the attention is on wealthy families and individuals, with general consensus in the media that they did not contribute their fair share these last years because of the way the Dutch tax system is organised. In combination with some further unintended effects of the tax system, this has led - and will in the near future lead to - some major changes to the tax system, including the introduction of provisions combatting excessive borrowing as per 2023. These changes have forced single family offices (and wealthy individuals and families in general) to rethink their tax structure, with the result that funds flow back to companies, and are reinvested by these companies instead of by their shareholders. In general, for foreign individuals and families, the Dutch tax system is still very attractive.
Should you like to receive more information about these developments, please contact us.
Jeroen Peters Exec LL.M. LL.B. TEP is a Tax Partner with HVK Stevens, Amsterdam. Jeroen Peters focuses his respected practice on tax and wealth planning matters for wealthy families. He also has extensive expertise in investment structures and asset transfers. Jeroen Peters studied tax economics and tax law at Maastricht University. After graduating, he took a postgraduate course in International and European Tax Law at the International Tax Center of Leiden University. Before joining HVK Stevens in 2019, Jeroen worked at PwC and at Atlas Tax Lawyers. In both roles, he was involved in advising family businesses, the family behind them and wealthy individuals. Over the years, Jeroen has specialized in subjects that relate more to the personal tax field, such as investment structures (including investments in real estate), charities, privacy and estate planning. He regularly publishes on these subjects.