NETHERLANDS: An Introduction
Navigating the Evolving Tax Landscape for (Ultra) High Net Worth Individuals in the Netherlands
Introduction
Although the Netherlands has never been a low tax jurisdiction, it was and to a certain extent still is a favourable jurisdiction in which to establish the global or regional headquarters of a multinational company. Important factors in this respect have always been its strategic location, stable economy and the possibility to conclude advance tax rulings (ATRs) with the Dutch tax authorities (DTA) to get upfront certainty about how the tax legislation works out in a specific situation.
Depending on the exact circumstances, the Netherlands was also an attractive destination for (ultra) high net worth individuals (HNWIs) and a country where the effective tax rate (ETR) that individual taxpayers experienced was such that HWNIs did not feel compelled to consider relocating abroad. Recent shifts in legal and economic policies have however changed this. In this article we will analyse current trends, new legislation and potential challenges HNWIs face in the Netherlands, offering strategic insights.
Enhanced tax enforcement for HNWIs
Approximately ten years ago, the Netherlands, following the example of the UK’s HMRC, formed the “Zeer Vermogende Particulieren” (ZVP) unit within the DTA. This unit focuses on HNWIs, clustering knowledge and expertise to ensure that the unit’s tax inspectors are well-equipped to handle the complexities associated with high-net-worth taxation. This specialised approach aims to enhance compliance and ensure equitable tax contributions from HNWIs.
So far, our experience has shown that the establishment of this team has resulted in HNWIs being subjected to stricter scrutiny and increased questioning of the structures set up by these taxpayers. In this context, we believe that it is more important than ever to engage with the tax authorities in an open and transparent manner. In our view, this inter alia means that one should always assume that all facts and circumstances become public knowledge.
Escalating tax rates: strategic adjustments needed
The Netherlands has a classical tax system, in which legal entities, including companies, are independently subject to corporate income tax (CIT). The profits distributed by a company are subsequently independently taxed at the level of the shareholder/natural person.
Dividends received and capital gains realised by a shareholder/natural person, holding at least 5% of the shares in a company (a so-called substantial shareholding), are taxed with 33% personal income tax (PIT). The rate increased from 26.9% to 33% starting 2024. In conjunction with the CIT, which imposes a 25.8% rate on profits exceeding EUR 200,000, the cumulative effective tax burden is therefore 50.3%.From 2011 to 2020, the cumulative maximum effective tax burden was 43.75%.
On the positive side, it is still possible to defer PIT until distribution or disposal of the shares, where one needs to take into account that one’s death constitutes a deemed disposal of a substantial shareholding insofar as the value consists of portfolio investments.
As (i) the business succession facility in the Dutch inheritance and gift tax (IGT) only applies to business assets and (ii) the IGT rates for acquisitions by children is 20%, this necessitates strategic estate and tax planning and sophisticated wealth management to preserve wealth. This might include (i) taking a holistic view at the family’s assets, (ii) utilising tax-efficient structures and (iii) transferring wealth to the next generation as early as possible, while retaining control.
Above, we noted that until recently, HNWIs did not feel compelled to consider relocating abroad. This has been gradually changing since the introduction of the “excessive borrowing” regulations, the aforementioned increase of the PIT rate to 33% and the frequent media reports suggesting that HNWIs pay relatively little tax. Relocating can be seen in this respect as a deferral strategy, where taxation over the (latent) capital gain in a substantial shareholding can under certain conditions be postponed to – ultimately – one’s demise.
It is, in this respect however, important to consider that the DTA has not only formed a team focused on HNWIs but also a team specialised in investigating one’s tax residency. For Dutch tax purposes, individuals are deemed residents of the Netherlands much more quickly than one might expect. In a significant decision frequently referenced in lower courts, the Supreme Court ruled that a person who spent ten weeks per year in his former rental property in the Netherlands and 42 weeks per year in the country of his nationality with his second spouse and minor child was still considered a resident of the Netherlands.
Supreme Court ruling: redefining fair taxation
On 6 June 2024, the Dutch Supreme Court ruled that the current system for taxing income from investments and savings (box 3 of the Dutch PIT system) was in breach of the European Convention on Human Rights. According to this ruling, taxpayers are only required to pay PIT on actual realised returns, not deemed returns.
Anticipated reforms: preparing for 2027 and beyond
Already prior to the aforementioned landmark ruling, the Dutch government has announced plans to significantly amend box 3 of the PIT system by 2027. The new system will tax actual realised returns instead of deemed returns. Unrealised capital gains, except on real estate and certain innovative start-ups, will already be included in the taxable base. In this regard, the new system is referred to as a (in Dutch) “vermogensaanwasbelasting”. Over the course of an investment one might, as an example, therefore in total have to report a gain of 100, whereas in some years a gain of 200 will need to be reported and in other years a loss of 100.
Because real estate and shares in start-ups are illiquid, capital gains on these assets are only taxed on realisation. In Dutch, this system is referred to as a “vermogenswinstbelasting”.
These reforms require HNWIs to make proactive adjustments to navigate these changes effectively, particularly where the adage “asset rich, cash poor” applies
Anticipated reforms: business succession facility
The Dutch business succession facility in the IGT and PIT act is likely to be further reduced in the coming years. In anticipation of these changes, many business owners are expediting the transfer of family businesses to the next generation. This trend underscores the importance of timely estate planning and strategic utilisation of existing tax reliefs to minimise future tax liabilities.
Political landscape: wealth tax debate
Several political parties in the Netherlands advocate, also referring to international initiatives (see below), the introduction of a wealth tax in addition to the PIT. While these parties are not part of the current government, the debate continues to influence the political discourse. HNWIs must monitor these developments closely.
International co-ordination on taxation: a new paradigm
Internationally, within the OECD, but also in the Netherlands, more and more politicians argue that in an increasingly interconnected world, the need for a harmonised approach to taxation has become paramount. Significant progress has in this respect already been made in the taxation of multinational enterprises.
Recently, attention has also begun to focus on the taxation of HNWIs. A recent report, commissioned by the Brazilian G20 presidency proposes an internationally co-ordinated minimum effective taxation standard for US dollar billionaires and potentially centimillionaires. It recommends that individuals with more than USD1 billion (and potentially USD100 million) in wealth should pay a minimum tax of 2% of their wealth annually. The report suggests that this standard could be implemented flexibly by participating countries through various domestic instruments. The rationale behind the proposal is the significant revenue loss and increased wealth concentration due to the failure of current tax systems to effectively tax HNWIs. These are also arguments used by Dutch politicians.
A 2% tax on billionaires would, according to estimates, raise USD 200–250 billion per year globally, and extending this to centimillionaires could add an additional USD100–140 billion.
For now, most European countries, including the Netherlands, place great importance on their sovereignty in tax matters, especially with respect to wealth, inheritance and gift taxes, which are highly unpopular taxes. In the aftermath of the financial crisis, however, these countries managed to implement internationally co-ordinated measures within a few years, significantly limiting the ability of multinational enterprises to mitigate their tax burden. As the number of taxpayers affected by these proposed measures would also be relatively limited, we believe it is crucial for all taxpayers potentially impacted by these measures to closely monitor all developments.
Legislative changes in partnerships
As of 2024, the legislation regarding partnerships has changed, with transitional laws in effect this year. By 2025, all partnerships will be considered transparent for Dutch CIT and PIT purposes. Previously, non-transparent partnerships were used to keep wealth held via companies from being publicly recorded. The new regulations require restructuring existing partnerships and devising new structures going forward to ensure compliance and maintain privacy. Luckily, this can be achieved.
Conclusion
The evolving tax landscape in the Netherlands presents both challenges and opportunities for HNWIs. Staying informed about international proposals, national legislative changes, and significant court rulings is crucial for effective planning and wealth management. By proactively adjusting their strategies to these developments, HNWIs can navigate the complexities of the Dutch tax system, ensuring the preservation and growth of their wealth for future generations. Strategic foresight, informed decision-making, and agile adaptation are and will remain key to thriving in this dynamic environment. By staying ahead of the curve, leveraging expert advice, and being prepared to continuously adapt your strategy, it should be possible to mitigate risks and capitalise on opportunities.