Dutch entrepreneurs having left their home country for better tax climes might feel a bit less homesick since last week.
Last week in the annual budget announcement the Dutch government closed a long standing facility – effective immediately – that allowed shareholders in Dutch companies that emigrated to sell their shares without capital gains tax if they waited for at least 10 years with selling. This facility is now suddenly re-branded a tax-loophole.
Hopefully this serves as a wise lesson to anyone not to rely on the predictability of government policy for long term planning.
The Netherlands just become a little bit less attractive for anyone to set-up a business in the first place. The Dutch government expects to collect 65 million Euros annually because of closing this so-called loophole.
This kind of simplistic thinking is unfortunately all too common. The calculation runs as follows: they check what they would have been able to tax if entrepreneurs would have been doing exactly the same thing with the tax in place as without the tax in place. This is analogous to a restaurant holder thinking he is already rich by making cash flow projections based on the assumption that the customers could be locked into the restaurant for 5 hours and not allowed to leave without paying an exit fee.
Would you get more customers if you treat them like that? Would they consume more than if they were allowed to leave without an exit fee? Could it be a consideration for an internationally operating entrepreneur to set up in a country where he is not confronted with an exit tax? Could it be that these policies add up to the feeling that the assessment of the investment climate in the country is altogether less certain and predictable? Imagine having left the country 9.5 years ago and waiting for the 10 year deadline to approach and suddenly… it is abolished.
It is impossible to calculate the effect of businesses not being started had the tax been in place. Unfortunately these kinds of thoughts do not seem to cross the mind of tax hungry governments. It is the age-old mistake of taking into account that what you can quantify and disregarding what you cannot. Our gut feeling is that these costs add up to much more than 65 million Euros a year. An objection to the above line of reasoning could be that this exit tax is relatively minor compared to all the taxes already in place. Well, granted, that is true, a little bit more does not make such a difference. It won’t be the straw that broke the camel’s back.
So what has changed exactly?
The Dutch Exit Tax Explained
The income tax law in the Netherlands states that when a shareholder emigrates he is deemed to have sold his shares and therefore would have to pay a capital gains tax (of 25%) based on the value of the shares at the time of emigration (“exit tax”). Since the shares in the company are not actually sold at that moment the facility that security is deposited in lieu of actual payment exists (although when emigrating to another EU country this requirement was scrapped a few years ago because it was considered to be in violation of the principle of uninhibited movement of people within the EU).
When the shares are actually sold at a later point in time the capital gains tax is payable still based on the capital gain realised (attributable to the increase in value realised before and after emigration) while the amount of the exit tax is deducted from the amount payable. In case the new residence country of the shareholder has concluded a double taxation agreement (“DTA”) with the Netherlands the new residence country is usually assigned the right to tax the capital gain but the Netherlands under the treaties it has concluded has retained some kind of taxing right on the gain as well. For instance in the treaty with Switzerland it has retained the right to tax the capital gain which is attributable to the increase in value realised before emigration. Now, since the 10 year rule was abolished, there is no time limit any longer on when this taxing right expires.
In other treaties however the Netherlands retains the right to tax capital gains (irrespective of whether they can be attributed to the period before or after emigration) realised on shares in a Dutch company for a period of 5 years after emigration. So the abolition of the 10 year limitation will not affect residents of these countries. There is another change that was made however that will affect residents of these countries as well. Previously distribution of dividends for 90% or more of the value of the company at the time of emigration was deemed to be a sale of the company and also triggered the capital gains tax. Now any distribution will trigger the tax (pro-rata).
Then yet there are tax treaties where the capital gains realised by individuals are not protected at all. For instance under the treaty The Netherlands has with the UAE only Emirati nationals are exempted from capital gains tax realised on the sale of shares in Dutch companies. Other residents of the UAE who hold shares in Dutch companies were and are still fully taxable on the capital gains realised on shares they hold in companies resident in the Netherlands, irrespective of whether they lived in the Netherlands.
However, in cases like these there might still be other tax planning opportunities. Like for instance making use of the fact that companies managed and controlled from the UAE are able to access the benefits of the capital gains article in the DTA.
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