MEMORANDUM: AMENDMENT OF CERTAIN TAX LAWS (REVISION REGIME FOR PROFIT FROM SUBSTANTIAL INTEREST, CONSUMER INTEREST AND NET WEALTH TAX)
I INTRODUCTION
On June 4, a bill concerning substantial interest, deduction of consumer interest and amendment of net wealth tax was submitted to the Lower Chamber.
The effective date proposed is: January 1, 1997. For the amendments to net wealth tax: January 1, 1998.
What are the main aspects of this bill?
II SUBSTANTIAL INTEREST
A. In What Cases Will A Substantial Interest Be Deemed To Exist
From Now On?
A substantial interest will be deemed to exist on a private shareholding of 5% or more (at present this is still 33 1/3% or more) in a company.
This is determined on the basis of the following group: the shareholder, his or her partner, and their relatives and relations by marriage in a lineal and collateral line. Parents, children, grandchildren and their spouses are therefore included. Brothers and sisters are no longer included. As a result of the new criterium a substantial interest will more readily be qualified. There is no extenuating regulation for shareholders who acquire a substantial interest under the new criterium.
This means that the value appreciation of their share parcel before 1997 also falls under the substantial interest claim. A new element is that a substantial interest holder's receivables will be attributed to his company under the substantial interest regulation.
B. When Does Substantial Interest Taxation Occur?
At present levy takes place on an alienation, such as sale, donation and exchange of substantial interest elements.
It has now been proposed to also levy:
- if someone has a substantial interest but falls under the 5% limit;
- on emigration to another country;
- on inheritance, etc. of the shares to entrepreneurs, legal entities (for instance, a B.V. or foundation) or persons residing abroad.
C. The New Rate: Dividend And Sales Profit Taxed At 25% Income Tax.
An income tax rate of 25% will apply in substantial interest situations. This rate does not only apply to alienation profits on shares (also in holding and liquid equity constructions) and receivables, but also to dividends.
Alienation profits on shares are presently taxed at 20% and dividends are progressively taxed. The alienation of receivables is tax-free under the present regime. Interest from receivables on companies in which a substantial interest is held will, however, continue to be progressively taxed after January 1, 1997.
The 25% rate will arise if the benefits exceed the amount of the first income tax bracket of the tax tables. Moreover, the taxable benefits will be fully imputed as income on the application of the 68% regulation for net wealth tax (the so-called anti-cumulation regulation).
D. A Special Regulation For Turbo Share Capital And Turbo Receivables.
As of June 4, 1996 turbo share capital and turbo receivables will be included under the new regulation. Share capital and receivables for which one has paid less than 70% of the paid-up or nominal value qualify under this regulation.
E. Can The Substantial Interest Holder Expect More Changes?
Three facilities will be abolished from January 1, 1997:
a. the dividend exemption (at present NLG 2,000 for a married couple) will no longer apply for substantial interest parcels;
b. the recapitalization facility - turnovers from profit reserves in share capital taxed at 11.1% income tax - will be abolished.
This also applies to funds quoted on stock exchanges;
- the status of fiscal investment institution (subject to 0% corporate income tax) will only exist for fiscal investment institutions quoted on the stock exchange. Other fiscal investment institutions will lose their status from 1997 and will therefore pay corporate income tax at the normal rate from 1997. From now on the income tax rate on profit generated in 1997 and subsequent years will be 25% after corporate income tax.
F. Possible Points Of Action 1996
In view of the proposed amendments it is advisable if it is already intended to alienate the substantial interest elements, to consider alienating the shares in 1996 to an independent third party (be warned of liquid equity companies and holding constructions). In principle, one may thus save 5% income tax.
A considerable tax saving can be realised by waiting to pay out dividend until after January 1, 1997 (this does not apply in the case of fiscal investment institutions).If emigration is being considered then this should be planned in 1996 as emigration is not yet qualified as a taxable action for the application of the substantial interest regulation.
In situations where a substantial interest has not yet been acquired but will be on the basis of the new criteria, consideration could be given to allowing the shareholding to drop to under 5% in 1996.
Finally, it is noted that, where possible, recapitalization may still take place in 1996.
G. What About Salary, Interest And Rental For The Director/Majority Shareholder?
Measures are being proposed to prevent the situation in which the taxable income is reduced by waiving salary, rental or interest in favour of the B.V.
A deemed amount is nevertheless imputed to the income of the director/major shareholder. Where interest and rental are concerned the amount involved should correspond to what independent third parties would agree on together; where salary is concerned an amount is imputed to the income resulting in a salary which is not substantially lower than what is commercially considered a normal salary.
III. RESTRICTION OF INTEREST DEDUCTION
The restriction of the interest deduction will come into play from 1997 in the case of so-called consumer interest. This is interest relating to the acquisition of a car, caravan or boat.
The consumer interest will continue to be restricted to the following amounts per person/per married couple:
- in 1997 NLG 10,000/NLG 20,000
- in 1998 NLG 7,500/NLG 15,000
- in 1999 and subsequent years NLG 5,000/NLG 10,000.
These amounts will be increased by consumer interest relating to debts incurred for the following reasons:
- study, including the Study Financing Act;
- sickness and invalidity;
- debts owing to over-assignment in the case of an inheritance, etc.;
- collection interest on a share transfer in the context of succession in family situations;
in so far as the cumulative interest mentioned above amounts to more than NLG 1,000 (NLG 2,000 for a married couple).
Deduction continues to apply unrestrictedly for interest to finance sources of income, such as, for instance, interest on a loan entered into to purchase a house.
It should be noted that financing interest attributable to a substantial interest parcel is no longer deductible at the table rate but at a rate of 25%.
IV AMENDMENTS NET WEALTH TAX
The most important amendments to take effect from 1998 are as follows:
1. the tax-free sums will be increased slightly;
2. the deduction for children will be abolished.
A reduction of the net wealth tax rate has not been proposed.
Further information can be obtained from Mr te Spenke, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247; or enter a text search 'KPMG' and 'Business Monitor'.
Keywords: Netherlands / Dutch / Europe / EC / EU / European Union /KPMG Meijburg & Co / memorandum / substantial interest / restriction /interest deduction / net wealth tax
Note: The content of this contribution is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
