Future of box 3 (tax on deemed income from equity)
From the 1st of January 2017 the Dutch equity tax of the so called box 3 changes. In effect, the tax burden on higher amounts of net wealth will be increased while the tax burden on lower amounts of net wealth will be decreased. The tax free amount will be € 25,000 per person.
Then, on the first € 100,000 of net wealth a deemed return on investment of 2.87% will apply. This percentage is said to be based on the average interest rates of the last five years. For the next € 900,000 the deemed return is 4.6% and for amounts of net wealth above 1,000,000 the deemed return on investment is 5.39%.
This system is advantageous for those who achieve a relatively high return, but at the same time it’s really unfavorable if the actual return is low.
How to avoid box 3-taxation?
It is possible to avoid this box 3 taxation. There are some alternatives for box 3. Firstly, you could deposit your capital in a BV company (limited liability company). By doing so your tax burden shifts from box 3 (with a flat tax rate of 30%) to box 2 (income from substantial shareholding with a flat tax rate of 25%) The actual return on interest will be taxable in the corporate tax at 20/25%. When taking profits out of the BV as dividend, the tax rate is 25%. So the total tax burden is around 40%.
You could also grant a loan to your BV. The interest is deductible on the side of the BV and it is taxable in the income tax on the side of the shareholder. The applicable rate depends on the level of income of the shareholder and could be upto 52%. This is in most cases less beneficial can contributing your equity as capital in a B.V.
In the following example we will see the difference of when you keep your capital on your bank account or when you deposit your capital in a BV.
When your capital contains a total value around € 800,000 and you leave this on your bank saving account, against an interest of 1% (which is a high amount of interest these days).
Your box 3 calculations will be as follows:
Over the first € 100,000 – € 25,000 = € 75,000 on which you have a pre calculated income of 2.87% to taxes. Which means that your income on the first € 100,000 is € 2,153. On the remaining € 700,000 you will have an income of 4,6%. So your capital income over the last € 700,000 is € 32,200. When you add both amounts you will have an amount of € 34,353, according to the tax offices, as a capital income. Over this € 34,353 you will pay a tax rate of 30% so you will pay an amount of € 10,306 on taxes.
Your box 2 calculations will be as follows:
When you put your capital in a B.V. as share premium you will pay 20/25% corporate income tax over your actual interest income, so not a deemed income as in box 3. So when you have € 800.000 on your bank account against 1% interest, you will have an interest income of € 8.000. Over this € 8.000 you will pay a total percentage on tax of 40% amounting to € 3,600. To this add the notary fee of founding your own B.V. as well as the annual compliance expenses (annual accounts and corporate income tax return preparation). If you already own the shares in a B.V. than these additional expenses will be very limited. If at one point the share premium is to be repaid, a visit to the Notary will be required to keep this repayment of capital free of tax.
So putting your savings in an B.V. saves you € 6,706 on annual basis in this example, minus the one-time and annual expenses if applicable. If you are also curious to see how much you can save on your taxes, we are here to help you out. Also it is important to realize that these alternatives involve some risks too! We can help you with these solutions to improve your tax position.
Please feel free to contact us on this matter.