Planning for New Wealth Tax

In recent years, there has been a lot of discussion about the wealth tax. The High Court has rejected the current system. As a result, the government must devise a new wealth tax. The Secretary of State has presented his new plans. Read here what these plans entail.

Current System

The current wealth tax is based on wealth with a specific mix of assets. This means that the legislator assumes that you have a certain portion of your wealth in savings and another portion in investments (such as stocks or a second property). You then generate a notional return on this savings and investments, on which you pay 32% (2023) wealth tax. The issue with taxing a notional return is that in years when investments perform poorly or certain assumed savings rates are not met, you are taxed on a return that you do not actually earn. The High Court has ruled that this is in violation of the European Convention on Human Rights (ECHR). Due to this ruling, the government must search for a new method of taxing wealth.

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Challenges of Wealth Tax

Due to the aforementioned ruling by the High Court, the government must seek a method of taxation that taxes the actual return rather than a notional return. While this sounds very logical, it is more challenging in practice than one might think. Some of the problems that arise include:

• How do you accurately determine the return on shares in a company that is not publicly traded and is located abroad?
• How does the government ascertain how many cryptocurrencies someone possesses and what the return on these assets is when that person engages in continuous trading?
• When do you tax profits from real estate? Is it done annually, or only after a sale? How do you handle declines in property value? When is rental income taxed?
• The same applies to shares in family businesses. Taxing these assets during the course of ownership may potentially threaten the continuity of the business, but delaying taxation could lead to indefinite postponement of the tax liability.

The above examples illustrate that it is not easy to construct a system that is both simple and fair. Therefore, it seemed quite logical, in my opinion, to opt for a flat-rate tax, especially considering that in 2021, the year when the notional taxation system was introduced, some countries still maintained banking secrecy.

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Wealth Accumulation Tax

The taxation of savings and shares in publicly traded companies in the new proposal by the Secretary of State appears to be relatively straightforward. You will be taxed on the interest received, dividends, and increases in the value of the shares. You can deduct costs from this amount, and losses from previous years are, in principle, eligible for offset.

In principle, this system seems relatively straightforward and feasible. However, questions may arise once again, as to how exactly you will provide information about transactions involving cryptocurrencies, for example.

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Capital Gains Tax

As evident from the examples mentioned above, questions arise about how to deal with assets that are not immediately liquid, such as shares in family businesses, a second home, or shares in a startup.
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For this, the Secretary of State has come up with the so-called capital gains tax. Let’s take a second home as an example. The problem with a pure wealth accumulation tax is that you would pay tax on the property’s value appreciation every year, but you wouldn’t have this value in cash because it’s tied up in the property. The plan now is that you only pay tax on the value appreciation when you sell the property. This also applies to the mentioned shares when you sell them.

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Let’s see how the taxation of the second home will work under this system. Regarding income from the second home (which you rent out), you have two streams: rental income and value appreciation. As for expenses, you also have two streams: maintenance costs (e.g., painting) and investments (e.g., an extension).
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The rental income minus the maintenance costs will be subject to annual capital accumulation tax. When you later sell the property with a profit, you will be taxed on the sales proceeds minus the purchase price minus investments with capital gains tax.

In my opinion, this adjustment makes the system fairer, but it could potentially bring about a significant number of complications in its implementation.

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Wealth Exemption

In the current wealth tax system, everyone is entitled to an exemption of €57,000. This means that you don’t pay tax on the first €57,000 of your wealth. This is going to change. It’s likely that a threshold will be introduced, above which your returns must exceed before you start paying wealth tax. So, the exemption will no longer be based on wealth but on returns.

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Wealth Tax for Directors of Private Limited Companies (DGA)

If you own more than 5% of the shares in a BV (Besloten Vennootschap or private limited company), you are classified as a director-major shareholder (DGA). There are several tax strategies available to DGAs to reduce their wealth tax liability. How exactly this will play out in the new system is not entirely clear yet. The plan for implementing the new law is set for 2027. Therefore, there will be little change for DGAs in the meantime.

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