The Route IV government is diligently looking for money. All kinds of budget setbacks and deliberate cost increases are piling up. Under current budgetary rules, billion-dollar setbacks must be included in the budget. Therefore, for a number of weeks, there have been persistent rumors that the government wants to raise the taxes in Box 2, especially to absorb rebates in the wealth tax in Box 3 due to the Supreme Court ruling. Entrepreneurs and tax specialists rightly become uneasy.
Box 2 is unknown to the public. That’s the dirty public secret of the Dutch tax system. In Box 2, dividends and capital gains are taxed for shareholders in private limited companies (BVs) who own 5 percent or more of the shares in a company (‘significant interest’).
Few will ever have to deal with box 2. In 2017, about 400,000 people filed tax returns in box 2. That is less than 3 percent of the more than 12.5 million taxpayers in the Netherlands. About 260,000 of those 400,000 are directors of private limited companies. They are not only shareholders, but also work in their own company and are referred to as the CEO-Major Shareholder (DGA). There are also shareholders who are not employed by the company but who act as financiers.
The tax authorities tax the shareholders of BVs twice: first with the profit tax on companies and then with the income tax in box 2. The profit tax on companies is 15 percent as long as the profit is lower than 395,000 euros and 25.8 percent for profits over it. More than 95 percent of companies fall below the low rate of 15 percent. When companies’ profits are paid out in the form of dividends to shareholders, the tax authorities come along for the second time. Dividends are taxed in Box 2 at a rate of 26.9 per cent.
Owners of BVs should not distribute the company’s profits immediately. Most people prefer to keep all profits in their business for as long as possible. For example, to finance new investments, such as a pension provision and, above all, to pay as little tax as possible.
But if they eventually sell the shares in their company, the tax authorities come and pay box 2 tax on the capital gain on the sale of the shares.
It is urgent that box 2 be overhauled. Among tax specialists, box 2 is referred to as the ‘fun box’, because within this box there are many options for lowering, postponing and sometimes even completely adjusting the tax. It happens in several ways.
Always less taxed
The first way to minimize taxes is to distribute as much income as possible in the form of dividends or capital gains on shares and as little as possible as earned income. In addition to their dividends or capital gains on their shares, DGAs also receive wage income because they work in their own business. That wage income is taxed in box 1 just like ordinary employees’ income at progressive rates of (maximum) 49.5 per cent. But dividends and profits on BV shares are always taxed lower: in total by only 38 percent, as long as the BV profit is lower than 395,000 euros. This applies to virtually all shareholders.
People with BV save – with exactly the same income as people without BV – 12 øre in tax for every euro they pay as capital income instead of earned income.
Box 2 thus creates legal inequality. People with BV save – with exactly the same income as people without BV – 12 øre in tax for every euro they pay as capital income instead of earned income. In addition, as an entrepreneur, they can also deduct all kinds of costs for tax, while employees can not.
To prevent DGAs from massively bottlenecking the tax authorities, the latter require DGAs to pay themselves a minimum wage of 48,000 euros gross. This is called ‘usual wages’. The IRS must demonstrate if it believes that a DGA’s income on employment is actually higher. DGA should just as well demonstrate if this is smaller. In practice, there is a large margin of maneuver in this, due to the fact that most DGAs have an artificially low working income.
The other way to minimize the tax is by not distributing the company’s profits as a dividend, but by hoarding it as long as possible in the BV. This is almost always more attractive from a tax perspective than paying dividends and then investing the money privately. This is due to the much lower tax rate on private investment (usually 15 percent) than the rate on private investment in Box 3 (31 percent). The return on the revaluation of the shares in BV is also untaxed, as long as these shares are not sold.
The third way to pay less tax is that people can leave their business to their children and then virtually do not have to pay inheritance tax through the “corporate inheritance” scheme. Children also do not have to pay tax on the increase in value of donated or inherited shares, via the so-called ‘pass-through scheme’. Taxation can thus be deferred to eternity through constructions with family businesses.
Because hoarding is so attractive from a tax perspective, people in corporations borrow on a large scale. In this way, people can dispose of their assets, but without emptying their e.g. There are now sloppy 60 billion euros in loans from BVs. These loans are used to live off and to buy real estate or shares. A small group of 10 percent of BV owners account for 60 percent of all loans from BVs. Sometimes owners of BVs completely avoid the box-2 tax by having their company go bankrupt after emptying their company with loans.
It should come as no surprise that giant assets are now being held in private limited companies. Statistics Netherlands estimates almost 400 billion euros, almost half of national income. CPB research also shows that people only withdraw money from their BVs if it is fiscally favorable, for example because the government temporarily lowers the tax rate in Box 2.
What should also come as no surprise is that the shares of BVs are highly concentrated in the richest part of the nation. Of these 400 billion euros, 80 percent belong to the 1 percent richest people. The ten percent richest BV shareholders own 72 percent of that equity. This corresponds to approximately 2 million euros per. person.
Box 2 may no longer provide countless tax privileges and incentives to fatten up businesses.
Apart from the economic setbacks in the budget, it is true that the government is intervening in Box 2. Box 2 contributes greatly to property inequality, undermines legal equality and provokes all forms of fiscal construction work. Box 2 may therefore no longer provide countless tax privileges and incentives to fatten up companies.
The way to prevent DGAs from artificially lowering their salaries is to replace the usual salaries with a ‘usual capital income’, as all Scandinavian countries have been doing for years. The usual capital income is equal to a certain return on working capital, e.g. 10 percent. And it is then taxed in box 2. The remaining part of the company’s profits are taxed progressively in box 1 as earned income in DGA.
The tax incentives to stockpile assets in public limited companies disappear only if a limit is set for the low profit tax rate, for example by limiting the profit to less than 50,000 euros. In addition, it may no longer be profitable to defer profits indefinitely. This is possible with an annual withholding tax on the shares. This withholding tax is then settled backwards with the tax on capital gains when people sell their shares. The tax authorities can also subsequently make corrections to remove the benefit of untaxed return growth in the increase in value of shares.
Finally, the company follow-up facility and the transfer scheme must disappear as soon as possible. These tax benefits have no documented economic benefit. They are mainly used by the richest to pass on their assets to their children at low or untaxed rates, while they would have no problem paying the inheritance tax or the box-2 tax of their share profits.