CPB: low tax on family business inheritance unnecessary and ineffective

BOR (Business Succession Scheme) concerns a limited group of people, not even a few thousand a year, but it is a lot of money. People who inherit a business from a family member have an advantage over people who receive a regular inheritance: They have to pay much less tax. This also applies to the people who receive a business through a gift, often from a parent who is retiring.

The condition is that the heir continues the business for at least five years. In 2017, the total tax benefit for this group amounted to more than 400 million euros.

This tax benefit is unnecessary and inefficient, the Central Planning Bureau (CPB) concludes in an evaluation at the request of the Cabinet. The four coalition parties agreed to revise this Business Succession Scheme (BOR): can it be improved and can improper use be prevented?

Continuity is not in danger

The low tax was once devised to prevent children who inherit and want to continue a business from getting into financial difficulties because they cannot pay the inheritance tax. Not all companies have enough liquid assets for this, was the idea. Sometimes the value of business is in bricks or machines.

That part of BOR works, CPB concludes: So little inheritance or gift tax must be paid that the continuity of the companies is not in danger. But this tax advantage is by no means necessary.

The Planning Office examined all legacies and donations between 2010 and 2017 that made use of this BOR. Assume: The ordinary inheritance or gift tax would have applied to these companies. In that case, about three-quarters of the companies’ legacies and gifts had sufficient ‘free resources available to pay the full tax immediately,’ CPB writes. Either from the one who donates the business or from the one who buys the business.

For the quarter of inheritances and gifts where there was not enough money to pay the tax, a payment scheme can easily be made with the tax authorities. Then the heirs pay the tax spread over years. Officials from the Ministry of Finance have already reached a similar conclusion. The tax exemption is not necessary to ensure the survival of family businesses.

BOR is therefore not effective, CPB concludes. The goal – to protect the continuity of companies – is not achieved at the lowest price. A payment scheme is much cheaper for the state: In that case, tax revenues increase.

Benefit for the wealthy

BOR has for some time been criticized by economists such as Bas Jacobs and Koen Caminada. For the same reasons that CPB now puts forward. The event is not necessary. And the tax benefit goes to relatively wealthy households. The CPB also concluded in the evaluation.

Entrepreneurial wealth is mainly in the hands of the richest households. And “transferring these assets to the next generation increases wealth inequality within the new generation,” writes CPB.

Only 2.2 percent of the heirs had a value of more than 5 million euros, but they still received 36 percent of the tax benefit

CPB director Pieter Hasekamp previously called in BOR NRC “a spacious facility for the very wealthiest Dutch, namely those with a family business, to transfer virtually tax-free wealth to the next generation”.

A significant part of BOR’s tax benefit goes to a small number of major inheritances and gifts. Only 2.2 percent of the heirs had a value of more than 5 million euros, but they still received 36 percent of the tax benefit. More than 80 percent of the scholarships had a value of less than a million euros.

The tax advantage also applies to persons who do not inherit an entire company, but a ‘substantial interest’ in a company, at least 5 percent of the shares. It is precisely this wealth that is ‘highly concentrated among the richest households’, writes CPB. By 2020, 93 percent of business wealth was in the hands of the 10 percent most affluent households in the Netherlands.

No tax on the first million

Anyone who meets the conditions of the business transfer scheme does not have to pay tax on the first million. A little more than that. To illustrate: Someone who simply inherits 2 million euros pays more than 380,000 euros in inheritance tax. A person who inherits a business worth 2 million pays more than 12,500 euros in taxes.

CPB calculated the tax burden on the entire inheritance that children received in the years between 2010 and 2017: Without BOR it was almost 20 percent, with BOR more than 5 percent.

The Netherlands is certainly not alone with this tax. Other European countries have similar tax benefits when inheriting companies. These are unnecessarily generous and especially beneficial to the highest incomes, the OECD, the club of industrialized countries, concluded earlier. If the government lowers or abolishes BOR, the CPB does not expect many entrepreneurs to move to neighboring countries.

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