Richest Dutch paying less and less tax since 2001 tax reform

Since the 2001 tax reform, the wealthiest people in the Netherlands have paid less and less tax, Follow the Money reports based on a memo created by officials from the Ministry of Finance after investigating how the super-rich avoid taxes. According to the memo, the Tax Authority is “resigned” to the tricks rich people use to pay as little tax as possible.

The memo shows that wealthy business owners have found an easy way to avoid the already relatively low Box 3 tax on wealth and savings. Other super-rich people, like professional football players and high earners in the Amsterdam Zuidas, have also seen their tax burden drop significantly since the 2001 reform.

“Until 2001, the marginal tax burden of [a director-owner of a profitable company] was roughly equal to that of employees,” the Ministry of Finance officials said in their “memo 5,” which FTM gained access to by appealing to the Open Government Act. “Over the years, the tax burden of [director-owners] continued to decline.”

The problem is how the Netherlands’ three-box tax system is set up. Box 1 taxes the income of all employees and self-employed persons. Box 3 taxes the income from savings and investments - the return on wealth. All Netherlands residents with over 51,000 euros in savings, investments, cryptocurrency, or other assets get taxed in Box 3.

Box 2 is where the problem lies. This box taxes the “substantial interest” of owners of companies. Dividends paid to shareholders are taxed in this box, as are the proceeds from selling shares.

According to the Finance officials in memo 5, super-rich people move money from Box 3 to Box 2 to avoid paying taxes on their wealth. An example from the memo: a wealthy couple has 150 million euros in a private account, which would be taxed in Box 3. In 2018, they set up a private company (BV). They transferred 70 million euros to that BV in 2018 and another 15 million in 2019. That leaves them 65 million euros in Box 3.

The 85 million transferred to the BV now falls under Box 2 and is therefore not taxed annually in Box 3, saving the rich couple 1.4 million euros in wealth tax per year. The money in the BV will only be taxed if the company pays dividends or is sold.

The rich couple also still has access to the money in the BV - they can borrow money from their company. Until the beginning of this year, wealthy people could borrow from their own private companies almost infinitely. Now they can only borrow up to 700,000 euros, except if it is to buy a home, then they can borrow any amount.

And the debts they incur in these “loans” can be offset against their assets in box 3. “The Tax Authority does not care that it is not a real debt, but a loan from yourself to yourself,” FTM said. For example, the rich couple borrowed 2.5 million euros from their BV to buy a fancy sports car. That “debt” is then deducted from the 65 million euros in Box 3 assets, so the Tax Authority only taxes them on 62.5 million euros in wealth.

According to the Finance officials, the super-rich simply ensure that their debt to their private companies is equal to or greater than their wealth that falls under Box 3 and thereby avoid paying any taxes on said wealth.

The Cabinet is working on reforming Box 3 and hopes to introduce a new system in 2027, with a wealth tax based on actual returns from savings and investments. State Secretary Marnix van Rij (Finance) is considering removing real estate from Box 3 and taxing the earnings from it in Box 1 instead. Savings and investments in things other than real estate will remain in box 3, the rate of which will increase to 34 percent. But whether these steps will make a difference in how much tax the wealthy pay is doubtful as long as the tax haven of box 2 continues to exist, according to the Finance officials.