Europe’s plans for dividend tax will turn Dutch Box 3 tax on its head, experts say

The European Commission plans to make investing through a private limited company (BV) more attractive by completely eliminating tax on dividends between companies, the Telegraaf reported based on a draft proposal from European Commissioner Wopke Hoekstra. The Dutch European Commissioner aims to facilitate more investments in Europe, but in the process, he will turn the Dutch Box 3 tax completely on its head, tax experts told the newspaper.

Currently, all shareholdings exceeding 10 percent between parent and subsidiary companies are exempt from tax on dividends. If Hoekstra’s proposal is approved, any investment in shares will yield tax-free dividends.

The Dutch parliament recently approved plans for a new Box 3 tax system, which the Senate will vote on before the summer recess. That system taxes capital appreciation instead of capital gains, meaning investors have to pay tax on gains they haven’t cashed out yet. That’s not the case in Box 2.

Hoekstra’s proposal, combined with the proposed Box 3 Act in the Netherlands, will make it much more attractive for Dutch people to invest through a BV in Box 2 instead of privately in Box 3. Furthermore, the tax rate in Box 3 is 36 percent, while Box 2’s rate is only 31 percent.

Jan van de Streek, a professor of Tax Law in Leiden, called the European proposal very radical. “If you invest through a BV, you no longer pay any tax at all on your investment,” he said to the Telegraaf. “Only when you, as the owner of the BV, distribute to yourself do you pay 31 percent tax, considerably less than the 36 percent in Box 3.”

“This is going to cost the Treasury billions,” he said. “This is at odds with Box 3. It turns that entire system completely upside down.”

Van de Streek expects that the European proposal will also fuel the introduction of all kinds of structures. “You are going to see banks offering products in which equity gains and crypto profits are converted into dividends.”

Edwin Heithuis, a professor of fiscal economics at the University of Amsterdam, agrees that Hoekstra’s proposal will cause revenue from Box 3 to fall even further, he told BNR. But he adds that it is far from certain that this draft proposal will ever be implemented.

A fiscal proposal in the EU requires unanimous support from all 27 member states before being implemented. “It is not yet certain that it will happen,” Heithuis said. According to the professor, all member states are aware that lowering taxes means that money has to come from somewhere else. “A lot of money is needed in Europe, and taxes are important sources of revenue for the EU.”

The topic of taxing capital appreciation instead of realized gains in Box 3 has faced heavy criticism. The Dutch government is currently trying to find another way.