Dutch Tax Blog

Dutch Tax Blog

Box 3 savings

General Dutch (Tax) NewsPosted by Mike de Gruijl Wed, October 17, 2018 15:25:21


There is a way of avoiding taxation of investment and saving assets in box 3: Set up a Fonds voor Gemene Rekening, a joint fund account.

The Dutch tax system is a so-called box-system with three different boxes for the taxation of different sources of income each with their own set of rules and tax rates: box I income from employment, box II income from substantial interest and box III income from savings and investments.

In the Netherlands not the actual interest, dividend or rent from your savings and investments is taxed in box III, but the taxation is based on the value of these assets as per 1st January of each year.

This value is taxed against a fixed rate which is calculated by the tax office based on average interest rate/stock market rate of return of prior years. There are three tax brackets and there is a tax-free threshold amount of € 30,360 (2019) per tax payer.

Income from savings and investments tax rate 2019

Taxable income more than (€)

but not more than (€)

Effective tax Rate 2019 (%)

1stbracket

0

71,650

0.58

2ndbracket

71,650

989,736

1.34

3rdbracket

989,736

Unlimited

1.68

At this moment the actual interest rates a bank calculates are very low. Due to the fixed and fictitious tax rate the Dutch tax office uses for the calculation of the amount of taxes due on your savings and investments it is even possible that you pay more taxes than the actual interest, dividend you receive.

Therefore, it can be more beneficial for you to transfer assets like saving and investments to box II income from substantial interest (in case you have more than 5% of the shares in a company) and as a result avoiding a high fictitious taxation of your income from your assets in box III compared to the actual rate of return you have.

In this box II the actual dividend you receive (and the profit made by selling of your shares) is taxed against 25% (2018/2019).

To transfer assets from box III income from savings and investment to box II income from substantial interest it is required that you are the owner of at least 5% of the shares in a company or certificates in a fund.

To transfer (a part of) your assets to box II there are several options such as:

1. Setting up a company: for example, a Dutch BV or a UK Limited

2. Setting up a so-called Fonds voor Gemene Rekening (a joint fund account)

In this whitepaper the setting up of a Fonds voor Gemene rekening (FGR) and its pros and cons will be further explained.

Setting up a so-called open Fonds voor Gemene Rekening (FGR).

One of solutions to avoid taxation of savings and investments as a box III asset based on a fictitious and fixed income is to set up a so called “Fonds voor Gemene rekening” (a joint fund account).

In a joint fund account (FGR) participants will contribute a certain amount of money and/or share portfolio and he or she will get certificates of participation in the FGR in return. The FGR will use the equity to invest in deposits, shares and/or bonds etc.

The participants will agree in an FGR agreement on how much each of the participants will contribute and how the entitlements regarding the future profits of the FGR will be split based on their participation ratio.

You and the other participants can set up an open FGR by drawing up an FGR agreement and it is not obliged to use the services of a notary.

Very important is that a FGR requires at least two participants and one of the participants can only have a maximum of 90% of the certificates of participation.

Besides yourself the other participant can be your partner or your adult child(ren).

In case you are married in community of property then your partner will not qualify as your second participant and you need at least a third participant.

One of the participants will be the caretaker (“beheerder”) of the fund and the bank account of the FGR will be in his or her name.

After setting up the FGR the FGR needs to be registered at the Dutch tax office. The tax office will check if the fund qualifies as an open FGR or not.

If the fund qualifies as an open FGR the fund will get its own fiscal number and the fund will qualify as a box II fund.

If the Dutch tax office decides that the fund does not qualify as an open FGR the fund will be regarded as a so called closed FGR (“gesloten FGR”) and as a box III asset. In case of a closed FGR this fund has no corporation tax obligations.

After the agreement has been settled the money and/or shares belong to the FGR and if the tax office qualifies the fund as an open FGR then as a result this asset will no longer be regarded as your box III asset.

Advantages of an FGR

· Certificates of participation are free tradable;

· A notary is not required;

· An FGR is comparable to a Dutch B.V. (a Dutch private limited company) or N.V. (a Dutch public limited company), but more flexible;

· An open FGR is not regarded as a box III asset and therefore no fictitious box III taxation;

· No registration at Trade Register of the Dutch Chamber of Commerce is required (compared to a BV or NV);

· No public annual report is required (compared to a BV or NV)

· Lower costs compared to a BV or NV; 3

· Only the actual interest and/or dividend will be taxed;

· In general a FGR is more beneficial with a savings and investment amount of € 200,000;

· the FGR can be easily liquidated.

Disadvantages of an open FGR

· You need at least 2 participants and one of the participants may hold a maximum of 90% of the certificates of participation;

· The certificates of participation need to be free tradable. Therefore, it is not possible to state in the FGR agreement the obligation to first offer the certificate of participations to the remaining participant(s) or the permission of the remaining participants is required in case one of the participants decides to sell his or her certificates of participation.

· In case this condition is stated then the FGR will be regarded as a so called closed FGR and the FGR will be regarded as a box III asset;

· A profit of the FGR will be taxed with Dutch corporation taxes (the same as in a BV or NV);

· Payment to the participants will be regarded as dividend income and taxed with 25% dividend tax (the same as a BV or NV);

Is an FGR more beneficial then investments in box III?

The question if an FGR is more beneficial than taxation as box III income from savings and investments depends on the amount of equity that will be contributed to the FGR and the actual rate of return.

In case the actual rate of return is less than 3.25% in general setting up of a FGR for your investments is more beneficial than investments in box III.

The rate of return/profit with an FGR will be taxed with 20% corporation taxes (up till the amount of € 200,000) and above with 25% corporation taxes.

Any income a participant receives will be taxed with 25% dividend tax. Therefore, the total tax obligations in the FGR 40% (20% + 20% (80%*25%)).

A calculation as example:

Michael sets up an open FGR.. Michael deposits €1.000.000 into the opened bank account. The interest on this account is 1% per year (€ 10,000).

The calculation. There is an open FGR, so the FGR is liable for corporation tax and 20% corporation tax is payable on the interest, € 2,000 (20% x € 10,000). After this charge, an amount of € 8,000 to be paid will remain (€ 10,000 - / - € 2,000). This amount is taxed at 25% income tax, being € 2,000. In total, a levy of € 2,000 corporate income tax + € 2,000 income tax = € 4,000.

In comparison with box 3. If the money had been in a regular savings account in box 3, the tax was as follows: € 1,000,000 x 4% x 30% = € 12,000.

A tax saving of € 8,000 (per year)!

If you would like to avoid taxation of a certain amount of your assets as box III income from savings and investment, then the open FGR needs to be set up before the 1st January and each participant needs to have made his or her contribution before this date.

We note that it can take some time before the tax office has checked if the fund qualifies as an open FGR or not.



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