Measures for private individuals

Once again, the tax plans for 2020 contain the necessary measures for private individuals. We will be looking at these in detail under the heading “Measures for private individuals”. Among other things, the dual-band rate system in the income tax regime will be introduced in 2020 instead of 2021. Due to their importance, we will be looking at the proposed changes to the system for levying box 3 taxes, even though they are not part of the Tax Plan. These will certainly have the required impact. The training tax allowance will be abolished and replaced by the budget incentivising measures to improve an employee’s labour market position (STAP-budget).

Introduction of the dual-band system for income tax rates brought forward

As you will be aware, the Cabinet is aiming to introduce a dual-band system for the income tax rates and social security contributions. The introduction of the dual-band system will lead to a more proportional levying of income tax and social security contributions, a so-called social flat tax, with a joint basic rate for income up to €68,507 and a top rate for income above €68,507. According to the new proposal, the introduction, which had originally been planned for 1 January 2021, will now be taking place on 1 January 2020.

 

In the income tax regime, a rate system with two bands will be introduced in 2020 for income from work and residential property:

 

 

Band range

 

Rate

First band

€0 – €68,507

 

37.35% incl. social insurance contributions (basic rate)

Second band

€68,507 and above

 

49.50% incl. social insurance contributions (top rate)

As is currently the case, persons entitled to an old-age pension under the General Old Age Pensions Act (AOW) will pay no AOW contribution.

 

Increase in the general tax credit and employed person’s tax credit

In order to meet the needs of households with lower incomes, the Cabinet already proposed in 2019 to gradually increase the maximum general tax credit in 2019, 2020 and 2021. It is now being proposed to increase this slightly further. There will also be a slightly higher increase in the employed person’s tax credit.

 

Tax credits

2019 (€)

2020 (€)

General tax credit maximum (< state pension age)

2,477

2,711

Employed person’s tax credit max.

3,399

3,595

Income-related combination tax credit max.

2,835

2,881

Young disabled person’s tax credit

737

749

Reduction of deduction rate

As of 1 January 2019, items in the second band are only deductible at a rate of 49.5%. By a gradual process, deductible items in box 1 in the income tax regime will eventually (as of 2023) only be deductible at the low rate of 37.05%. For entrepreneurs, this means that the rate at which deductions can be made will steadily decrease for the following deductible items:

  • The tax allowance for self-employed persons;
  • The allowance for research and development work;
  • The co-working partner’s relief;
  • The relief for new businesses in case of incapacity for work; and
  • The SME profit exemption.

 

The percentage at which a deductible item can be repaid at the maximum amount will develop as follows in the coming years. The Cabinet is committed to this table, meaning that there will be a maximum deduction rate of 46% in 2020.

 

Year

 

Rate for deductible items

2020

 

46.0%

2021

 

43.0%

2022

 

40.0%

2023

 

37.05%

Change to box 3 system announced

The Secretary of State has announced a reform of the box 3 levy. This is not part of the Tax Plan 2020, but in a letter dated 6 September he outlined the contours of the new scheme and announced that he would be making a legislative proposal before the summer of 2020 to completely reform the box 3 levy. The intention is for the change to come into force on 1 January 2022.

 

The contours of the proposed scheme are as follows. First of all, it is determined whether the property on the reference date (which is also 1 January, as it is now) exceeds the tax-free allowance for each tax partner. If that is the case, it is then established how high the proportion of savings is within the assets. The remaining portion of the property is classed as value of other property. Finally, it is determined how high the amount of debt is. The income is then determined separately using the fixed yields for savings, other property and debts,subsequently added together. The proposal is based on the following fixed percentages, starting from 2020:

  • For the savings balance, it is proposed to take into account a fixed savings yield of 0.09%.
  • For the other property, it is proposed to take into account a fixed investment yield of 5.33%.
  • For the fixed debit interest on the debt, it is proposed to take into account 3.03%, based on the average mortgage interest rate.

For the total of the income from these assets, a tax-free income of €400 per tax partner will apply. The rate will be increased from 30% to around 33%.

 

In the letter mentioned above, the Secretary of State provides the following overview:

 

Box 3 now

Box 3 in future

Assets (property minus debts)

  • less than taxfree allowance

of €30,846: box 3 does not apply

  • more than taxfree allowance of €30,846:

box 3 does apply (on the assets exceeding €30,846)

Property

  • less than threshold of €30,846:

box 3 does not apply

  • more than threshold of €30,846:

box 3 does apply (to the entire assets)

Fixed yield on capital yield tax base (assets minus tax-free allowance of €30,846):

 

  1. from €0 to €72,797: 1.80%
  2. from €72,797 to €1,005,572: 4.22%
  3. more than €1,005,572: 5.33%

a + b + c = box 3 yield

Fixed yield on assets:

 

 

  1. value of all the savings: 0.09%
  2. value of other property: 5.33%
  3. value of debts: 3.03%

a + b – c = box 3 income

Box 3 yield = box 3 taxable income

Box 3 income minus tax-free income = box 3 taxable income

Rate: 30%

Rate: 33%

Reference date arbitration within box 3: not possible

Reference date arbitration within box 3: discouraged by legislation

In order to define the savings, the term ‘deposit’ will be used as defined in section 1:1 of the Financial Supervision Act (Wft). As is currently the case, the fixed interest on savings will be based on the most recent available (average) interest on savings accounts. According to the Secretary of State, this offers advantages compared to a levy on the actual interest on savings, both for taxpayers and for those carrying out the levy. For other property and debts, the yield percentages will remain fixed.

 

Comment by PKF Wallast

With this proposal, the Secretary of State is mainly attempting to meet the needs of taxpayers with (only) savings. Roughly speaking, no box 3 levy will be paid on approximately the first €440,000 of savings (fixed yield of 0.09% and a tax-free income of €400 leads to a threshold of €440,000). This applies to each partner, so for tax partners this amount will be double. It should be noted that the amount of €440,000 depends on the fixed yield for savings and the tax-free income; however, this may be different when it is introduced in 2022.

This proposal may severely worsen the situation for taxpayers who predominantly have investments and/or immovable property. This will be even worse if the investments and/or immovable property are financed by loans. It should be noted that, in the proposed system, debts can no longer be directly offset against the property in the tax base, but are only considered at 3.03% – and the investments or immovable property at 5.33% (these percentages are also expected to change on introduction in 2022).

The Secretary of State considers it necessary to increase the rate from 30% to 33% so that the reform of box 3 is carried out on a budget-neutral basis.

 

Transitional provision for hybrid annuities

For hybrid annuities from before 2001, the Income Tax Act 2001 (Wet IB 2001) contains a transitional provision for annuities in respect of which the premiums were entirely non-deductible and annuities in respect of which the premiums were only partially non-deductible. The latter category constitutes the hybrid annuities. As of January 2021, the transitional provision to current legislation will cease to apply, which means that tax will once again be payable in box 1 on the value of the annuities. In terms of the hybrid annuities, the Cabinet wishes to continue the transitional provision beyond 2020. In that case, leaving the transitional provision in place would mean that taxes continue to be levied on the benefits in box 1 as soon as they are received, with application of the balancing method. As part of this arrangement, the obligation to settle the matter with the tax authority will also no longer apply as of 31 December 2020.

 

Comment by PKF Wallast

This solves a problem in practice and for taxpayers. Leaving the obligation to settle the matter with the tax authority unchanged would give rise to significant problems of a practical nature. After all, the obligation to settle the matter with the tax authority only applies to that part of the annuity, the premiums of which have not been deducted for tax purposes. This would have meant that hybrid annuities had to be split into a box 1 part and a box 3 part after the expiry of the transitional provision; easier said than done.

 

Optional scheme for electronic communications

Some citizens would rather communicate with the Dutch Tax Authorities in paper form and some in digital form. On the basis of the Dutch Tax Authorities Online Messaging and Data Interchange Act (Wet elektronisch berichtenverkeer Belastingdienst), the relevant laws contain the general rule that correspondence between citizens and the Dutch Tax Authority  is sent exclusively online. There is currently no option to choose to receive messages only in paper form or only in digital form.

The legislative proposal that has been submitted would introduce an optional scheme allowing citizens to choose whether they receive messages from the Dutch Tax Authorities in digital form or by post. This relates to messages sent to the citizens by the Dutch Tax Authorities. The option applies in principle to all outgoing messages (tax levy, tax collection, allowances). It is therefore not possible to choose the form of delivery per type of communication, for example digital for assessments and paper form for allowances. Nevertheless, it is quite a flexible option. Citizens are not tied to the choice that they make, but can in principle change their choice as often as they like without needing to explain this to the Dutch Tax Authorities.

It should be noted, however, that citizens who are also entrepreneurs do not have the right to choose when it comes to income tax, turnover tax and payroll tax. These communications will remain digital.

 

Comment by PKF Wallast

It is good that citizens will be given a statutory right to choose how they communicate with the Dutch Tax Authorities. Although the future is digital, there are still many citizens (and not just older people) who prefer paper to digital. It is good that the government is taking into account the wishes of all of its citizens.

 

Adjustment of the interest on inheritance tax

As of 1 January 2019, individuals who request a provisional assessment or file an inheritance tax return before the first day of the ninth month following the death are not charged any interest on tax if the (provisional or final) inheritance tax assessment is determined in accordance with that request or return. This will now also apply in respect of inheritance tax assessments in the case of which the time period for filing the return starts at a different time than on the date of death or is suspended. This includes situations where, as a result of pregnancy, there is uncertainty regarding the individual who is the heir, or situations resulting from the fulfilment of a condition.

 

Educational tax allowance replaced by STAP budget

The tax allowance for educational expenses in the income tax regime is set to be abolished. This tax allowance will be replaced by a learning and development budget financed by the government, known as the STAP budget (budget incentivising measures to improve an employee’s labour market position). The STAP budget is likely to be in the form of an annual personal budget of €1,000 for everyone in the Dutch labour force. It will be possible to claim from the budget via a digital portal, with a participant indicating the type of eductation that he or she wishes to use the budget for.

 

The scheme is part of a broader policy of lifelong development (Leven Lang Ontwikkelen, LLO) that aims to give Dutch people more control over their personal development throughout their careers. The replacement of the tax allowance is the result of an evaluation study into effectiveness and efficiency. The following effects are expected to be achieved by the new scheme:

  1. The tax allowance is mainly used by highly educated people, often in paid employment, while the STAP budget is much more suitable and offers an advantage to less highly educated people on low incomes.
  2. In contrast to the tax allowance, the STAP budget does not require any pre-funding by the participant.
  3. The use of resources is set to become far more effective due to replacing the tax allowance with the STAP budget. The CPB Netherlands Bureau for Economic Policy Analysis has calculated that 73%-100% of the tax allowance does not lead to extra training or education.
  4. There will be less of an administrative burden for both citizens and the Dutch Tax Authorities due to the fact that the STAP budget is a simpler scheme.

It will not take effect on 1 January 2020. It has already been indicated that this is not feasible. The tax allowance will only be abolished once the STAP budget has come into effect, so as to avoid a period where there is no financial incentive at all for education, training and development.

In the event of subsequent payments or repayment of training expenses after the system has been changed, these can still be processed in the income tax regime on the basis of a transitional provision.

S.H. (Stephen) Vergeer MB RB Advisor
S.H. (Stephen) Vergeer MB RB, Advisor
dr. J. (Jeroen) van Strien Advisor
dr. J. (Jeroen) van Strien, Advisor
Prof. dr. J.C.M. (Hans) van Sonderen Advisor
Prof. dr. J.C.M. (Hans) van Sonderen, Advisor
mr. drs. R.W. (Ruud) van der Linde Advisor
mr. drs. R.W. (Ruud) van der Linde, Advisor
mr. S. (Sicco) van den Berg Advisor
mr. S. (Sicco) van den Berg, Advisor
I. (Ibrahim) Ahmed LL.M. Advisor
I. (Ibrahim) Ahmed LL.M., Advisor
drs. A.T. (Andor) Valkenburg Manager Amsterdam, Advisor
drs. A.T. (Andor) Valkenburg, Manager Amsterdam, Advisor
mr. H.J.A. (Huub) Nacken Advisor
mr. H.J.A. (Huub) Nacken, Advisor
mr. R.C. (Ron) Henzen Advisor
mr. R.C. (Ron) Henzen, Advisor
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