Excessive giving to charities ? The Patagonia revolution is stifled

Ineke wrote recently a pamflet in the periodical Fiscal Tijdschrift on Wealth (December 2022), which is informally translated below:

"Excessive Giving to charities” - Patagonia revolution is stifled  

'But if thought corrupts language, language can also corrupt thought' - George Orwell , 1984


Philanthropists who donate their assets away to charities[1] are, in the terminology of our legislator, engaged in 'Excessive Giving', while because of the defiscalisation of these gifts in our tax law, according to the Ministry of Finance, a large part of the 'budgetary impact of the gift deduction' is utilised.

Gross simplifications like Unspeak[2] and Doublespeak[3] fly around our ears. We have ended up in an Orwellian landscape where the cabinet has emerged as the ribbon bearer of the Ministry of Finance’s officials. Worst of all, the people are being incited via the public news channel and hefty media reports, paving the way for the Lower House. The idiom has already soured to the extent that many tax advisers has also lost their way and thinks every philanthropist is a tax dodger. Why else would anyone want to give away their wealth ?  It shows, because that donated expensive painting is still just hanging on the donor's wall ! The Detached Distrust[4] is turning against George Soros not only in Hungary, but also in the Netherlands against all philanthropists. According to our government, philanthropy should mainly be a marginal activity, in the shadow of the government, but it certainly is not.

Patagonia revolution stifled

The whole world reacted with delight when it was announced that the founder of clothing brand Patagonia, Yvon Chouinard, was handing over his company to a social institution that will receive around $100 million in revenue from the company every year to combat climate change and protect the world's rapidly dwindling natural environment[5] . This also protects the company from the self-interests of future shareholders.

As wealth increases among business owners, so does the social issue of where those funds are going.  What good are assets if the earth will soon be uninhabitable for our grandchildren ? If we perish due to new pandemics ? If people come under such pressure that democracies appoint autocratic leaders to 'put things in order' and we thus go far back in our development as humanity? We also see that politics is not going to solve any of this while politicians hope for miraculous innovation for everything from business. The reality is that innovation cannot happen without the world of large wealth funds: social organisations that can operate purely demand-driven without political or shareholder pressure.

Many wealthy entrepreneurs are now aware that letting their assets inherit automatically is not the best choice. It is often not good for their children, who thus lack the incentive to develop themselves and thus prosper. Nor is it good for the company, which has to absorb the forces of shareholders' lives such as divorce, death and conflict. Of course, it is good to give the children support, but the dynamics of a 'cousin consortium' and family business is of positive value to few.

With this, the business case for an alternative ownership structure is huge and should be on the agenda of every serious family business[6] .
In addition, the current gift and inheritance tax exemptions for business assets are unsustainable now that they are a major driver of inequality. An alternative ownership structure also becomes an attractive option from this perspective. The ship with the lobby to preserve the business succession scheme is going to turn the shore one day, at least where gift and inheritance tax is concerned.

In the United States, the Patagonia solution is phenomenal, while in continental Europe there is a much longer tradition of similar examples: the Bernard van Leer Foundation and Stichting Utopa in the Netherlands, the Robert Bosch Stifttung in Germany, Zeiss foundation in Switzerland (Ernst Abbe) and the Carlsberg Foundation (Jacob Jacobsen) are resounding examples. There are many families again these days who are considering, in the interest of their family, their business and society, institutionalising the shares in a family business in a foundation, which has a social purpose (ANBI). The value of these donations quickly amounts to many (tens or hundreds) of millions.

It is therefore certainly noteworthy that on Budget Day, the cabinet unexpectedly proposed a capping of the deduction of periodic gifts on the basis of section 6.38 of the IB 2001 Act, which effectively makes a transfer of a company to a charitable organisation in the Netherlands impossible from 2023 onwards. In the case of gifts of company shares, section 4.22 of the IB 2001 Act stipulates that the fair market value should be regarded as consideration. In practice, this notional gain is neutralised by fits and starts by making the use of the gift deduction coincide with a temporal donation of shares in at least five equal instalments. Incidentally, the donor's mortality risk is not infrequently also already a serious obstacle to a donation to an ANBI of box 2 values. By limiting this deduction for periodic gifts for donations from 5 October 2022 to an amount of €250,000 on an annual basis without at the same time scrapping this 'notional profit' for donations of company shares, no entrepreneur in the Netherlands will still donate his company shares to an ANBI. After all, the assets from which he would have to pay that 26.9% income tax have been donated to the generally useful foundation.

  1. Capping periodic gift deduction for 'Excessive donations' populistly motivated

The explanation[7] on this capping is extremely brief and refers to the recent report of the Interdepartmental Policy Research on Wealth Distribution (IBO), which zoomed in on remarkable use of tax schemes.  It is unclear which tax experts wrote the now infamous Appendix 10 under the name 'Remarkable tax constructions'[8] , but it is likely to come from the finance ministry's civil service. The legitimacy of this report is granted by Laura van Geest, chairwoman of the AFM, who recently issued a call to resist the lust for control and regulation created by growing mutual distrust[9]

According to the Explanatory Memorandum, the IBO report shows cause for concern because the signals and figures from the IBO suggest that extremely high amounts of periodic donations may be involved, resulting in the gift deduction reducing the entire income tax base to zero. (...). I quote from the Explanatory Memorandum, where any unspeak[10] ' is printed in bold: "The 2019 and 2020 returns (the most recent figures) show that the number of extremely high donations has increased. Extremely high donations refer to periodic donations of more than €1 million. In practice, donations are sometimes even significantly higher than €1 million. Against these extremely high donations, there is then also a comparably high income, as a result of which the taxable income is, on balance, greatly reduced or even reduced to zero. One can then wonder whether, in the case of such extremely high donations, the donor's generosity is paramount or rather the desire to pay as little tax as possible. In other words, is it socially desirable to grant such a large gift deduction for such extremely high gifts? If someone is willing to commit to a gift of €25 million a year for five years, thus donating a total of €125 million, that is generally very generous. The other side of the story is that if this €125 million is deducted from income, no income tax is paid on it and the community takes care of that part of the donation."

In the end, the State Secretary for Finance sums up: The government's aim here is not to discourage the generosity of taxpayers, but to limit the deduction of excessive donations.

So, the word is out: Excessive Gifts. We see the terminology built up from 'extremely high' to 'Excessive' in which a moral judgement is wrapped up. The Secretary of State is using an Unspeak frame here, a political charge that crushes any distinction. Thereby, without flanking regulations for Box 2, it becomes a weapon, in this case against the basic principles of our democracy. I will return to this below.

The Secretary of State fails to explain why the philanthropists in question also have a "comparably high income". This is obviously due to the gain from substantial interest notionally recognised as a result of the donation to the ANBI. The conclusion that 'the community takes care of that part of the donation' is therefore a fallacy, where donations of Box 2 income are concerned. The purported return to the treasury will then also not be achieved with this proposal, because in the absence of the donations, no gain from substantial interest will be enjoyed either.  

The cabinet's rhetoric may well apply to donations in cash or in kind of e.g. a precious painting, where the value can be spread over a long period of time so that to that extent no income tax is due on the donor's remaining income.  In such cases, the donor can be said to set off the value of his gift against his income tax in future years. To claim that the "community takes care of that part of his donation" is also, in my view, an unspeak, an assertion with a strong political connotation that we may have come to think is normal from journalists; surely a purer legal justification should really be expected from the legislator.   

Doublespeak: 'mere' bare ownership gift

Furthermore, the State Secretary relies on the example in the IBO report where 'mere' bare ownership of a painting or a company is donated. The example describes how a painting is left by the donor hanging over his sofa, but whose purchase price is deducted in five instalments from a periodic gift. That example is misleading because a donor obviously cannot deduct more than the value of the bare ownership on the painting, which, however, is not mentioned. Museums are keen to obtain bare ownership in rem of paintings relevant to their collection, as this secures future ownership and does not depend on the 'bird in the sky' in a possible will and the wishes of heirs or executors.

Careful media orchestration took care of the rest: on the NOS news on 15 August 2002, the example of the valuable painting above the bank of a person who does not pay income tax led to great public outrage. This is an excellent example of doublespeak: a deliberate attempt to stir up indignation among the public and thus the Lower House, while concealing the truth, however. The Secretary of State also does not elaborate on the example because then he will not escape being honest. This is because the reality is that a gift of bare ownership of a painting only leads to deductibility if this can be traced back to an arm's length pricing in the market for the gift, as for gifts in kind, only the fair market value is eligible for deduction[11] . The lump-sum valuation of bare ownership for application of box 3 under section 5.22 of the IB 2001 Act is not relevant for the deduction of a periodic gift, not least because this lump-sum approach does not take into account particularly impractical clauses that can occur in a usufruct, such as the right of alienation and digestion. The suggestion that an entrepreneur donates bare ownership of a business but reserves the right to dividends at will is also unrealistic. An entrepreneur who can himself determine the company's dividend policy at the AGM, and thus the extent of his usufruct, cannot be said to have a business relationship with the charity and, accordingly, no fair value can be attributed to it. However, if they are preference shares, where the right to dividends is fixed, the value of the donation can be determined. The State Secretary believes that this would be difficult to enforce or monitor, but I do not see why this is the case, as the burden of proof with regard to the deduction also lies entirely with the donor. In practice, this leads to detailed agreements on the valuation of a bare property for purposes of the gift deduction, e.g. if it can be priced in the market by buying life insurance[12]

This was not addressed in the Parliamentary process, and so the legislator gets away with the appearance of abuse based on a media offensive, while the practice is certainly much more nuanced.

In the debate in the House of Representatives, a motion was tabled by Pieter Omtzigt[13] , suggesting that the capping be applied only to donations to 'affiliated' ANBIs' established by the donor. That motion was rejected. According to the State Secretary, there is nothing wrong in itself with establishing and donating to an affiliated ANBI. Nevertheless, the suggestion is indeed made that this is the case, partly by adding that, moreover, such a restriction is expected to have materially little effect due to 'the interposition' of a third party on the board of the affiliated ANBI. An ANBI must have an independent board in order to be an ANBI and also has the burden of proof in this regard; a straw man on the board is in direct conflict with this. If an ANBI cannot prove that it has meaningful governance, it cannot obtain ANBI status. The tax authorities should ask critical questions on this point, but in practice, in my opinion, this does not happen or at least far too little.

Furthermore, the government justifies the €250,000 limit on the grounds that it wants to take decisive steps towards a more balanced taxation of assets. However, the effect of the measure will actually be a reinforcement of inequality, as philanthropists will no longer allocate their assets to charities (or the government[14] ). While in fact this is the only possibility under the current set of instruments to rebalance too skewed distribution of wealth[15] .

3. Competition within the public interest

I know of no other developed democratic jurisdiction in which gifts to charities are taxed as notional gains. Gifts to qualifying charities are always exempt from gift and inheritance tax and capital gains tax. The reason is that every democratic society recognises - with the separation of church and state as a textbook example - that the government does not have a monopoly on public benefit and the pluralism that social institutions create is an essential part of that democracy[16] . Therefore, the tax position of charitable funds cannot be framed as a favour, subsidy or 'incentive', but as a reflection of the affirmation of the democratic principle that the activities of all qualifying ANBIs benefit society without government interference through taxation.

Fundamental principles should be respected and not 'evaluated', let alone attacked by a legislator on the basis of populist rhetoric. What does need to be evaluated is the control of ANBIs and whether the conditions imposed on ANBIs are strict enough to (continue to) comply with these principles. However, this will have to face the fact that the government has to pay the price of controlling and supervising ANBIs. The marginalisation of the gift deduction can then be seen as an austerity measure, after all, this significantly reduces the pressure to control precisely the most difficult ANBIs (the wealth funds that are not controlled by the general public)[17] .

In fact, the government is saying that there is competition between the ANBI's public benefit and that of the government, and that it should not be the case that no tax is paid at all on donors' other income. That is a matter of tax policy and is up to politicians to determine at their discretion, but then please provide careful justification as to why this is the case. In the United States, for example, there is a distinction between donations to public charities and charities not supported by the general public. Gifts to the latter category are only deductible up to 50% of taxable income, while the conditions are also considerably stricter. Note that this is a real deduction and not a deduction used to offset a notional capital gain.

Some years ago, I marvelled at the competitive thinking of the tax authorities. I came up with a solution for an owner of a substantial property portfolio in box 2 to create his legacy without transfer tax by transferring everything to an ANBI with an established reputation. The tax authorities - although there were good legal reasons for doing so - did not want to agree, simply because it did not please them that the man's entire estate would go to an ANBI and thus be beyond the reach of taxation of the owner and his children.

This reflects a culture of scarcity, which assumes competition for tax resources and, to my taste, wrongly assumes that the government has a 'claim' on the deferred reserves in the company even if it is transferred to an ANBI[18] .

And how to proceed?

In 2015, the Netherlands was still the most liberal legal system for philanthropy in the world according to The Index of Philanthropic Freedom, compiled by the Hudson Institute in the US[19] .  Within that Index, we are now in danger of tumbling to a rather dubious level.

That freedom comes with control is a fact, and the exact question is whether the government is willing to accept the price of strict control of ANBIs under all circumstances. Society needs a tight delineation of an ANBI and control of its conditions so that a donor is not burdened with populist allegations that do not concern him. The government could use any suggestions that have been and are being made to the legislature for improvements in this area to improve[20] .

From a legislator, we do not expect unspeak and doublespeak methods to underpin a bill. Our society is built on the philosophy of pluralism, which embraces the complexity of our society as a matter of principle. The legislature respects the democratic principles of our legal order, where there is no competition for the common good.

To rebalance the level playing field again, I call on the State Secretary to effectively render Section 4.22 of the IB 2001 Act inoperative for donations to ANBIs from 1 January 2023. In my opinion, this can easily be done by a Decree, along the lines of the Decree of 2 March 2001, CPP 2001/464 M where the same is regulated for transfers to employee self-management foundations.

If the proposal gets through the Senate unscathed, this is the only way to avoid effectively stifling the Patagonia revolution in the Netherlands.









[1] Charities are referred to as ‘ANBI’s’ in the Dutch acronym of Algemeen Nut Beogende Instelling.

[2] "Unspeak itself does violence: to meaning. It seeks to annihilate distinctions. Because meaning is socially constructed, the Unspeak that skews meaning for political ends can itself properly be called 'anti-social', in: Steven Poole, Unspeak: How Words Become Weapons, How Weapons become a Message, and how that Message becomes reality, Grove Press, 2007, chapter 10.

[3] William Lutz, Doublespeak: from 'Revenue Enhancement' to 'Terminal Living': How Government, Business, Advertisers, and others use language to deceive you, Harper Perennial 1990. Doublespeak is language that avoids or shifts responsibility, language that is at variance with its real or purported meaning. It is language that conceals or prevents thought: rather than extending thought, doublespeak limits it.

[4] Ewoud Kieft, Fighting for Democracy, 2022, p. 93.

[5] https://www.nrc.nl/nieuws/2022/09/14/oprichter-kledingmerk-patagonia-geeft-bedrijf-weg-om-klimaatverandering-te-bestrijden-a4141955.

[6] See Ineke Koele and Rasmus Feldthusen, Shareholder Foundations of enterprises: the North European style of securing family businesses for the long term - rising up to the global challenge, Trust & Trustees, Oxford University Press, September 2020, pp 654-662.

[7] Parliamentary Papers II 2022/23, 36202, no 15.

[8] See T. Hoogwout, Remarkable tax constructions, FTV November 2022.

[9] https://fd.nl/opinie/1457408/de-hoge-prijs-van-een-low-trust-samenleving-q3k2carOetYu.

[10] See note 1.

[11] Supreme Court 10 November 2017 ECLI:NL:HR:2017:2825.

[12] This is the case of the Shared Giving technique, see Compendium Estate Planning, SDU 2022, p. 265 onwards.

[13] Parliamentary Papers II 2022/23, 36202, no 77.

[14] Indeed, the same is true if the donor were to (hypothetically) gift box 2 shares or dividends to the government.

[15] Idem Niels van Mol, Cabinet limits deduction of periodic donations to charitable institutions, NLF 2022/2080 and R. van Gendt, The Hague demolishes social and cultural organisations, Financieele Dagblad, 14 November 2022.

[16] I.A. Koele, International Taxation of Philanthropy, IBFD 2007, chapter 2.3 Political philosophy of preferential tax status.

[17] For an overview of the Finance Ministry's year-long campaign to abolish or cap the gift deduction, see: https://www.thefloris.nl/opinie/hoe-minfin-de-waarheid-verhult-bij-aftopping-giftenaftrek/.

[18] See also I.A. Koele, Inspiration for a good Giving Act, FTV March 2011, p. 13ff.

[19] https://www.hudson.org/foreign-policy/index-of-philanthropic-freedom-2015

[20] See e.g. https://www.dedikkeblauwe.nl/news/cowboy-country.

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