The Netherlands as seen by a UK resident - Private Client Business, Sweet Maxwell 2023 / 1

Publication in 'Private Client Business' published by Sweet & Maxwell, 2023/ 1 on 'The Netherlands seen by a UK resident' written by Dr. Ineke A. Koele. 

Based in the heart of continental Europe, with a North European culture and a long tradition of tradesmanship, increasingly the Netherlands attracts HNWI families and charities from the UK and other Anglo Saxon jurisdictions. The Netherlands has a strong position in the World’s Happiness Index, the World’s Innovation Index, mostly among or just below the Scandinavian countries. The culture of the Dutch populace is very open-minded, sometimes noisy, liberal in a practical sense, and foremost truthful. They say what they mean. Refreshing but annoying, indeed !

This publication deals with the liberal legal culture that offers more flexibiity in many aspects compared to UK laws, investments in the Netherlands, relocation to the Netherlands and the benefits of the 30% regulation.
Among the most tricky topics that are discussed is the concept of residence (no day counting in the Netherlands and a substance over form approach) and the radical approach to any discretionary type of trust, even with respect to beneficiaries that do not receive any distributions from a trust.

Be mindful when trust structures are involved:

The Netherlands have adopted a rigorous tax system to “combat abuse” of foreign discretionary trusts which is based on the notion that “hovering of assets” between a settlor and beneficiaries is unacceptable for Dutch tax purposes. In essence, the assets of a trust with discretionary elements are attributed for Dutch tax purposes to the transferor of assets into trust during his or her life and, upon the decease, the same is fictitiously attributed to the heirs of the transferor(s) — whether or not those persons are also beneficiaries of the trust.

          Where the idea of a discretionary trust is that nobody can tell whoever will receive what, the fiction in the Netherlands is that upon the decease of the transferor(s), the respective heirs are deemed to own the assets in proportion to the share of the total estate that each heir is entitled to under the applicable estate law. In annex, there are several further anti-abuse provisions, e.g. if heirs are disinherited by the transferor into trust. Only if the attributed heir is apparently unable to benefit from any trust, he or she may escape the Dutch taxation on the deemed apportionment of the assets in the trust; this may however have consequences for the other heirs involved as their portion is deemed to be enlarged.

          An individual that is a resident of the Netherlands therefore may become fully subject to income tax with respect to assets held in a discretionary trust upon the decease of a parent who has been a transferor of assets into trust. Whereas Dutch income tax functions as a wealth tax (a fictitious yield that is amended from year to year is subject to 31% income tax) the resident is subject to income tax irrespective as to whether any distributions are being received. In practice, it is rather difficult to obtain avoidance of double taxation for any tax that may be imposed on the discretionary trust. The deemed attribution of ownership also counts for gift and inheritance tax, which entails that any distribution by the trust to a third party may be treated (partially) as a taxable gift by the Dutch resident beneficiary.

          On the opposite side, Dutch resident beneficiaries may receive distributions from a foreign discretionary trust without being subject to income tax based on the fictitious attribution of the trust assets to a non-Dutch-resident transferor of assets. During the life of the transferor of the assets, the beneficiaries therefore escape any income taxation in the Netherlands upon distributions. In that case, however, the Dutch resident has still full reporting obligations to the tax authorities on the trust situation, qualification and its assets.

          It is therefore very important to seek proper guidance and advice with respect to the structuring of trusts to avoid unintended situations of taxation that are not in line with the trust distributions. In practice, a proactive approach towards the tax authorities may avoid or iron out the most salient irregularities of this transparency legislation.

Where according to Dutch views, a trust is not discretionary, which implies that beneficiaries have enforceable claims towards a trustee, they are – depending on the precise circumstances – taxable on a claim on the trust or alternatively, are deemed to own the underlying assets of the trust. It is important to acknowledge that a trust may have both discretionary elements and non-discretionary elements with different tax consequences.


Download: private-client-business-sweet-maxwell-2023-1-the-netherlands-as.pdf