GLOBAL FINANCE AND TAXATION, FINANCIAL AND ECONOMIC CRISIS ...

GLOBAL FINANCE AND TAXATION, FINANCIAL AND ECONOMIC CRISIS AND THE ROLE OF

TAXATION

Taxation of investment income of individuals

(e.g. comprehensive income tax systems versus dual income tax systems, box systems)

Student: Kim de Veer

Master Thesis: Tax Law

Student Number: 711016

Date: May 2011

Supervisor: Drs. C.A.T. Peters

Eucotax-Wintercourse 2011 Tilburg-Team

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Contents

Chapter 1: Introduction ......................................................................................................... 6

1.1 Eucotax-Wintercourse .......................................................................................................... 6

1.2 Purpose of this master thesis ............................................................................................... 7

1.3 Approach ............................................................................................................................... 7

Chapter 2: The Dutch income tax system ............................................................................... 9

2.1 Introduction .......................................................................................................................... 9

2.2 Personal income tax .............................................................................................................. 9

2.3 Corporate income tax ......................................................................................................... 11

2.4 Income from work and home ownership (box 1) ............................................................... 12

2.4.1 Introduction ................................................................................................................. 12

2.4.2 Box 1 in general ............................................................................................................ 12

2.4.3 Entrepreneurial income ............................................................................................... 14

2.4.3.1 Limited partnerships and profit dependent loans ................................................ 15

2.4.4 Results from other activities ........................................................................................ 16

2.4.4.1 Making assets available ........................................................................................ 17

2.4.5 Home ownership .......................................................................................................... 18

2.5 Income from the substantial shareholding regime (box 2) ................................................ 18

2.6 Income from savings and investments (box 3) ................................................................... 21

2.7 Background of the Dutch income tax system ..................................................................... 23

2.7.1 Introduction ................................................................................................................. 23

2.7.2 Box 3 ............................................................................................................................. 24

2.7.3 Box 2 ............................................................................................................................. 27


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2.8 Conclusion ........................................................................................................................... 29

Chapter 3: International aspects of the Dutch income tax system ......................................... 30

3.1 Introduction ........................................................................................................................ 30

3.2 Non-resident tax-liability .................................................................................................... 31

3.3 Option for non-resident to be taxed as a resident taxpayer .............................................. 31

3.4 Avoidance of double taxation ............................................................................................. 32

3.5 Assumed investment yield tax in an international perspective ......................................... 33

3.6 Conclusion ........................................................................................................................... 34

Chapter 4: Comparing various tax systems ........................................................................... 36

4.1 Introduction ........................................................................................................................ 36

4.2 Comprehensive income tax system .................................................................................... 37

4.3 Dual income tax system ...................................................................................................... 38

4.4 Schedular income tax system ............................................................................................. 39

4.5 Classification of the Dutch system ...................................................................................... 40

4.6 Conclusion ........................................................................................................................... 41

Chapter 5: Taxation of investment income of individuals ..................................................... 43

5.1 Introduction ........................................................................................................................ 43

5.2 Differentiation of residents and non-residents .................................................................. 43

5.2.1 The taxable categories of investment income............................................................. 43

5.2.2 Investment income other than capital gains ............................................................... 44

5.2.3 Capital gains ................................................................................................................. 45

5.2.4 The tax rate .................................................................................................................. 45

5.2.5 Withholding tax ............................................................................................................ 46


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5.2.6 The tax base ................................................................................................................. 46

5.2.7 Deduction of expenses................................................................................................. 47

5.2.8 Deduction of losses ...................................................................................................... 47

5.2.9 Transfer of losses ......................................................................................................... 48

5.2.10 Allowances ................................................................................................................. 48

5.2.11 Tax-free amount ........................................................................................................ 49

5.2.12 Sub conclusion; taxation of residents ........................................................................ 49

5.3 Non-residents ...................................................................................................................... 50

5.3.1 Investment income; capital gains ................................................................................ 50

5.3.2 Avoiding double taxation ............................................................................................. 52

5.3.3 Tax free amount ........................................................................................................... 53

5.3.4 Expense deduction ....................................................................................................... 53

5.3.5 Loss deduction ............................................................................................................. 54

5.3.6 Carry back/carry forward ............................................................................................. 55

5.3.7 Tax rate: flat or progressive? ....................................................................................... 55

5.3.8 Method of collection: withholding tax? ...................................................................... 57

5.3.9 Sub conclusion; taxation of non-residents .................................................................. 58

Chapter 6: The economic and financial crisis and the relationship to investment income of

individuals. .......................................................................................................................... 59

6.1 Introduction ........................................................................................................................ 59

6.2 Principle of equality ............................................................................................................ 59

6.3 Efficiency ............................................................................................................................. 60

6.4 Definition of capital flight ................................................................................................... 61


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6.5 Problems with capital flight ................................................................................................ 62

6.6 Taxing capital income (?) .................................................................................................... 62

6.7 Wealth taxes ....................................................................................................................... 65

6.8 Various tax systems and capital flight ................................................................................ 66

6.9 The Dutch system................................................................................................................ 71

6.10 Conclusion ......................................................................................................................... 74

Chapter 7: Conclusions ........................................................................................................ 76

7.1 Summary ............................................................................................................................. 76

7.2 Final statements .................................................................................................................. 79

Annex 1 ............................................................................................................................... 81

Annex 2 ............................................................................................................................... 82

Annex 3 ............................................................................................................................... 84

Annex 4 ............................................................................................................................... 88

References .......................................................................................................................... 89


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Chapter 1: Introduction

1.1 Eucotax-Wintercourse

This master thesis is the result of my participation in the Eucotax-Wintercourse 2010/2011. This

intensive program of EUCOTAX (European Universities COoperating on TAXes) is based on the

desire of the participating universities (Barcelona, Budapest, Leuven, Lodz, Paris, Rome,

Uppsala, Tilburg, Osnabruck, Vienna, Warsaw and Washington) to set up a permanent structure

in order to stimulate the instruction in and research on European aspects of Tax law. In this

program both students and researchers contribute.1 As said, this year I was one of those

students.

The main subject area of the program is the European Harmonization of Tax Law and

each year a different general theme is chosen. This year the main theme is GLOBAL FINANCE

AND TAXATION “Financial and Economic Crisis and the Role of Taxation." As every year the

main theme is divided into 6 subparts for the different students to explore and write their

theses on. The subparts defined for this year's Eucotax-Wintercourse, which was held at Luiss

Guido Carli University in Rome, are2:

1) Taxation of investment income of individuals

E.g. comprehensive income tax systems versus dual income tax systems, box systems;

2) Taxation of financial institutions

E.g. banks, investment funds, private equity funds, sovereign wealth funds, pension funds,

hedge funds, insurance companies, bank tax;

3) Exchange of information and tax procedures, including legal protection of taxpayers

E.g. money laundering, Financial Action Task Force, G-20, Global Forum;

4) Tax arbitrage

E.g. tax avoidance, treaty shopping, hybrid entities, CFC;

1 www.wintercourse.com

2 www.wintercourse.com


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5) Deductibility of interest in company taxation

E.g., earnings stripping rules, limitation of interest deductions;

6) Fiscal and commercial accounting rules

E.g. derivatives (e.g., credit default swaps), hedge accounting, net operating losses and

carryovers, general business credit carryovers, alternative minimum tax credit carryovers,

capital loss, foreign tax credit carryovers.

The subpart appointed to me was subpart 1: Taxation of investment income of

individuals, e.g. comprehensive income tax systems versus dual income tax systems, box

systems. Naturally this master thesis will be on this subject.

1.2 Purpose of this master thesis

The financial and economic crisis has had a big influence on the economy throughout the world

these past few years. The questions of how to prevent another crisis from happening in the

future and how to overcome the crisis as soon as possible have been asked by numerous

people since the crisis started. No wonder that the financial and economic crisis was chosen as

a general theme for this year’s Eucotax-Wintercourse.

This master thesis will deal with the relationship between taxation of investment

income of individuals and the economic and financial crisis. An attempt will be made to answer

the following research question:

What has been the role and the position of the taxation of investment income of

individuals in causing the financial and economic crisis and what should be the role and the

position of the taxation of investment income of individuals in overcoming the financial and

economic crisis?

1.3 Approach

In order to come up with an answer the several tax systems of the participating countries of the

Eucotax-Wintercourse will be analyzed and compared. To be able to compare, something to


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compare to is necessary. Therefore to begin with, a description will be given of the Dutch tax

system and in particular how investment income is treated within the Dutch tax system

(chapter 2). After that the international aspects of the Dutch system will be dealt with (chapter

3). Now, it is tome for the comparing part. The systems of the various countries will be shortly

described and the most interesting differences and similarities will be highlighted. This will

firstly be done with the tax systems in general (chapter 4) and later with the more technical

aspects of taxation of investment income of individuals (chapter 5). Following the comparing

part comes the analyzing part which will mostly concern the relationship between the ability-

to-pay/equality principles on the one hand and preventing flight of capital on the other hand

within the several tax systems (chapter 6). Hopefully it will be possible to answer the research

question after this in the conclusion (chapter 7).


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Chapter 2: The Dutch income tax system3

2.1 Introduction

As it turns out, the Dutch box system is one of a kind.4 All the more reason to explain how this

system works. In this chapter a general overview will be given of the Dutch box system and

given the topic of this master thesis, some extra attention will be given to the parts which

contain elements of investment income. Also some attention will be given to the corporate

income tax in order to be more capable of understanding the place of the Dutch income tax

system in the Dutch tax system in general. In line with this, the background of the Dutch income

tax system will be discussed.

2.2 Personal income tax5

In the Netherlands personal income tax (PIT)6 is levied on the taxable income of an individual,

which is assessed each year. Capital gains are not taxed separately but treated as taxable

income. Individuals who are a resident of the Netherlands are liable to tax on their worldwide

income. Double taxation is prevented by means of a double tax treaty or the Dutch Unilateral

Decree to prevent double taxation. Individuals who are not a resident of the Netherlands are

liable to tax on income arising in the Netherlands (though subject to provisions in double

taxation agreements). The taxable income is divided into three boxes, being the income from

work and home ownership (box 1), income from the substantial shareholders regime (box 2)

and income from savings and investments (box 3).7 The calculation of income in box 1 is on

3 G.T.K. Meussen, “Netherlands; Income Tax Act 2001”, European Taxation November 2000, p. 490-498. This article

is used as the starting-point of this chapter. 4 See chapter 4 for the comparison between tax systems.

5 R. van Zelst, “Nexia International: The international Tax Handbook; the Netherlands”, West Sussex: Bloomsbury

Professional, 2011, p. 392. 6 Personal Income Tax Act (PITA) 2001.

7 According to the Council of State in 1999 (in Dutch: Raad van State) 97% of the total tax base would be reflected

in box 1, 1% in box 2 and 2% in box 3. The rates are not taken into account with this estimate. Probably, considering the rates, the %ages of total tax revenue will be even less for box 2 and 3 (Wet inkomstenbelasting


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accrual basis and/or the income or benefit received. In box 2 it is the actual income received

when the taxpayer is shareholder of at least 5% of the subscribed capital of a company whose

capital is entirely divided into shares. In box 3 the income is a fixed yield of 4% on average value.

Capital gains are included in the fixed yield and thus not taxed separately. The tax year is a

calendar year and the tax assessment starts after submitting an individual tax return. For over-

or underpayment interest is received, respectively due. In box 1 losses have a carry back of

three years and a carry forward of nine years. In box 2 losses have a carry back of one year and

a carry forward of nine years. It is not possible to have losses in box 3. There are restrictions for

loss compensation between the boxes. The tax rate in box 1 is progressive (from 33,45% up to

52%), in box 2 the rate is 25% and in box 3 the rate is 30%.

After the taxable amount has been determined there is a system of levy rebates, which

are fixed amounts that directly decrease the income tax that has to be paid.8 The amounts of

the levy rebates change somewhat each year as well as the various components of the levy

rebates.9 The most important and also the highest one is the general levy rebate which applies

for each taxpayer at €1,987 in 2011.

When a taxpayer receives social insurance due to the General Old Age Pensions Act10,

the Surviving dependants’ Benefits Act11 or the Exceptional Medical Expenses Act12, taxpayer’s

levy rebate can be restricted. The levy rebate may never exceed the tax liability plus national

insurance contributions and therefore will never result in a refund.

For the most part, the Dutch box system levies taxes on an individual basis, but there

are some situations in which a partner’s possessions are taken into account. Since January 2011

2001; Advies en Nader Rapport, Lower Chamber of Parliament, 1998/99, 26 727, A, p. 5.). Unfortunately, no recent numbers are known. 8 Articles 8.1 to 8.20 PITA.

9 For the original amounts and components: G.T.K. Meussen, “Netherlands; Income Tax Act 2001”, European

Taxation November 2000, p. 491. 10

In Dutch: Algemene Ouderdomswet (AOW). 11

In Dutch: Algemene nabestaandenwet (ANW). 12

In Dutch: Algemene wet bijzondere ziektekosten (AWBZ).


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a new general concept of the term partner is in place.13 In the new concept14, not only people

who are married15 are considered partners (for tax purposes) but also people who (a) live

together and have a partnership contract or (b) have a child together or (c) are mentioned in

each other’s pension plan or (d) own a home together. In the past, unmarried adults who lived

together for more than six months in a calendar year and who were registered at the same

address could opt annually to be considered partners for tax purposes, but with the

introduction of the new partner concept this option no longer exists.

2.3 Corporate income tax16

In order to fully be able to place the box system within the context of the total Dutch tax

system, a short description of the corporation tax system is helpful.17 Corporate income tax

(CIT)18 is levied on the taxable profit of a chargeable company for a year of assessment.19

Taxable entities are companies incorporated in the Netherlands, foreign companies with central

management and control located in the Netherlands and PE’s located in the Netherlands. Like

with the taxation of individuals, capital gains are not taxed separately, but treated as taxable

profit. However, when a corporation is shareholder of at least 5% of the subscribed capital of a

company whose capital is entirely divided into shares, the participation exemption applies.20

This means that when determining the taxable income, the profit (including dividends and

capital gains) and costs of acquisition or alienation of the participation will not be taken into

account. The taxable incomes are the worldwide profits and profits derived by a PE in the

Netherlands. The taxable profits are calculated starting with the accounting profit, but adjusted

for various tax add-backs, allowances and exemptions to arrive at the taxable profit. Within a

13 Kamerbrief, Under-Minister of Finances, “Motie en toezegging inzake partnerbegrip”, 5 November 2010.

14 Article 1.2 PITA.

15 A registered partnership is considered equal to a marriage.

16 R. van Zelst, “Nexia International: The international Tax Handbook; the Netherlands”, West Sussex: Bloomsbury

Professional, 2011, p. 393. 17

R. van Zelst, “Nexia International: The international Tax Handbook; the Netherlands”, West Sussex: Bloomsbury Professional, 2011, p. .391. 18

Corporate Income Tax Act (CITA) 1969. 19

Articles 1 to 7 CITA. 20

Article 13 CITA.


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year losses can be offset against other current year profits and a current year loss can be

carried back one year21 and carried forward nine years. A fiscal unity can be formed by a parent

company and its 95% subsidiaries.22 A fiscal unity means that the group is treated as one

company for corporation tax purposes and taxed on a consolidated basis. Foreign entities with

Dutch PE’s can unite the Dutch PE’s in a fiscal unity as long as the 95% condition is met. Profits

up to €200,000 are taxed at 20%, the surplus at 25%.23

2.4 Income from work and home ownership (box 1)24

2.4.1 Introduction

Box 1 is the most extensive, and consequently most complicated, of all the boxes. Therefore, it

is impossible to fully discuss every aspect of it in this master thesis, so an attempt will be made

to limit the discussion to where box 1 contains aspects of investment income and why the

choice was made to tax these aspects in box 1 and not in box 3. Before discussing these aspects,

a general overview of box 1 will be given.

2.4.2 Box 1 in general

Box 1 contains taxable income from work and home ownership. The tax base in this box is

divided in the income categories entrepreneurial income, wages, result from other activities,

periodical payments and income from home ownership. Besides the income categories, there

are three general deductions in box 1, being the deduction for non or little home ownership

debt25, expenses made to provide for one’s upkeep26 (for example an annuity) and the personal

21 Article 20 CITA. Because of the economic crises, a temporary arrangement has been made that allows losses to

be carried back for three years. 22

Article 15 CITA. 23

Article 22 CITA. The 25% rate applies since 2011, before then it was 25,5%. 24

Articles 3.1 to 3.157 PITA. 25

See section 1.2.5. 26

Articles 3.132 to 3.138 PITA.


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deduction.27 The first two connect to respectively the income from home ownership and wages

and are therefore exclusively deductable in box 1. The personal deduction does not have this

connection with box 1 and if box 1 has not enough positive income to fully use the deduction,

the remainder can be transferred to box 328 and box 229 in that order.30

For this box there is a graded tax system based on four income brackets, their limits and

rates varying somewhat each year. For 2011 the following diagram shows the current rates.31

Box 1 Income up to Rate 2011 Tax Cumulative

1st tax bracket € 18 628 33.0% (65+: 15.1%)

€ 6 146

(65+: € 2 812)

€ 6 146 (65+: € 2 812)

2nd tax bracket € 33 436 41,95%

(65+: 24.05%)

€ 6 211 (65+: € 3 561)

€ 12 357 (65+: € 6 373)

3rd tax bracket € 55 694 42% € 9 348 € 21 705

(65+: 15 721)

4th tax bracket more 52%

The actual tax rate for the first two brackets is in fact much lower than the diagram states, since

they include national insurance contributions. National insurance contributions are no longer

due in the third and fourth bracket. For the sake of completeness, the rates for people who are

6532 or older are included in the diagram, because they pay less national insurance

contributions.

27 Articles 6.1 to 6.30 PITA.




31 Articles 2.10 in conjunction with 2.10a PITA.

32 In the Netherlands 65 is the pensionable age.


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As previously said, some of the income categories of box 1 have aspects of investment

income in them, but the legislator nevertheless decided to not tax them in box 3. In the

upcoming sections these categories will be further discussed and some extra attention will be

given to the investment income aspects.

2.4.3 Entrepreneurial income

In order to qualify as an entrepreneur a business needs to be carried out for taxpayer’s account

and he needs to be directly bound by agreements that affect the business.33 The wording of the

entrepreneurial qualification has been adapted compared to the former income tax act.34 The

aim was to connect the fiscal entrepreneurial concept more to the economic and social

reality.35 The first part, ‘carried out for taxpayer’s account’, remained the same and needs to be

filled in by jurisprudence, like it has also been under the former income tax act. The Supreme

Court36 has come up with criteria for entrepreneurship. These include sufficient independence

from the client, not only occasionally accepting commissions, but aiming for continuity and

being liable to entrepreneurial risks. The requirement for a direct connection to the company’s

commitments is new compared to the former income tax act. This was inserted to express that

entrepreneurship is more than making assets available,37 for example, when a taxpayer rents

out property to a company, the taxpayer cannot be held accountable for the commitments

made by the company. In case the facts do not lead to the conclusion there is entrepreneurship,

the intentions of the taxpayer remain irrelevant.

A taxpayer generally wants to qualify as an entrepreneur in order to obtain certain tax

facilities, like the SME-profit exemption.38 The SME-profit exemption is twelve % of the profit

after this amount is reduced with eventual other entrepreneurial tax facilities. For some of


34 The current income tax act was introduced on January 1

st 2001, the former system was introduced on January 1

st

1964.

35 Memorie van Toelichting, Lower Chamber of Parliament, 1998/99, 27 626, No. 3, p. 97.

36 Supreme Court 20 december 2000, nr. 35 941, NTFR 2001/75.

37 See section 2.4.4.1.

38 Article 3.79a PITA. In Dutch: MKB-winstvrijstelling.


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these other entrepreneurial tax facilities it is necessary to meet the hours’ threshold, which

means a taxpayer needs to spend at least 1,225 hours per year on activities for his enterprise.

For other tax facilities, the hours’ threshold is not necessary, like the investment allowance,

consisting of the small-scale allowance, the energy-saving investment allowance and the

environmental-friendly investment allowance.39 The small-scale allowance applies to

investments from €2,200 up to €300,000. The higher the amount of the investment the smaller

the allowance will be. The energy-saving investment allowance applies to energy efficient

investments from €2,200 and amounts to 44% if the investment made. The environmental-

friendly investment allowance applies to environmental friendly investments from €2,200 and

varies from 13,5% up to 36%.

As the above mentioned implies, when an investment is made purely for the sake of the

business, the income derived from the obtained capital, including capital gains, are taxed in box

1 as income from entrepreneurship and not in box 3 as income from savings and investments.

When it is not clear whether certain capital is considered to be private capital that should be

taxed in box 3 or business capital that should be taxed in box 1, the taxpayer can chose in

reasonableness how he qualifies the capital.40

2.4.3.1 Limited partnerships and profit dependent loans

Different sources of entrepreneurial income are income from limited partnerships (LP’s)41 and

profit dependent loans. With these types of entrepreneurial income the line between investing

and carrying out an actual business becomes vaguer. Before the introduction of the Income Tax

Act 2001, the LP’s were used by taxpayers who were investors in economical sense, but wanted

to obtain the entrepreneurial tax facilities.42 These constructions were one of the reasons the

‘new’ definition of entrepreneur was introduced.43 Now, in principle, a limited partner will not

39 Articles 3.40 to 3.42a PITA.

40 Supreme Court, 7 October 1953, No. 11 383, BNB 1853/272 and 29 September 1954, No. 11 887, BNB 1954/313.

41 In Dutch: Commanditaire Vennootschap.

42 G.T.K. Meussen, “De commanditaire vennoot in de Wet inkomstenbelasting 2001, WFR 2000, p. 389-399 and

M.L.M. van Kempen, “Verbondenheid en ondernemerschap van commanditaire vennoten”, NTFR 2004/151. 43

See section 2.4.3.


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qualify as an entrepreneur, but if the LP carries out a business and the taxpayer receives profits

this will be taxed in box 1. However, he will not obtain all the tax facilities, just the investment

related business facilities (free depreciation and investment allowance), but not the

entrepreneurial tax facilities (self-employed persons’ allowance, research and development

deduction, working partners’ deduction, disabled starters allowance and cessation of business

allowance). If the LP owns only portfolio investments (real estate, stocks, savings etcetera), the

income derived from it is taxed in box 3 as income from savings and investments.

Another source of investment income which is taxed in box 1 is the profit dependent

loan. A taxpayer grants a loan to a company, but instead of a previously agreed upon pay back

and interest arrangement, the pay back and interest depend on the amount of profit the

company makes. However, the granting of loans to affiliated persons or companies is taxed in

box 1, though not as entrepreneurial income, but as income from other activities. This way they

do not benefit from entrepreneurial tax facilities. The income from other activities will be

discussed in the next section.

2.4.4 Results from other activities44

Taxable results from other activities are defined as the collective amount of the result from one

or more activities which cannot be defined as profit or wages.45 Income from these activities is

taxed under the rules of business profits, but it is not possible to benefit from the

entrepreneurial tax facilities. For income to qualify as a result from other activities, the income

needs to be obtained through an activity with economic value and the benefit is intended and

reasonably expected. The various ways these qualifications can be interpreted has led to much

jurisprudence with a wide range of outcomes and much discussion in literature.46 For now, the

focus will be on the relationship between results from other activities and investment income,

which is taxed in box 3. The crucial factor is making assets pay out in a way that exceeds normal

44 Articles 3.90 to 3.99b PITA.


46 Among others R.M. Freundenthal, “Resultaat uit overige werkzaamheden”, FM No. 103, Deventer: Kluwer, 2002

and H.J. Doedens, “Voordeel verwachten, voordeel beogen”, Smeetsbundel, Deventer: Kluwer, 1967, p. 117.


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asset management.47 For example selling of flats individually, to a considerable extent carrying

out large maintenance or other adaptations to a property by a taxpayer himself, the applying of

prior knowledge or comparable forms of knowledge by a taxpayer. When making assets pay out

does not exceed normal asset management, the assets are taxable in box 3 as income from

savings and investments.

2.4.4.1 Making assets available48

The legislator feared that the big difference between box 1 and box 3 could lead to

constructions where an entrepreneur does not acquire a certain asset he needs for his business

himself, but lets a connected person, for example his partner, acquire the asset which the

connected person49 then rents out to the entrepreneur.50 The benefit of this construction

would be that the entrepreneur deducts the actual rent from his progressively taxed profits and

the partner is not taxed for the actual received rent, but the asset is merely taxed for the

investment yield of 4%. Another possibility could be that a connected person makes capital

available to the taxpayer’s company at a high interest. The company deducts the actual interest

from its profit and the connected person is not taxed for the actual received interest, but the

claim is merely taxed for the investment yield of 4%. The legislator wanted to prevent these

types of box arbitrage, so making assets available was introduced as a source of income in box 1

as a part of results from other activities. Benefits arising from assets made available to the

entrepreneurship of a connected person or to the company in which a substantial interest51 is

held by the taxpayer or a connected person are taxed in box 1. Income from these activities is

now taxed within the progressive tax rate in box 1, which can get up to 52%, rather than the tax

rate of 25% in box 2 or 30% in box 3.

47 J.E.A.M. van Dijck, “Vermogensbeheer”, WFR 1976/5258, p. 141 et seq.

48 Articles 3.91 and 3.92 PITA.

49 Connected persons are the taxpayer’s partner (see section 2.2) and his minor children.

50 Memorie van Toelichting, Lower Chamber of Parliament 1998/99, 26 727, No. 3, p. 135-136.

51 See section 2.5.


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2.4.5 Home ownership

Income from home ownership is taxed in box 1 instead of box 3 as income from savings and

investments, which might seem more logical. This choice was made as a consequence of the

political debate preceding the introduction of the Income Tax Act 2001. Under the former

income tax act,52 mortgage payments were deductable and the legislator did not want that to

change. However, in recent years more and more people plea for taxation of home ownership

in box 3.53 Placing home ownership in box 3 would mean a deduction of 4% fixed interest,

instead of the actual paid interest, at a 30% rate. Now, the taxpayer’s income from home

ownership is taxed in box 1 through a fixed %age of the value of the home which is determined

by the municipality.54 Only the primary home is taxed in box 1 which is the home where the

taxpayer has its permanent principle residence.55 Other property is taxed in box 3.

Mortgage interest and other costs related to home ownership may be deducted in box 1

for a period of 30 years from the date the debt arises, which will almost always lead to negative

home ownership income. To prevent taxpayer’s from not paying off their mortgages or

negotiating unnecessary high mortgages because of tax benefits, the deduction may always be

at least the same amount as the determined income from home ownership.56 There are some

arrangements made for special situations such as divorce, moving house and taking on

additional mortgage. A second home, including any related mortgage or other debts will be

taxed in box 3,57 as well as endowment policies, but when the endowment is to be specifically

used to pay off the mortgage relating to the home it is exempt in box 1.

2.5 Income from the substantial shareholding regime (box 2)58

A substantial shareholding exists if the taxpayer, alone or together with a partner,59 is directly

52 Income Tax Act 1964.

53 E.J.W. Heithuis, “De eigenwoningwaarde in de 21

e eeuw”, WFR 2000, p. 1245-1258.

54 Article 3.112 PITA. In Dutch: waardering onroerende zaken (WOZ).


56 Memorie van Toelichting, Lower Chamber of Parliament 2003/2004, 29 209, No. 3, p. 1, 2 and 4.

57 See section 1.4.

58 Articles 4.1 to 4.53 PITA.

59 See section 1.1 for the definition of partner.


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or indirectly shareholder of at least 5% of the subscribed capital of a company whose capital is

entirely or partly divided into shares. Indirectly here means through options to buy at least 5%

of the shares, profit-sharing certificates that entitle the holder to at least 5% of the annual

profits or at least 5% of the profits upon liquidation of the company. An individual who has no

substantial shareholding himself, but whose partner or relative in the direct line60 does have a

substantial shareholding, is also treated for income tax purposes as if he had a substantial

shareholding.

In box 2 the actual income, consisting of regular income, such as dividends, and

alienation benefits are subject to tax. Costs made to obtain regular income, such as interest on

a loan to acquire shares, are deductable within the box. There is no specific definition of taxable

alienation, though it seems the situation has not changed compared to the applicable

legislation before the substantial shareholding regime was implemented in 1997. Therefore the

then going definition is assumed to still apply: i.e. taxable transactions are transactions

whereby the shares are sold to another person and legal acts according to which a part of the

entitlement to the profits of the company is alienated.61 There are also several specific events

mentioned in the income tax act that do not meet this definition, but are nevertheless

considered to be alienation, referred to as fictitious alienation. These events are:

(a) the repurchase of shares by the company;

(b) the buying of and buying in of profit-participating rights;

(c) the making available for payment of liquidation payments;

(d) becoming shareholder of another legal entity in the case of a legal merger of the company in

which the taxpayer held a substantial shareholding;

(e) the passing of a substantial shareholding under general title, such as joining of estates,

marital property law upon divorce and law of inheritance;

(f) contributing the shares to the property of an enterprise;

60 In Dutch: bloed-of aanverwanten in de rechte lijn. This group includes parents, grandparents, children,

grandchildren and their partners, but not brothers, sisters, etcetera. 61

T.A. Gladpootjes, ‘Het nieuwe aanmerkelijk belang regime’, Deventer: Kluwer, 1997, p. 38.


20

(g) no longer fulfilling the conditions for a substantial shareholding;

(h) no longer being a resident taxpayer for a reason other than death (in other words:

emigration);

(i) giving a purchase option.

These fictitious alienations can lead to a situation where taxable income can be determined,

but no cash has become available to the taxpayer. This problem is overcome by a roll-over of

tax claims in some cases and in other cases by a preserving assessment. The latter is mainly the

case when the taxpayer is not (anymore) a resident of the Netherlands, but this will be further

discussed in chapter 3. Roll-overs are allowed at the taxpayers’ request when there is alienation

under law of inheritance or gift.

When a substantial interest is alienated, the income is determined by deducting the

selling price from the purchase price. If no purchase price was paid or if the transaction was

concluded under abnormal circumstances, the economic value of the shares at the moment of

the transaction is to be used. The use if the economic value applies also if the interest in the

company was maintained, except if shares were issued. This economic value is also considered

to be the tax base for the receiving party in the transaction. The tax base can differ for

taxpayers and/or companies moving in or out of the Netherlands, which may be the “Achilles

heel” of the system in the international context.62 This issue will be further discussed in chapter

3.

The tax rate in box 2 is 25% because of the fact that received dividends or accretion of

the substantial interest has already been subjected to corporate income tax63 at a rate of

25%.64 Together this adds up to 50% which is almost the same as the highest tax rate in box 1,

being 52%. However, the costs have not been previously subjected to corporate income tax, so

it would be more logical to deduct the costs in box 1, which was the case under the 1964

62 R. Betten, “The New Income Tax Regime for Substantial Shareholder”, European Taxation, May 1997, p. 168.

63 Nader Verslag, Lower Chamber of Parliament 2003/2004, 26 626, No. 16a, p. 4-43.

64 Article 22 Corporate Income Tax Act 1969. There is a step-up in the corporate income tax rate. Up to €200.000

the rate is 20%, the surplus has a rate of 25%.


21

Income Tax Act. Nevertheless, the legislator specifically chose to keep box 2 closed.65 On the

other hand there are some possibilities to transfer to and from box 2.66 When a taxpayer has a

business interest of less than 5%, this is taxed in box 3, but will transfer to box 2 when this

business interest expends to 5% or more. In such a situation, the real value of the shares will be

regarded as their purchase price, instead of the price once paid for them. A taxable benefit

from the sale will only be deemed to exist if the value of the shares exceeds this stepped-up

purchase price. The reverse situation also applies: any surplus value of the shares will be

subject to tax once a substantial interest in a company ceases to exist, since the taxpayer will

have switched from box 2 to box 3. As there may be situations in which the shareholder does

not receive any cash at the time the shares cease to qualify as a substantial business interest,

the shareholder may opt to defer the settlement of tax until the moment of the actual sale of

the shares. In such a situation, there will be a national substantial business interest to which the

rule on income from substantial business interests will continue to apply in full. This may lead

to an increase of the future tax claim because the shares may increase in value. In this case, the

taxpayer may at any time request settlement of the tax claim on income from business interest.

The Income Tax Act 2001 does not allow for substantial business interest losses to be set

off against income tax payable on income in box 1 or box 3. Losses from substantial business

interest can only be set off in box 2 against income from such interests. This means that in

practice the options for set-off of losses are limited to a large extend.

2.6 Income from savings and investments (box 3)67

The most significant component of the Income Tax Act 2001 is the tax levied on income from

savings and investments.68 Instead of tax being levied on the income actually received, a fixed

assumed yield (or return) of 4% is calculated each year on the actual value of assets held. Actual

income is therefore no longer relevant under this assumed yield system. The assumed 4% yield

65 Nota naar aanleiding van het nader verslag, Lower Chamber of Parliament 1998/1999, 26 727, No. 17, blz. 107-

108. 66

G.T.K. Meussen, “Income tax act 2001”, European Taxation, November 2000, p. 494-495. 67

Articles 5.1 to 5.23 Income Tax Act 2001. 68

G.T.K. Meussen, “Income tax act 2001”, European Taxation, November 2000, p. 496-497.


22

is taxed at a flat rate of 30%, which means that the tax levied on income from savings and

investments is effectively 1.2% on the actual value of assets held. In addition, there is no

rebuttal arrangement (whereby the assumed yield is adjusted on the basis of actual yield). If

the actual yield exceeds the assumed 4% yield, the excess is not taxed. Similarly, if a lower yield

is earned, the assumed 4% yield nevertheless applies. However, there is an individual tax free

allowance of € 20,785, for partners a double allowance applies. This allowance may also be

supplemented by € 2,779 for each minor child and up to € 27,516 per person for senior

citizens69 if their assets are no more than € 275,032 and their income from work and home

ownership is no more than € 19,562.

The tax is levied on the actual value of assets held, which is called the yield assessment

base. The yield assessment base used to be the average of the balance of assets and debts on

two dates, January 1st and December 31st. Since January 1st 2011 only January 1st applies as

assessment date70. To the extent that they do not generate income under box 1 and box 2, such

assets include real estate and rights attached to real estate, movable property to the extent

that it is not for personal use or consumption or it is for personal use or consumption, but held

primarily as an investment and any rights attached to movable property, rights not relating to

property, such as shares or saving accounts to the extent they are not included in box 1 or box 2

and other rights attached to assets. Not included in the yield assessment base are forestry and

nature reserves, works of art and science, legal rights such as the right to use moveable

property arising from inheritance, life insurance policies, though under certain conditions and

income arising from employee savings schemes up to a maximum of € 17,025. The not including

of these assets ends when they are primarily held for investment purposes.

The main valuation rule is that taxable for the investment yield tax is the fair market

value of assets and debts at the beginning of the calendar year. However, the value under the

69 A senior citizen is 65 or older.

70 The Dutch legislator is trying to switch to a tax return system whereby the tax returns are prefilled (as much as

possible) and only need to be checked for correctness by an individual taxpayer. By introducing only one assessment date, the prefilling of the tax return of box 3 can already start after January

1

st of an assessment year

instead of waiting until after December 31st

to do so.


23

Valuation of Immovable Property Act71 applies to homes which are to a large extent available to

the taxpayer.72 This relates mainly to second homes and holiday homes. To fully let homes a

special arrangement applies73 that considers a decrease in market value of property that is

rented out to individual tenants who are protected by tenant legislation.74

2.7 Background of the Dutch income tax system75

2.7.1 Introduction

As its name leads one to expect, the Income Tax Act 2001 has been into force since January 1st

2001. One of the main reasons was that in the old Income Tax Act evasion of the net wealth tax

was relatively easy.76 If nothing was paid out, there was no base for taxation. People would

invest in financial products that retained profits, but increased in value. This increase in value

was untaxed, because there was no capital gains taxation. The main objectives of the Income

Tax Act 2001 were:77

- improvement of the structure of tax rates in the income tax;

- introduction of an investment yield tax on savings and investment;

- a shift from direct to indirect taxes;

- “greening” of taxes;

- a balanced and fair division of the burden of taxation and social contributions; and

- a streamlining of the tax aspects of retirement provisions.

In the upcoming sections an attempt will be made to describe the ideas and

considerations that led to the introduction of the Income Tax Act 2001. Because box 3 is the

most peculiar change, this will be the first thing to discuss. After that the background of the

71 In Dutch: Wet waardering onroerende zaken (WOZ); the WOZ-value.

72 To a large extent here means for a minimum of 30%.

73 Article 17a Implementing Decree Personal Income Tax (in Dutch: uitvoeringsbesluit inkomstenbelasting).

74 In Dutch: huurrecht.

75 Memorie van Toelichting, Lower Chamber of Parliament 1998/1999, 26 727, No. 3.

76 L.W. Sillevis and M.L.M. van Kempen, ´Cursus Belastingrecht´, Deventer: Kluwer, 2010, section 5.0.3.

77 Memorie van Toelichting, Lower Chamber of Parliament 1998/99, 26 727, No. 3, p. 7.


24

substantial shareholder regime of box 2 will be described. Most of the considerations worth

mentioning about box 1 have already been discussed in section 2.4, therefore no extra

attention will be given to box 1 in this chapter.

2.7.2 Box 3

According to the Income Tax Act 1964 regular income from personal capital such as interest,

dividend and rent were taxed, but the capital gains were not. This had the effect that taxpayers

attempted to enjoy capital income in the form of untaxed capital gains. As a consequence of

the high amount of investment types which were offered based on the untaxed capital gains,

the then going progressive rate on capital income could easily be avoided. This form of

undesirable tax avoidance increases when such types of investment are financed with loans,

since the interest corresponding with those loans was fully deductable. In practice this meant

that the just mentioned form of ‘tax saving’ was not considered as unacceptable by society, but

more as sensible.78 Another factor that contributed to this was that the progressive rate of

especially interests on savings, were often considered to be unreasonably harsh.

Especially the mobility of capital in an increasingly international oriented society makes

change of regulations when it comes to taxing income from savings and investments

necessary.79 Within this framework was searched for a more integrated approach of taxation of

capital and the thereby to gain income for the treasury. Several aspects in particular have been

taken into account.80 The taxation system needed to support an efficient functioning of capital

markets. Furthermore the tax system could not be in itself a variable that determines the

choice for certain investments within this system. At the same time it needed to stimulate

when it comes to the durable development of the economy. Also the European developments,

for example in the matter of source taxation, needed to be explicitly expressed in the result and

design. With these aspects in mind was searched for a direction that did not only solve the

problems around the taxation on capital income, but at the same time made a durable system





25

possible that could sustain the 21st century. With the proposed system of an investment yield

tax a new basis was put down that fits within the signaled and expected trends and

developments. The broadening of the tax base in combination with the box approach makes

that the ability-to-pay principle will be better represented. It further provides the necessary

means for a tax rate decrease for the capital income as well as in the general rate structure.

With a subjective approach of capital income will no longer be looked at the size of the

taxable benefit from the capital, but from the taxpayer himself. The substantial shareholding

regime already contains subjective elements, for example when a substantial shareholding is

alienated, the tax base is determined by looking at the selling price the taxpayer received.

Through further subjectification the income concept could be stretched in a way that all

foreseeable benefits can be involved in taxation. Subjectification therefore offers a solution for

part of the issue where the tax boundaries were explored more and sometimes even crossed.

The starting point to involve all foreseeable value mutations in taxation can lead to complicated

and sometimes seemingly unreasonable outcomes. Especially in the execution this can lead to

discussion. For example changes in interest rates that can lead to a foreseeable benefit, which

is involved in taxation, can go together, in the event of an interim sale, with a nun-deductable

capital loss. Subjectification does not lead to a structural and comprehensive solution; the basic

conception that underlies the objective system remains intact. This implies that non-

foreseeable benefits that can be seen as profit from an economic perspective, like realized

capital mutations on shares of property, including those with a speculative character, cannot be

involved in taxation even after subjectification. Because of this, further subjectification does

not have the legislator’s preference.81

Another alternative that was considered was to involve income from savings and

investments through a capital gains approach in taxation. From a fiscal-theoretical point of view

many point out that the system of box 3 does not meet the ability to pay principle, because



26

economic capital profit that is included in the base is not actually involved in the income tax.82

According to them redesigning of regular income, like interest, rent or dividend into untaxed

capital gains does not lead to tax avoidance but to tax postponement. The legislator’s reaction

is that it is noted that the ability to pay principle as outcome of the striving to fairness and

equality is a valuable orientation in the construction and design of a tax system.83 However,

that does not mean this orientation should per definition implicate the introduction of a capital

gains tax instead of a capital accrual tax. To the legislator theoretical concepts are important,

but not per se decisive. The general starting point of a capital gains approach can be designed in

various ways. An important choice to make is on which moment capital results need to be

settled. On the one hand there is the option to connect with the moment of actual alienation of

capital. In that case it can remain attractive to let (a part of) the profit be expressed through a

value increase of the underlying capital. Thereby postponement of taxation could be achieved,

because pay off is due at the moment of actual alienation. Taxpayers will be inclined, giving the

tax consequences, to postpone profit taking as long as possible and present possible losses a

soon as possible. On the other hand, theoretically could be chosen to involve capital results in

taxation annually, even though these results have not been realized yet. This way the capital

gains tax would get the character of a capital accrual tax. The before mentioned postponement

of profits would not happen anymore. However, the taxation of capital accrual can lead to

liquidity problems for a taxpayer. The idea that the taxable capital accrual (or loss) can easily be

measured by measuring the difference in capital between the beginning and the end of a

capital year is not shared by the legislator.84 Such approach cannot be seen apart from an in

parts detailed correction on withdrawals and deposits on the capital which have taken place

throughout the year. Such corrections lead to this seemingly simple capital equation become

very difficult to execute. Combine this with the fact that a capital gains tax has relative small

82 Among others: S. Cnossen and A.L. Bovenberg, “Vermogensrendementsheffing vondst of miskleun”, WFR

2000/6369, p. 8, J.E.A.M. van Dijck, “Vermogensrendementsheffing”, WFR 1999/6342, p. 705-706, F.R. Herreveld, “Vermogensrendementsheffing”, WFR 1999/6362, p. 1526. 83

Memorie van Toelichting, Lower Chamber of Parliament 1998/1999, 26 727, No. 3, p. 292. 84

Memorie van Toelichting, Lower Chamber of Parliament 1998/1999, 26 727, No. 3, p. 293.


27

and unstable proceeds, leads to the legislator’s conclusion that implementing a capital profit

tax does not offer enough perspective.

An investment yield offers the possibility to determine the range of the taxable income.

A choice is to be made between a small or a broad tax base.85 A broad base assumes that all

capital which can generate income should fall under the range of the investment yield. The

small base on the other hand assumes that for certain categories of capital the investment yield

will only apply for categories of capital of which the income is difficult to include in taxation.

The downside of an investment yield on a small base however, is that there will be a strong

dichotomy within the income from capital. On the one hand there is capital of which the

income is determined through an investment yield and on the other hand capital of which the

actual income will be involved in the taxation. Therefore was chosen for an investment yield on

a broad base.86

2.7.3 Box 2

The tax treatment of income from substantial business interests changed dramatically from 1

January 1997. As of this date, not only capital gains on shares belonging to a substantial interest

are characterized as profits from substantial business interests, but so is the regular income,

such as dividends. There were several reasons for the reform.87 The main one was the gigantic

difference between the tax rates on dividends88 and the rates on capital gains realized on the

alienation of a substantial shareholding.89 Also, capital gains on the alienation of other property

were not subject to income tax at all at that time. Taxpayers had many routes available to

reduce their income tax liability on income from, and profits from the alienation of, substantial

shareholdings: e.g. by converting dividends into capital gains and avoiding having a substantial

shareholding at all. Moreover, the tax base of the shares was deemed to be no less than the

average paid-in capital. This fact was often referred to as an objective element. As a



87 Rijkele Betten, ‘The New Income Tax Regime for Substantial Shareholders’, European Taxation, May 1997, p. 165.

88 The tax rate on dividends was a maximum of 60%.

89 The tax rate on the alienation of a substantial shareholding was 20%.


28

consequence, the historic price paid by the shareholder (i.e. his subjective cost price) played no

role if it was less than the average paid-in capital. In addition, there were two other tax rates

for specific income from a substantial shareholding: a 45% tax rate applied to the repurchase of

its own shares by the company, and in certain cases of recapitalization a 10% rate was available.

Another important factor was that in 1990 the Supreme Court90 began developing case

law on constructions used to realize retained profits while maintaining the entire, or virtually

entire, interest in the enterprise of the company, against the capital gains rate of 20% rather

than against the progressive tax rates that apply to dividends.91 According to this case law, the

tax rate to be applied in many of these cases was 45%. In several tax treaty cases the Supreme

Court decided92 that the Netherlands was not allowed to apply the 45% rate to non-resident

individual taxpayers in transactions which if they had taken place in a domestic context would

have been subject to tax.

Finally, strategies were developed whereby individuals would buy bankrupt companies

with a considerable share capital and/or practically worthless debt-claims93 and then develop

income-generating activities in that company. Eventually the retained profits could be received

tax free by repaying the debt-claims and reducing the share capital (possibly after first

converting the nominal value of the debt-claim into the same nominal amount of share capital).

These consequences were generally accepted by the Supreme Court94 because they connected

with the objective character of the Netherlands system of taxing income from companies.

The new system solves many of the above mentioned problems. One unchanged

element was that shareholdings not constituting a substantial shareholding were taxed as they

were prior to 1997: dividends for non-substantial shareholders were still subject to income tax

at a maximum of 60% and capital gains on the alienation of such shares remain tax free. Under

90 In Dutch: Hoge Raad.

91 See 88.

92 Supreme Court 15 December 1993, No. 29 296, BNB, 1996/259 and Supreme Court 29 June 1994, No. 28 734,

BNB, 1994/294. 93

In Dutch: turbovennootschappen or in English: turbo companies. 94

Supreme Court 18 October 1995, No. 30 643, BNB 1996/189.


29

the Income Tax Act 2001 this problem is partly solved with the introduction of box 3, because

non-substantial shareholdings are now subject to income tax, though through the assumed

investment yield of 4% and a tax rate of 30%. Alienation however remains tax free, but it is said

that this is indirectly taxed, because the profits from the alienation will be put on a bank

account, which value is taxed in box 3. The rest of the relatively new substantial shareholding

system has been largely left intact. The original proposals for the Income Tax Act 200195

included an increase of the tax rate for substantial business interests to 30%, but in the end the

tax rate has been maintained at 25%.

2.8 Conclusion

The Dutch personal income tax system consists of three boxes. Box 1: income from work and

home ownership, box 2: income from the substantial shareholding regime and box 3: income

from savings and investments. Each box has its own tax regime and tax rate, respectively these

tax rates are a progressive rate up to 52%, 25% and 30%. At first glance it seems that

considering the topic of this master thesis, taxation of investment income of individuals, it

would suffice to take a look at box 2 and 3. However, in order to prevent box arbitrage by

making sure some types of income fall in a box with a more favorable regime and rate than

wanted by the legislator, types of investment income are taxed in box 1 under certain

circumstances.

The most striking aspect of the Dutch personal income tax is box 3, because here taxes

are levied on an assumed investment yield of 4%. To prevent capital flight was chosen for a

separate (lower) taxation of income from savings and investments. From efficiency point of

view the legislator came up with the 4% assumed investment yield. The legislator decided it

would be too difficult to determine the actual generated income in box 3. However, questions

are raised whether this is true, because in order to calculate the 4% assumed investment yield,

something to calculate it from is necessary, so taxpayers need to declare the value of their

95 Belastingen in de 21

e eeuw; een verkenning, Lower Chamber of Parliament 1997/1998, 25 810, No. 2.


30

assets in box 3 anyway.

Another benefit of the box 3 system is the consistent revenue for the treasury. When

considering the economic and financial crisis, box 3 softened the blow a bit, because box 3

cannot result in a refund, because negative income can only be set-off against positive income.

Chapter 3: International aspects of the Dutch income tax system

3.1 Introduction

In this chapter the international aspects of the Dutch PITA will be discussed. An answer will be

given to the question how the Netherlands treat non-residents with Dutch sourced income

(section 3.2). In the Netherlands, a non-resident with Dutch sourced income has the option to

opt to be treated as a resident taxpayer. This will the discussed next (section 3.3). After that the

treatment of resident taxpayers with foreign income and how double taxation is avoided in this

case will be described (section 3.4). Finally, the international aspects of the assumed

investment yield will be evaluated (section 3.5), since this is such a ‘strange’ way of taxing

investment income.


31

3.2 Non-resident tax-liability

A non-resident of the Netherlands becomes liable to tax in the Netherlands when he starts to

enjoy certain types of income from the Netherlands.96 Non-resident taxpayers will be taxed on

the basis of a scheduler system.97 This comes down to income from work and home ownership

in the Netherlands (box 1),98 income from a substantial shareholding in a company residing in

the Netherlands (box 2)99 and income from savings and investments in the Netherlands (box

3).100 Non-resident taxpayers will not be entitled to the income tax credit, levy rebates and

personal deductions unless they opt for treatment as resident taxpayers.101 This can be

different if so agreed upon by a convention102 or in the case of the Netherlands Antilles and

Aruba due to the tax regulation for the Kingdom of the Netherlands.103 When a non-resident

taxpayer is a resident of a state with which a convention for the avoidance of double taxation

was signed, the non-resident tax liability as described in the income tax act only applies if the

convention appoints the taxation rights to the Netherlands. If the convention appoints taxation

rights to the Netherlands, but under the income tax act the income is not subjected to Dutch

taxation, than the income remains untaxed.

3.3 Option for non-resident to be taxed as a resident taxpayer

The Income Tax Act contains an option for non-residents to be taxed as resident taxpayers.104

This option means that residents of other EU Member States and residents of countries having

a tax treaty with the Netherlands, containing an exchange of information provision, may opt to

be treated as residents of the Netherlands for tax purposes. If they opt for treatment as

resident taxpayers, they will be eligible for income tax credits, levy rebates and personal

deductions. Non-resident taxpayers choosing this option will nevertheless remain liable to tax

in their resident state.105 On the other hand, he will be taxed for his worldwide income and

96 C. van Raad, “Begrensd Territoir”, FED 1997/190, p. 784-787.





101 See section 3.3.

102 This is the case for Belgium, Germany and Suriname.

103 In Dutch: Belastingregeling voor het koninkrijk (BRK).

104 Article 2.5 Income Tax Act 2001.

105M.J. Feskens and F.A. Engelend, “Internationale aspecten van de Belastingherziening 2001, onderdeel 6”, WFR

1999/6362, p. 1505-1523. It is ofcourse also possible to to be liable to tax in a different state if there is another source state.


32

receive a credit for the tax due in (an)other state(s). An arrangement has been made to prevent

double taxation from occurring when a non-resident has opted to be treated as a resident

taxpayer,106 which is similar to the arrangements made in the Dutch Double Taxation Decree.107

To prevent abuse the option is not applicable in situations where a taxpayer is subject to

tax upon emigration. Substantial shareholders and persons entitled to pensions or annuities are

among those who would fall within this category. Another anti-abuse provision provides that

amounts deducted over the past eight years can be reclaimed if the taxpayer no longer

exercises this option, such as interest payments on the mortgage for a taxpayer’s principal

dwelling abroad and losses incurred in a non-Netherlands business. However, personal

allowances will not be reclaimed and neither will tax credits or deductions to which non-

residents are also entitled. The deductions will be reclaimed for the year preceding the year in

which the option is no longer exercised.

Worth mentioning here is that there is a lot of discussion in literature whether or not

this option to be considered a resident taxpayer is in line with European law, particularly the

fact that certain deductions can be taken back when a taxpayer stops opting to be treated as a

resident taxpayer.108

3.4 Avoidance of double taxation

The Netherlands have a unilateral decree109 to arrange the avoidance of double taxation for

their residents, insofar this is not arranged in a different way, for example through a tax

treaty.110 If there is a tax treaty in place, of course the in the tax treaty described method for

avoidance of double taxation needs to be used. The avoidance of double taxation will be

106 Articles 2 to 10 Uitvoeringsbesluit IB 2001.

107 In Dutch: Besluit voorkoming dubbele belasting (BVDB).

108 Amongst others: B Opmeer, “zwaar weer voor de keuzeregeling voor binnenlandse belastingplicht”, MBB

2009/2, p. 83-84 and B Opmeer, “Dwingt ‘De Groot’ de wetgever de keuzeregeling voor binnenlandse belastingplicht te heroverwegen?”, MBB 2003/9, p. 270-278 and B Opmeer, “De keuzeregeling voor binnenlandse belastingplicht: innovatie of gevaarlijke noviteit?”, MBB 2002/10, p. 268-282 and H.T.P.M. van den Hurk and F.P.G. Pötgens, “Europeesrechtelijke aspecten van de keuze voor binnenlandse belastingplicht in de Wet IB ’01”, Internationaal Belasting Bulletin, 1999/5, P. 1-6. 109

Netherlands Double Taxation Decree 2001 (NDTD). In Dutch: Besluit voorkoming dubbele belasting 2001 (BVDB). 110

Often tax treaties in which the Netherlands is a contacting state refer to the methods used in the NDTD.


33

calculated separately for each box. A resident taxpayer is exempt for income tax on foreign

income from work and home ownership (box 1).111 This exemption will be applied separately

for income from every different state by a decrease on the payable tax. The decrease is applied

at the same ratio to the payable tax as the foreign income has to the total income in box 1,112

but the decrease cannot be more than the national tax due. A resident taxpayer receives a

credit for tax paid in a different state on dividends from the substantial shareholders regime

(box 2). The credit is either the tax levied in the other state or the same ratio of foreign income

to the total income in box 2 as the foreign tax due to the total payable tax. The lowest amount

of these two methods applies.113 For the income from savings and investments (box 3) different

regimes apply depending on the type of income. The first system is for foreign tax levied on

interests, royalties and dividends, which is compensated through a tax credit on the income tax

due in box 3, however no more than 15% of the received interests, royalties and dividends.114

The second system is for the other sources of income that can occur in box 3, for example

capital gains from foreign property. For these sources of income, an exemption applies. Again

the earlier mentioned ratio applies here for the income in box 3.115

3.5 Assumed investment yield tax in an international perspective116

Under the Income Tax Act 2001 fictitious income from capital is taxed at a rate of 30% on an

assumed yield of 4%. In other words, the tax base is no longer income that has been actually

earned. A crucial question was how such a tax would be characterized for purposes of the

Netherlands’ tax treaties. The tax must be a tax on income or capital within the definition of

111 Article 8 NDTD.

112 Article 10 NDTD.




116 M.J. Feskens and F.A. Engelen, ‘Internationale aspecten van de belastingherziening 2001, Weekblad, 1999/6362,

p. 1521.


34

Article 2(1) of the OECD Model Convention.117 During the parliamentary debate, the Under-

Minister explained that the fact that fictitious income from capital was taxed did not affect the

nature of the tax – it is still a type of income tax.118 He added the new tax involved nothing

more than the taxation of income from capital on the basis of a fixed rate. Consequently, the

Under-Minister believed that the assumed yield might be classified under ‘income’ as referred

to in Article 2(1) of the OECD Model. However, according to Article 3(2) of the OECD Model, this

term must be interpreted in accordance with its meaning under domestic law (the Income Tax

Act 2001), unless the context otherwise requires. And, under the Income Tax Act 2001, a

taxpayer’s income from savings and investments is his return on these savings and investments.

For both resident and non-resident taxpayers, this income has been deemed to be 4% of the

average yield base.119

Some of the tax treaties concluded by the Netherlands do not apply to taxes on capital,

usually because the other state does not have such taxes. This means that these treaty partners

are not required to grant their residents relief for the Dutch assumed investment yield tax and

double taxation will result. Obviously, the Dutch assumed investment yield tax will affect non-

resident taxpayers in only a limited number of cases, with immovable property owned by non-

residents being the most common category.120 The other category relates to profit-sharing

rights that do not fall in box 1 or box 2.

3.6 Conclusion

In the Netherlands non-residents are taxed when there are certain sources of income derived

from the Netherlands. This can be different an agreed upon tax treaty states otherwise. Like for

117 M.J. Feskens and F.A. Engelen, ‘Internationale aspecten van de belastingherziening 2001, Weekblad, 1999/6362,

p. 1521 and M.J. Ellis, ‘Enige internationale kanttekeningen bij het ontwerp van de Wet Inkomstenbelasting 2001’, MBB, 1999, No. 10/11, p. 396. 118

Nota naar aanleiding van het verslag, Upper Chamber of Parliament, No. 202c, p. 1040 and Memorie van Toelichting, 26 272, No. 3, p. 40-42. 119 The Supreme Court (BNB 2007/68) has supported this argumentation: the income tax levied on taxable income

from savings and investments (box 3) must, for the application of a treaty, be considered as a taxation of income. 120

M.J. Feskens and F.A. Engelen, ‘Internationale aspecten van de belastingherziening 2001, Weekblad, 1999/6362, p. 1521.


35

residents, the income for non-residents is determined per box. However, non-residents are not

entitled to income tax credits, levy rebates and personal deductions. This is different when a

non-resident taxpayer opts to be treated as a resident taxpayer. This choice can be made each

year, however, when a non-resident stops opting to be treated as a resident taxpayer, the tax

deductions he received over the past eight years can be reclaimed, with the exception of

deductions every non-resident taxpayer receives even though he did not opt to be treated as a

resident taxpayer.

Avoidance of double taxation is primarily arranged through tax treaties. When

avoidance of double taxation is not regulated in any way, the Netherlands have a unilateral

decree in place. Avoidance of double taxation is also calculated per box and the unilateral

decree describes the methods of avoidance that need to be used.

Finally there is the issue of the assumed investment yield of box 3. It has a lot of the

characteristics of a wealth tax. The problem is that a lot of tax treaties and conventions treat

wealth taxes differently from income taxes. After much discussion it was decided that box 3

should be considered an income tax.


36

Chapter 4: Comparing various tax systems

4.1 Introduction

Taxes have been present since the start of civilization. Publio Cornelio Tácito already pointed

the necessity of taxes out in 55 B.C.: “Neither can the quiet of nations be maintained without

armies, nor armies can be maintained without salaries, nor salaries without taxation.”

Today taxation has an enormous role in countries’ economies, and it is essential for the

economic sufficiency of countries to pay for the Welfare state. The expenses are shared by

citizens in countries according to their personal situation, and thereby making the system as fair

as possible. This is one of the main issues in every tax system and because of that the principle

of equality is examined later.121

Individuals can receive income from diverse sources. The intention of the topic of this

master thesis is to describe and analyze the treatment of investment income in the different

taxation systems. Every country has their particular way to treat personal income taxes,

however the tax systems can be divided in two main systems; the comprehensive system and

(some form of) the scheduler system.122 Hungary, as one of the Eucotax-Wintercourse

participating countries, has recently introduced an almost pure scheduler system.123 However,

in the past years the development rather tends to go towards the scheduler subgroups, being

the dual income tax system and the box system. In this master thesis, the systems are analyzed

to find the advantages and disadvantages that arise in each of them.

The comprehensive system is the tax system that fulfils the principle of equality the best,

but on the other hand, the scheduler system through the dual income tax system and the box

system, seeks to be more efficient and neutral even though it moves away from the traditional

frameworks of the principle of equality.

121 See chapter 6.

122 The Netherlands are quite unusual with their box system.

123 See annex 1.


37

Another fact that one must be bear in mind is that capital is mobile and that it has a

natural tendency to be reallocated to places where taxation is more favourable.124 Furthermore,

the European principle of free movement of capital and the availability of information means

private investors can invest their savings wherever they see fit and in particular where the

taxation is more favourable.

To adapt to these circumstances, numerous countries have already reformed their

personal income tax system. In a context of tax competition investments are encouraged, along

with risk taking and entrepreneurship. When comparing the different systems of the

participating countries125, several conclusions can be drawn which will be discussed in the end

of this master thesis.

4.2 Comprehensive income tax system

A comprehensive income tax system taxes all incomes from whatever source derived, that

accrue to the same taxpayer as a single mass of income.126 In other words it taxes the accretion

of economic spending power rather than the use of such opportunities.127 Such a system

accordingly adopts a broad definition of income which would typically include current

consumption and the current addition to the taxpayer’s net capital worth. In this sense income

may be said to provide the most comprehensive measure of the taxpayer’s ability to pay.

However, under a true comprehensive income tax system all personal deductions would be

disallowed. Such a system would imply that a gift or inheritance would be subjected to income

tax in the hands of the beneficiary. Such a system may be considered to promote horizontal

equity in that all income is taxed the same irrespective of the form it takes128 and the reduction

of tax avoidance since a single tax rate applies to all types of income.

124 M. Cozian & F. Deboissy, Précis de fiscalité des entreprises, éd. Litec, 2009/2010 P.174.

125 Eucotax-Wintercourse 2011, Rome. Participating countries: Austria, Belgium, France, Germany, Hungary, Italy,

Poland, Spain, Sweden, the Netherlands and USA. 126

S.R.F. Plasschaert, ´schedular and global systems of income taxation; the equity dimension´, Antwerpen: Centrum Derde Wereld, Universitaire faculteiten St. Ignatius, 1986. 127

Report of the Royal Comission on Taxation, Ottawa: Queen’s Printer, 1966. 128

Report of the Royal Comission on Taxation, Ottawa: Queen’s Printer, 1966.


38

Along with the USA, Austria, France and Italy use this tax system.129 In practice however,

none of the above mentioned countries have fully implemented a pure comprehensive

personal income tax system.130 All countries have special tax treatments for certain types of

income131 and many countries levy social security contributions only on certain types of

income.132 This lack of neutrality, in turn, increases the compliance and administrative costs,

reduces tax compliance and tax revenues and impairs the efficiency and equity of the tax

system.133

As a result of such a semi- comprehensive tax system, tax-arbitrage possibilities are

available to individuals who make use of differences in tax rules and rates and of tax

exemptions and allowances. Further, the progressive taxation of realized gains exacerbates

lock-in effect,134 because the taxpayer may be pushed into a higher tax bracket in the year of

realization.135

On the other hand in a comprehensive tax system, since all income is treated in the

same way, people would try to shift their income to corporate rates and thereby receiving

better tax treatment.

4.3 Dual income tax system

Under a dual income tax system136 the taxpayer’s income is split in two categories: income from

capital and income from labor, and subjected to different regimes. Typically, income from

capital is taxed at a proportional rate and income from labor taxed at a progressive rate. In this

system dividends are taxed only once.

The objective of the dual tax system is to increase efficiency through neutrality and

129 See annex 1.

130 See annex 1.

131 For example fringe benefits, owner-occupied housing, capital gains, pensions etcetera.

132 Mainly on labor income.

133 OECD Policy Brief, Reforming Personal Income Tax (2006).

134 Lock-in effect occurs when a taxpayer holds on to his assets in order to avoid generating taxable capital gains.

135 P.B. Sørensen, Dual Income tax System: Nordic system, p.7.

136 L. Mutén e.a., `Towards a dual income tax?: Scandinavian and Austrian experiences`, London: Kluwer Law

International, 1996 and S. Cnossen, `Dual income taxation: the Nordic experience`, Rotterdam: Erasmus University, 1997.


39

simplicity. Neutrality is shown in different ways, for example the system avoids the lock-in

effects137 and the clientele effects138 connected to the use of progressive rates. However, if for

the taxation capital gains the realization principle is used, as it usually does, lock-in effects due

to this will hamper the reallocation of capital towards more productive uses.139

The lower tax rate on capital reduces incentives for capital flight, tax avoidance and

evasion. The system also achieves horizontal equity within each of the categories, however

there is a discussion in tax literature whether a dual income tax is in conformity with the

principle of equality. The mix of the individuals’ income categories will make the individuals’

taxation different depending on the origin of the income. This is seen as an incentive to shift

labor income to the lower taxed category of capital income, rendering complex special

legislations to prevent such a shift.

Furthermore, this difference of treatment can lead to tax arbitrage. This can be

described as deliberately exploiting the taxation differences within the tax system or between

different countries’ tax systems.140 Treating all the investment income the same way reduces

the scope for tax arbitrage within a country.141

4.4 Schedular income tax system

Another income tax system is the schedular system. Schedular taxation142 is a tax system under

which income is divided into different categories or “sources”, each source being subject to its

own computation rules and, in some cases, tax rates. Schedular tax systems have their origins in

the United Kingdom in the nineteenth century when, to protect the confidentiality of a

taxpayer’s affairs, income arising under the various schedules was separately assessed by

137 See 134.

138 Under a progressive capital income tax investors in high-income brackets may choose to specialize in holding

assets whose returns accrue in tax-favoured form (e.g. in the form of capital gains benefiting from tax deferral). Since the productivity of assets may depend on who owns them, such tax distortions to ownership patterns may be undesirable. A switch to proportional capital income taxation will reduce such distortions. 139

P.B. Sørensen, Dual Income tax System: Nordic system, p. 7. 140

Tulio Rosembuj, Ed. El fisco, La crisis financiera y el arbitraje fiscal internacional, p. 26. 141

P.B. Sørensen, Dual Income tax System: Nordic system, p. 7. 142

S.R.F. Plasschaert, `The suitability of schedular, global and dualistic patterns of income taxation: with particular reference to LDC's`, Antwerpen: Centrum Derde Wereld, Universitaire faculteiten St. Ignatius, 1986.


40

different inspectors. The term “schedular” refers to the legislative “schedules” which originally

contained the separate rules for each category. A distinction is commonly made under such

systems between income from labor (i.e. business income or employment income) and income

from capital (i.e. investment income). Modern schedular tax systems are generally applicable in

combination with a complementary tax which is imposed on the total amount of an individual’s

income. In practice, schedular tax systems in their pure form rarely occur today.143 It is

becoming increasingly common for countries to incorporate features of a schedular tax system

into their taxation structure in order to differentiate the tax burden between different types of

income. This may also be used as a means of partially or wholly relieving double taxation. In its

most extreme form, where income of a particular category is subject to tax at a zero rate, a

schedular approach is equivalent to the exemption method for relieving double taxation.144

Mainly two problems are characteristic for a schedular taxation system. First, tax rates

and computing rules may differ between schedules, therefore taxpayers try to manipulate the

character of their income to fit into a more favorable schedule. This also gives administrational

consequences in the classification of the different schedules. Second, it is hard to implement a

progressive scale on the ability-to-pay principle since the tax is imposed separately on the

income of each schedule rather than on the total income.145

4.5 Classification of the Dutch system

In the Netherlands was chosen for a box system to tax personal income. This taxation

system has aspects of a dual tax system, because of the separate taxation of capital gains. In

addition, the box system also has aspects of a schedular tax system, because of another

separate source of income with its own regime, in the case of the Netherlands, the substantial

shareholders regime. The idea of a box system developed from wanting a more effective

143 S.R.F. Plasschaert, `The suitability of schedular, global and dualistic patterns of income taxation: with particular

reference to LDC's`, Antwerpen: Centrum Derde Wereld, Universitaire faculteiten St. Ignatius, 1986. 144

S.R.F. Plasschaert, `schedular, global and dualistic patterns of income`, Amsterdam: IBFD, 1988. 145

H.J. Ault and B.J. Arnold, (Principal authors)., ”Comparative Income Taxation: A Structural Analysis”, Second edition, Boston College Law School, 2004 Kluwer Law International p. 167.


41

system to tax capital gains, because tax avoidance occurred at a large scale in the past,146 so the

system of box 3 was developed. The substantial shareholding regime was introduced in 1997

and was working properly,147 so the legislator did not want to let this regime go.148 The result

was that a different box needed to be created for the substantial shareholding regime, which

became box 2. The remaining sources of income were then joined in box 1.

4.6 Conclusion

When comparing the different tax systems that are used in Europe, a clear trend that can be

identified is as follows. Earlier the majority of the European countries adopted the

comprehensive tax system of which the underlining values are the principle of equality together

with the redistribution of wealth. Since the 1990’s, with the introduction of the dual income

tax system in the Nordic countries, the trend seems to go towards increased efficiency at the

cost of equality.

The principle of equality is recognized in the constitutions of most of the participating

countries.149 However, solemnly in a minority of these countries the taxpayers have the

possibility to take legal action against tax provisions on the ground that the provisions violate

the principle of equality.150 Nevertheless, the success rate to challenge the compatibility of a

tax provision with regard to the constitutional right to equality is very low.

Interesting to point out is that in the Netherlands, where the principle of equality could

be considered to be least respected due to the taxation of investment income at an imputed

rate of return of the box 3 assets, no such constitutional right is provided. The box system

however seems to meet the requirements to manage efficiency.

Where equality is a fundamental principle in a comprehensive system, its importance is

less visible in the schedular tax systems. In this system neutrality, efficiency and simplicity are

favoured. These characteristics, and the use of a flat rate, seem to be more attractive for




149 See annex 1.

150 See annex 1.


42

investors.

The dual tax system seems to be the intermediate between the comprehensive tax

system and the box system to deal with the principle of equality and at the same time manages

to be efficient. This is probably the main reason for the popularity of the system.

Interesting is also that Sweden, which has taken the dual income tax system the furthest,

is about to implement an optional investments savings account for the most common securities

to be taxed as a fixed assumed yield much similar to the third box in the Dutch system. The

main reason for this new tax form is to increase the simplicity of investments and to prevent

lock-in effects caused by the use of the realization principle and thereby increase the efficiency

of the system.


43

Chapter 5: Taxation of investment income of individuals

5.1 Introduction

Previously, in chapter 2 and 3, the more technical aspects of the Dutch personal income tax

system have been discussed, naturally with the emphasis on the taxation of investment income

of individuals. In this chapter these more technical aspects will be compared to the personal

income tax systems of the other Eucotax-Wintercourse participating countries. The first part

will explain the various aspects of the tax systems considering residents and the second part

will describe these aspects for non-residents.

5.2 Differentiation of residents and non-residents151

Countries tend to define non-resident individual taxpayers in the negative, by defining expressly

residents and excluding them from all individual taxpayers. Residency is determined throughout

the different states based on domicile or place of abode in the respective country, or based on

the non-resident’s presence in that country for at least 183 days. This is about the case with

Austria, Belgium, France, Germany, The Netherlands, Italy, Poland, Spain, and Sweden. The USA

and Hungary distinguish citizenship as a third, additional category to the definition of a non-

resident. Apart from this difference in the USA and Hungary, the definitions of residency or

non-residency are uniform in the countries we examined.152

5.2.1 The taxable categories of investment income153

Each country can define the categories of investment income by its domestic law, while a

general definition of this term cannot be given. Countries define their investment categories in

151 Austria: Sec. 1 Para. 3 ITA of Austria, Belgium: Art. 227 ITC of Belgium, Germany: Sec. 1 Para. 4 ITA of Germany,

Hungary: Section 3.2 and 3.3 PITA of Hungary, Italy: Art. 1 and 2 PITA of Italy, The Netherlands: Art. 2 Sec. 1 PITA of the Netherlands, Poland: Sec. 3 Para. 1 PITA of Poland, Spain: Art. 10 PITA of Spain, Sweden: Chap. 3 Sec. 3 PITA of Sweden, The United States: Section 7701 (a), (b) IRC of the United States. 152

See annex 2. 153

Sec. 27 Personal Income Tax Act (PITA) of Austria, art. 17 PITA of Belgium, sec. 2 para. 1 and sec. 20 PITA of Germany, sec. 65-68 PITA of Hungary, art. 6 PITA of Italy, sec. 3 art. 1 (box 1) and sec. 4 art.1 (box 2) and sec. 5 art. 1 (box 3) PITA of Netherlands, cap. II PITA of Spain, chap. 1 sec. 3 PITA of Sweden, sec. 61 and 1221 PITA of USA.


44

different ways, although most of the investment income is taxed in almost every country.

Furthermore it is possible that countries define the same categories by different way.

Throughout this means that one country taxes certain types of income as capital investment,

while another does not. As a cause of this problematic situation, the most common categories

are introduced and how far they are taxed in the Eucotax-Wintercourse participating countries.

5.2.2 Investment income other than capital gains

The most important categories are dividends, interests, royalties, rents and capital gains. Since

capital gains are so special and important, it will be described and explained later. These

incomes are taxed as follows:

dividends Interests royalties rents

Austria x x x* x*

Belgium x x x x*

France x x x x*

Germany x x x* x*

Hungary x x x* x*

Italy x x x x*

Netherlands x x x** x**

Poland x x x x

Spain x x x x*

Sweden x x x* x

USA x x x x

* Taxed, but not as investment income ** Taxed under circumstances


45

As it can be seen above, dividends, interest, royalties and rents are all taxed in the examined

countries. The difference is how they are treated and regulated in the countries. While

dividends and interests are always taxed as investment income, royalties and rents may be

taxed differently depending on the domestic law of each country.

5.2.3 Capital gains

Capital gains are taxed in all examined countries, but it is important to distinguish between

investment income and immovable property. However in Belgium, the Netherlands, Germany,

Poland, Hungary and Spain they are taxed in different way.154 In Belgium the speculative

transactions are subject to tax, but generally the capital gains are not. In Spain there is no

specific capital gains tax, it can be included as part of individual income tax or the non-residents’

income tax. In the Netherlands capital gains are only taxed in box 1 and 2, whereas it is not

taxed within box 3. In Germany capital gains out of real estate will only be taxed if they are held

less than 10 years. In Poland capital gains from immovable property are taxed when the assets

are held for less than five years. In Hungary in case of disposal of immovable property the

capital gains are taxed depending on how long the immovable property was held. The longer it

was held, the less it is taxed.

5.2.4 The tax rate155

The setting out of tax rates is a domestic issue. Tax rates can be changed all the time, for

example if a country has to adapt to a new environment (e.g. caused by the financial crisis) the

modification of the current tax rates can be a solution.

The tax rates related to investment income in the examined countries are very

changeable in a wide scale, from 15 to 50 %.156 Most of the Eucotax-Wintercourse participating

countries apply a flat rate for investment income. The only exception from this is the USA,

154 See annex 2.

155 sec. 27a PITA of Austria, art. 130 PITA of Belgium, sec. 32d para 1. PITA of Germany, sec. 8 PITA of Hungary, L.

13/12/2010 N.210 Financial Bill of Italy, sec. 2 para. 10 (box 1) and sec. 2 para. 12 (box 2) and sec. 2 para. 13 (box 3) PITA of Netherlands, chap. 65 sec. 7 PITA of Sweden, sec, 1a-1d PITA of USA. 156

See annex 2.


46

which applies a progressive rate in a frame of a comprehensive system. In Hungary and Sweden

there is only one flat rate for investment income. Belgium’s flat rate can be different depending

on the item, while Spain’s flat rate depends on the amount. The rest of the countries can apply

progressive tax rates as well for investment income. Whether the tax rate is progressive or

proportional depends on the amount or the item which is taxed.

5.2.5 Withholding tax157

In countries where a withholding tax is used, taxpayers get their money only after the

deduction of taxes and they do not have to directly pay or report any tax. Through the

deduction of the withholding tax, the tax file is usually closed. Countries can profit from this

solution, because firstly the money can be kept within the country easier, secondly it causes

less work for tax authorities.

In Spain, Sweden and the USA there is no withholding taxation at all. In Germany,

Hungary, Italy, the Netherlands and Poland the withholding taxation is basically used, but with

certain exceptions. In all other countries the taxation of investment income is a final

withholding taxation.158

5.2.6 The tax base

The tax base is, next to the tax rate, the most important figure of the upcoming tax burden. The

tax payable is the product of the proper tax rate and the tax base.

The gross income is the receipts and gains from all sources minus the costs of goods sold.

Net income is the residual income after adding the total revenue and gains and subtracting all

expenses and losses. By the previous definitions, only in Belgium the tax base is the gross

income. In all other examined countries the tax base is the net income159, but the possibility of

certain deductions can be very different in the countries.

157 sec. 93 PITA of Austria, art. 269 PITA of Belgium, sec 32d para 3. PITA of Germany, sec. 65 PITA 2 of Hungary, art.

7 Dividend Tax Act of Netherlands. 158

See annex 2. 159

See annex 2.


47

5.2.7 Deduction of expenses160

An important element of the tax base being gross or net is the deductibility of related expenses

and costs. Related costs can be defined as costs which are spent to create an income. This fact

is the most famous issue of the ability-to-pay principle.

In Austria, Belgium and Italy the expenses cannot be deducted at all, while in Hungary,

Sweden and the USA they are totally deductible.161 In France the expenses are only deductible

when the income is taxed somehow by a progressive rate. In Germany the deductibility of

related expenses is limited up to an amount of €801, whereby acquisition costs can be fully

taken into account. Furthermore it is possible for German taxpayers to deduct the €801 even

though no expenses arose. Next to that, all related expenses can be taken into account in

Germany if the taxpayer has chosen to be taxed under the progressive tax rate. In the

Netherlands the expenses are deductible only in the first two boxes while in box 3 no deduction

is allowed. In Poland the deduction of expenses is possible, but not in the case of dividends and

interests. In Spain, generally the expenses are deductible with no refund, but it can vary in the

different autonomous regions.

5.2.8 Deduction of losses162

Since a taxpayer can incur a capital loss, it is questionable how far this loss can be taken into

account. In many countries the deduction of losses is absolutely widely used, but only in

Belgium it is not possible at all. A further exception is the Netherlands, where the losses are

only deductible in the first two boxes. In all other countries the capital losses are deductible. In

Germany losses can only be deducted within the same investment category.

160 sec. 20 para. 2 PITA of Austria, art. 22 PITA of Belgium, sec. 20 para. 9 PITA of Germany, sec. 67/A PITA of

Hungary, D.P.R 600/1973 of Italy, chap. 3 (box 1) and chap. 4 (box 2) PITA of Netherlands, chap. 42 sec. 1 PITA of Sweden, sec 212 PITA of USA. 161

See annex 2. 162

sec. 97 para. 2 PITA of Austria, sec. 20 para. art. 156 PITA of France, 9 PITA of Germany, sec. 67/A PITA of Hungary, art. 68 PITA of Italy, sec. 3 para. 13 (box 1) and sec. 4 para. 10 PITA of Netherlands, chap. 42 sec. 1 PITA of Sweden, sec. 165 PITA of USA.


48

5.2.9 Transfer of losses163

According to the previous section, it is clear that capital losses are deductible in almost every

country. In most cases these capital losses can be carried forward to other periods with

different limitations.

The only two countries where the losses are deductible but not transferable are Austria

and Sweden.164 In the USA the capital losses can be carried forward indefinitely but only USD

3,000 annually. In France, Hungary, Italy, Poland and Spain the carry forward is limited by a

certain time period between two and six years. Furthermore in Italy there is no refund

possibility on top of the time regulation. In Germany a loss carry forward is limited to an

amount of 1 million euro or for 60% exceeding 1 million euro. In the Netherlands the possibility

of transfer of the losses and the related regulations depend on the boxes.

5.2.10 Allowances165

An allowance is a fixed amount that is set off against the income of a taxpayer under certain

personal circumstances, allowing the taxpayer to receive that much income free of tax. It is not

very common to have allowances related to investment taxation, but some examples are

observable.

As it was earlier described,166 in France the investment income is generally taxed at a

proportional rate, but sometimes it can be also progressive. Allowances are available only in

case of progressive taxation. In the Netherlands allowances are only given if the investment is

taken in box 1, which means that no allowances are available if the investments are treated in

the other two boxes. In Poland allowances are generally not available, although as an exception,

the domestic law allows the allowances in case of the rental income from immovable property

163 sec. 18 para. 6 PITA of Austria, sec. 10d and sec. 43a para. 3 PITA of Germany, sec. 67/A para. 6-8 PITA of

Hungary, art. 10-16 PITA of Italy, sec. 3 para. 13 (box 1) and sec. 4 para. 10 PITA of Netherlands, art. 49 PITA of Spain, sec. 1211b and 1212b/1 PITA of USA. 164

See annex 2. 165

sec.97 para. 2 PITA of Austria, art. 104-116 PITA of Belgium, art. 10-16 PITA of Italy, chap. 8 PITA of Netherlands, tit. V PITA of Spain, sec. 62 and 63 and 165 PITA of USA. 166

See section 5.2.4.


49

and royalties. In the USA the allowances are given but not to all forms of investment income

and an allowance can be set against the income in case of rentals, ordinary dividends, interests

and royalties. In all other examined countries there are not any allowances related to

investment income taxation.167

5.2.11 Tax-free amount168

A tax-free amount is not considered to be taxable income up to the ruled amount, allowing the

taxpayer to receive that much income free of tax. In general, governments can allow taxpayers

to realise a certain amount of income without any tax charge, but these cases are regulated

well enough and not considered anywhere as a loophole of legislation.

It is common in France for tax free-amount to arise, but only when the investment

income is taxed by the progressive rate. In Hungary, if an investment is held long enough with a

proper contract, it can be realised without any tax charge, while in the disposal of movable

property, it is exempt from tax below a certain limit. In the Netherlands, a tax-free amount

appears, but only in box 3. In Poland, in case of rental income from immovable property and

royalties a tax-free amount exists, in other cases it does not. In Spain, the investment income

can be realised without any tax burden on it, up to € 1,500. In the USA a tax-free amount can

decrease the tax liability of taxpayers in case of rentals, ordinary dividends, interests and

royalties. In the other Eucotax-Wintercourse participating countries there are not any tax-free

amounts at all.169

5.2.12 Sub conclusion; taxation of residents

As a summary of this part of this master thesis which deals with technical issues of taxation of

residents, different statements can be made. Firstly, tax rates are totally different in the

member countries and are treated totally different. This demonstrates a problematic dealing

with taxes within the Eucotax-Wintercourse participating countries, because investments in

167 See annex 2.

168 sec. 41 para. 3 PITA of Austria, art. 131 PITA of Belgium, sec. 41 para. 3 PITA of Austria, sec. 58-59 and sec. 67/B

PITA of Hungary, sec. 5 para. 5 (box 3) PITA of Netherlands, tit. VI PITA of Spain, sec. 62 and 63 and 165 PITA of USA. 169

See annex 2.


50

other countries are treated totally different. An European standard would help at least to

simplify the system.

Further domestic law provides many other exceptions

which makes the systems not totally comparable. When in one country expenses can be

deducted, the other country does not even allow the deduction of losses. It is most obvious

that through such different treatment, investments can be controlled by a country because

investors will find the most beneficial country to invest in. A different obvious thing is that

throughout the current systems an investment without any legal advice is almost not possible.

These lines shall be seen as introduction of the different tax systems within the Eucotax-

Wintercourse participating countries and shall make it obvious that each country has on certain

points a quiet different understanding from investment income. Since not all investments

income is taxed under a specific investment income regime, it is important and obvious that the

term is used different within the countries.

5.3 Non-residents

As a result of jurisdictional limitations, all countries tax the investment income of non-residents

generated from the country’s domestic sources.170 Tax treatment of non-residents should be

viewed within the context of each jurisdiction’s inherent tax system instead of being analyzed

in isolation.

5.3.1 Investment income; capital gains171 and other types of investment income172

Although most countries tend to tax non-residents in a manner similar to the taxation of

170 See section 5.2 for a definition of non-resident.

171 Austria: Sec. 98 Para. 1 Subs. 5 ITA of Austria, Hungary: Sec. 58 to 59 PITA of Hungary, Italy: Art 62 PITA of Italy,

The Netherlands: Box 2: Art 4 Sec. 12 PITA of the Netherlands, Poland: Sec. 30b PITA of Poland, Spain: Sec. II Art. 21 PITA of Spain, Sweden: Chap. 41 Sec. 1 and 2 PITA of Sweden, The United States: Sec. 1 (r) IRC of the United States. 172 Austria: Sec. 98 Para. 1 (5) ITA of Austria, Belgium: Art. 228 Para. 1 Subsec. 2 ITC of Belgium, Germany: Sec. 49 ITA of Germany, Hungary: Sec. 65 to 68 PITA of Hungary, Italy: Art. 23 PITA of Italy, The Netherlands: Box 1: Art. 3 Sec. 1 PITA of the Netherlands, Box 2: Art. 4 Sec. 1 PITA of the Netherlands, Box 3: Art. 5 Sec. 1 PITA of the Netherlands, Poland: Sec. 22 PITA of Poland , Spain: Art. 15 in Titolo III PITA of Spain, Sweden: Chap. 1 Sec. 6 PITA


51

residents, some countries do not allow non-residents the same benefits permitted to residents,

such as refundable and non-refundable income tax credits and personal allowances.

Most countries tax income from capital assets, such as interest income and dividends

from shareholdings. Countries included in this majority group include Belgium, France,

Germany, Italy, Hungary, The Netherlands, Poland, Spain, and the United States. France,

Germany, Hungary, Italy, Poland, Spain, Sweden and the USA also tax capital gains.173 However,

in some countries both residents and non-residents are subject to the same provisions

applicable to certain types of income. An example of this parallel tax treatment is Poland where

all types of investment income, other than most forms of interest income, are taxed the same

for residents and non-residents. Poland also includes income from investment while countries,

such as France and the United States, effectively tax the same income under different

categories.

Italy differentiates between capital gains from qualified shareholdings and capital gains

from non-qualified shareholdings by including 100% of non-qualified shareholdings in the tax

base and only 49% of qualified ones. In Germany and Austria, the taxation of capital gains from

shareholdings depend on whether the taxpayer holds a substantial shareholding.

Sweden taxes dividends, and rent from and capital gains from immovable property, but

exempts from taxation interest income and capital gains from disposal of securities.

France treats royalties from patented inventions and software as long-term capital gains

if received by individuals conducting a business.

Austria taxes dividends, distributions of profits from private foundations, from Austrian

silent partnerships and real estate investment funds and interest income from loans and

mortgages secured by ships and real estate in Austria, but not from bank accounts, for example.

Austria classifies royalties and rent from immovable property as an income category separate

from investment income.

of Sweden, The United States: Sec. 871 (b) IRC of the United States. 172

See annex 3.


52

True to the spirit of its box system, the Netherlands categorize types of investment

income from different sources by taxing it under its three different boxes with their different

regimes. The Netherlands taxes non-residents’ income from home ownership and immovable

property made available to a connected person174 (box 1); dividends, other profit distributions,

interest, and capital gains derived from substantial shareholdings (box 2); interest income,

royalties, and dividends from equity interests other than substantial shareholdings (Box 3). Also,

the Netherlands allow non-residents the option to be taxed as residents.

Unlike residents, a non-resident would qualify for reduction in their tax liabilities and

even total exemption under bilateral tax conventions concluded between the non-resident’s

country of residence and the taxing country. Moreover, bilateral tax conventions serve to

prevent double taxation of individual taxpayers’ income, in addition to credits for foreign

income tax paid. Notably, tax treaties may fully exempt particular types of income from

taxation to the benefit of non-resident taxpayers.

5.3.2 Avoiding double taxation

The international double taxation is one of the hardest problems of tax law, in fact different

solutions were prospected to solve it. One that can be qualified as working is the creation of an

international model, for instance the OECD-Model. The most important element of these

models is not being self-executive, and not compulsory; in this way states keep their

sovereignty but at the same time they apply the same guidelines.

Broadly speaking it may be said that most of the EU Member States follow the OECD-

Model. Most states are using the credit method to avoid double taxation. However, the full

credit method is not applied. Therefore, corrective rules have to be applied; the rules are

decided by the states.

Some states prefer to have their own regulations; there may be many reasons for that,

for instance if the EU member is dealing with a non-white list country.175


175 A white list country is a country that is considered not to be a tax haven.


53

It may be concluded that the OECD-Model is often used to avoid double taxation,

because it both allows self-government and a common guideline for legislation.

5.3.3 Tax free amount

Most countries allow a tax free amount only to their residents, but not to their non-residents,

with the exception of Germany.176

5.3.4 Expense deduction

Although some countries tax investment income on gross basis, most allow deductions for

investment expenses to a varied degree. The extent of allowed deductions depends on the

extent of the neutrality of their regimes with respect to capital inflows from non-residents.

Countries allow deductions for investment expenses and losses either to attract capital or to

create neutrality between their residents and non-residents, both of whom choose to invest in

the country’s domestic economy.

Belgium, Hungary, Poland, The Netherlands, and Sweden impose tax on investment

income on net basis by allowing deductions for investment expenses. In contrast, the tax base

in other countries, such as Austria, France, Germany, Italy and Spain, is made up of gross

investment income. Austria and Germany only allow deductions for expenses related to income

from investment funds. Only the U.S. taxes non-residents on their gross investment income and

generally does not allow non-residents to deduct investment expenses unless they earn

investment income from the conduct of a trade or business in the United States.177

Only the USAallows deductions for all investment expenses while Sweden, Hungary, and

the Netherlands allow such deductions only for closely related costs. In the Netherlands,

deductions under boxes 1 and 2 are limited to costs related to income in those boxes, box 3

allows deduction of mortgages, investment loans, and other deductions related to investment

property in box 3, but these are limited to the amount of corresponding income.

Unique modes of taxation characterize Belgium and Poland. In Belgium, non-residents

176 See annex 3.

177 See annex 3.


54

may deduct costs incurred to maintain their investment, such as bank fees. Poland allows

deductions for the acquisition cost of shares and a deduction of 50% of the earned income for

lump-sum royalties. Poland also permits deduction of any expenses incurred to generate capital

gains, rents from immovable property, and income from capital funds.

5.3.5 Loss deduction178

Poland and Belgium certainly allow deductions for investment losses. Other countries allow

specific deductions for losses. For example, Sweden allows deductions only for losses

connected to investment derived from Swedish sources or Hungary where losses are deductible

against income from controlled capital market transactions. In Austria, only if a non-resident

taxpayer chooses to include his investment income in the tax return. The USAallows deductions

for investment losses against business investment income but not for capital losses.

The Netherlands has a combined provision for investment losses that allows their

deduction in box 1 and box 2, but not in box 3. France, Germany and Spain, allow deduction

only for investment losses, but not for investment expenses. Italy allows deduction only for

capital gains.179

France, Germany (offsets limited to investment income) and Spain, allow deduction only

for investment losses, but not for investment expenses. Italy allows deduction only for capital

gains.

In Austria and Germany, the offsetting of losses is limited in that it is only possible to

offset losses from investment income with income from investment income.

The rationale behind that is, that losses may not be offset against income taxed at a

different tax rate. In Germany, for example, the tax rate for investment income is 25 %, other

types of income, however, are subject to a progressive tax rate up to 45 %. Otherwise, there

would be a possibility to use losses arising under investment income to reduce the tax burden

178Austria: Sec. 97 Para. 2 ITA of Austria, Germany: Sec. 10d ITA of Germany, Hungary: Sec. 67/A PITA of Hungary,

Italy: Art. 68 and 73 PITA of Italy, The Netherlands: Box 1: Chap. 3 Art. 13 PITA of the Netherlands, Box 2: Chap. 4 Art. 10 PITA of the Netherlands, Poland: Sec. 9 Para. 3 PITA of Poland , Spain: Art. 33 PITA of Spain, Sweden: Chap. 11 Sec. 1 and 2 PITA of Sweden, The United States: Sec. 871 (b) IRC of the United States. 179

See annex 3.


55

on other income, for example from businesses or labor. That would lead to a potential for tax

avoidance, a possible erosion of the tax base and loss of fiscal revenue.

Italy, on the other hand, limits loss deductions by amount.

5.3.6 Carry back/carry forward

Although different tax systems’ approaches to loss carry-overs vary, almost no countries allow

loss carry-back.180 The Netherlands, (who allow carry-forwards of three years for box 1 and one

year for box 2), is an exception to this trend of disallowing loss carry-forwards for non-

residents.181 Carry-forwards of losses are not allowed in Belgium, Sweden, the USA, and the

Netherlands (box 3). Other states, however, such as Austria and Italy, allow carry-forward of

losses only for specific types of income. Austria permits loss carry-forward for business

investment income, and Italy allows it for capital gains (but only for net capital losses, and with

a temporal limit of four years). Typically, the examined countries allow carry-forward but with

at strict temporal limit. For example, the limit extends only to two years in Hungary, which also

requires express permission, nine years in the Netherlands (box 1 and box 2), five years in

Poland, and four years in Spain. France and Germany allow carry-forward of investment losses

indefinitely.

5.3.7 Tax rate: flat or progressive?182

Tax rates applicable to non-residents range from 15 to 50%. The tax rate on investment income

of non-residents is flat in most of the countries examined.183 For example, Austria, Belgium,

France, Germany, Hungary, Spain, Sweden, and the USA impose flat tax rates. In Italy, all

investment income of non-residents is subject to a progressive rate. Most investment income in

180 Transfer of losses deduction to previous tax years to offset taxable income.

181 See annex 3.

182Austria: Sec. 97 Para. 2 ITA of Austria, Belgium: Art. 243 et seq. ITC of Belgium, Germany: Sec. 20 ITA of Germany,

Hungary: Sec. 8 PITA of Hungary, Italy: Financial Bill of Italy, the Netherlands: box 1: Art. 2 Sec. 1 PITA of the Netherlands, box 2: Art. 2 Sec. 12 PITA of the Netherlands, box 3: Art. 2 Sec. 13 PITA of the Netherlands, Poland: Sec. 27 PITA of Poland , Spain: Art. 66 PITA of Spain, Sweden: Chap. 63 Sec. 2 PITA of Sweden, The United States: Sec. 864, 871 IRC of the United States. 183

See annex 3.


56

Poland is also taxed at a flat rate, except rent payments, which are subject to progressive rates.

Applying a single, flat rate across categories of income, regardless of type, promotes horizontal

equity among non-resident recipients of different types of investment income. Furthermore,

the flat rates imposed on investment income are generally lower than the rates on income from

other categories, the rationale behind that being encouragement of foreign investment or

prevention of capital flight.

Taxation in the Netherlands differs from the other reviewed countries because the

applied tax rate may be either flat or progressive and its magnitude may vary depending on

which box the income belongs to. Progressive tax rates are applied, for example, to an

immovable property rented out to a connected person,184 capital gains from business activities

and income from a Dutch primary home (box 1).185 Income from a substantial shareholding and

income from a second home located in the Netherlands are taxed at flat rates (respectively box

2 and 3). The tax rates for income from a substantial shareholding and income from a Dutch

second home are respectively 25% and 30%.

Some countries tax all categories of investment income at the same flat rate. For

example Hungary applies 16%, Austria and Germany tax at 25% and Sweden subjects

nonresidents’ investment income to 30%. In the USA, the tax rate is 30% for all categories of

investment income except for capital gains from immovable property, which are subject to a

flat rate of 10%.

Where the flat rates differ by category of investment income, a distinction is mostly

made between dividends, interest, and royalties. France, Belgium and Spain are good examples

of such varied tax treatment. Poland may also be attributed to the countries where the flat tax

rate differs by category of investment income, because it only slightly differs from France,

Belgium and Spain in that rent payments are subject to a progressive rate.


185 See annex 2.4.5.


57

In France, the tax rate levied on fixed-income securities186 generally is 18% although it

may vary according to the securities’ issue date, the date of payment, holding period, and

whether the subscription is anonymous or not. France taxes dividends paid to non-residents at

a rate of 25% and to residents of the EEA at 18%, but exempts interest from tax. However,

France imposes a tax rate of 50% on dividends and interest paid to non-residents who reside in

tax havens. In France, royalties are taxed at 33.33%. In Belgium, dividends are subject to a tax

rate of 25%, which may be lowered to 15% if certain conditions are met while interest and

royalties are generally subject to tax at 15%. In Spain, dividends and interest are taxed at 19% if

they equal amounts below €6,000; above this threshold, the rate is 20%. Royalties and

payments to artists and sportsmen are taxed at 24%. In Italy, the tax rates levied on investment

income generally are progressive.

5.3.8 Method of collection: withholding tax?187

Tax systems resort to withholding of tax instead of self-assessment and reporting that they may

allow to residents. The reason for the use of a withholding mechanism is that countries have

limited extraterritorial jurisdiction over non-residents who often are not citizens of that country

and whose capital is highly mobile across borders and thus may ultimately escape taxation.

Where a withholding tax is applied to investment income of residents, it is usually reasoned

that a withholding tax leads to simplification. Moreover, a withholding tax is particularly

important where bank confidentiality provisions prevent reporting of information about the

income received to the tax authorities. Tax on investment income of non-residents is levied

through a withholding mechanism in Austria, Belgium, France, Germany, Spain, and the USA.188

Only some types of investment income are taxed by withholding tax in Italy, the

186 Fixed-income securities include interest income derived from private and government-issued bonds, negotiable

debt instruments, bank deposits, and capitalization contracts that are combined with life insurance policies. 187

Austria: Sec. 93 Para. 1 ITA of Austria, Belgium: Art. 261 et seq. ITC of Belgium, Germany: Sec. 20 ITA of Germany, Hungary: Sec. 65 to 68 PITA of Hungary, Italy: Art 600 PITA of Italy, The Netherlands: Art. 7 Dutch Dividend Tax Act, Poland: Sec. 30a PITA of Poland, Spain: Art. 67 Sec. 70 PITA of Spain, Sweden: Chap. 1 Sec. 6 PITA of Sweden, The United States: Sec. 4141 IRC of the United States. 188

See annex 3.


58

Netherlands, Poland and Sweden. Hungary, Italy, and Poland levy a withholding tax on

dividends, interest, and royalties. In Poland, non-residents report their tax liabilities arising

from rents and capital gains from immovable property through self-assessment. As for Sweden

and the Netherlands, only dividends are taxed through withholding in these two countries.

5.3.9 Sub conclusion; taxation of non-residents

In the second part of this chapter a closer look was taken at the taxation of non-residents. Like

with the taxation of residents, the systems of the various Eucotax-Wintercourse participating

countries vary a lot. No clear trend can be discovered. However, due to treaties that exist

between most of the Eucotax-Wintercourse participating countries, more clarity is given which

country had the right to tax a certain type of income. Still, because of national legislation,

double taxation can occur. This is even more so the case when the non-resident comes from a

country with whom no tax treaty exists.


59

Chapter 6: The economic and financial crisis and the relationship to investment

income of individuals.

6.1 Introduction

Finally in this chapter the essential part of this master thesis will be discussed: the economic

and financial crisis and the relationship to investment income of individuals. This will start by

giving a certain framework to test a tax system to, which leads to the principle of equality

(section 6.2) and efficiency (section 6.3), because these are generally found to be important in a

tax system according to most legislators of the Eucotax-Wintercourse participating countries.189

After that one of the major issues of each tax system when it comes to the taxation of

investment income, flight of capital, will be explained (sections 6.4 and 6.5) In this respect the

question of whether or not to tax capital income at all is treated (section 6.6). An attempt will

be made to analyze the way the various Eucotax-Wintercourse participating countries treat

investment income and what their take is on capital flight (sections 6.7 and 6.8). Finally the

formed framework and will be applied to the Dutch box 3 system (section 6.9).

6.2 Principle of equality

One of the main questions that arise when there are any changes in any country’s tax system is

whether the system fulfils the principle of equality. The principle of equality is specifically

recognized in the constitutions of almost every modern country.190 Because of that it is a

principle that benefits from exceptional protection. In some countries the individuals have the

possibility to go to court on the grounds of this principle.191 Nevertheless, this does not apply to

all countries.

189 For a background of the various personal income tax systems of the Eucotax-Wintercourse participating

countries, see the various personal papers of the Eucotax-Wintercourse students 2010/2011. 190

M. Bourgeois, Constitutional framework of the different types of income, B Peeters, The concept of tax IBFD 2005, p. 86. 191

See annex 1.


60

Equity in taxation is an element of tax justice.192 Equity was among the elements Adam

Smith proposed as an integral to an adequate tax system, in addition to efficiency, simplicity,

certainty and fiscal responsibility.193 A fair, and therefore equal, tax is usually considered to be a

progressive tax that takes into consideration the taxpayer’s individual situation in accordance

with the ability to pay principle.194

However it must be mentioned that there is no universal accepted agreement on the

meaning of the principle of equality. Therefore one can disagree with such a concept of this

principle and decide that proportional taxation fulfils the requirements of the principle of

equality.

The principle of equality can be interpreted as applying the same treatment to two

different individuals in the same situation. The principle of equity is an extension of the

principle of equality. The latter aims at applying an equal treatment, whereas equity

determines the “fair share” that an individual should pay. The equality principle has a vertical

and horizontal dimension, both derived from the ability to pay principle. By vertical equity,

progressive tax rates are motivated since it holds that differently situated taxpayers should be

treated differently, e.g. individuals with more income and/or capital. Horizontal equity dictates

individuals situated in similar economic circumstances should shoulder a comparable tax

burden according to their similar ability-to-pay.195

6.3 Efficiency

Governments find themselves squeezed by pressures to maintain or to increase their

expenditures on the one hand and the need to make their tax systems more competitive on the

other hand. The economic competition also implies the stimulation of a volume of investments

that can finance the development of businesses, create durable jobs and fight unemployment.

To achieve the goals of being a welfare state on the one side and also be an attractive country

192 W. Nykiel, Zasady, p.18.

193 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1970 ed).

194 Randolph E. Paul, Taxation in the United States (1954); Beale, supra note 29, at 820.

195 Tax Reform for Fairness, Simplicity and Economic Growth: The Treasury Department Report to the President,

Nov. 1984-11/01/1984.


61

for investments and preventing capital flight on the other side, the tax system needs to be as

efficient as possible.196

One way to achieve an efficient system is through a neutral and simple tax system. In a

completely neutral tax system, taxation should not influence an investor’s choice to invest in a

particular asset. In line with this also comes the fact that a broader tax base is used since all

kinds of investment income should be taxable and thereby allowing a lower tax rate. By a

neutral system the market will optimize itself by allocating capital to the assets that gives the

best payoffs regardless of tax.197

Further, simplicity is also needed to make the system efficient.198 A general fact is that

recent tax reforms in many countries have shown an effort to simplify the taxation of

investment income to improve tax compliance.199 Among the recent tax reforms several

common trends can be identified and include the introduction of an electronic filing system of

tax returns, pre-filled tax returns and the improvement of the availability of the different tax

authorities to help taxpayers in the event that they encounter difficulties when filing their tax

return. In turn, this will also improve the efficiency of the personal income tax and increase the

attractiveness of the system.

6.4 Definition of capital flight

In order to examine the relationship between capital and the financial and economic crisis, it is

important to start off with a clear understanding of what capital flight entails. For the purpose

of this master thesis a strict definition will be applied. There will always be some flight of capital

in any state that cannot be attributed to the tax system, but for example to personal reasons or

due to the non tax related social-economical situation. This type of capital flight will be

196 Example of this is that the preamble of Spanish income tax law justifies the law change in accordance to the

need of efficiency neutrality and simplicity. Ley 35 /2006 del Impuesto de las Personas fisicas. 197

Sørensen P.B ,Dual Income tax System: Nordic system, p.7. 198

Taxing similar activities differently causes behavioral distortionsand unfairness.”), quoting David A. Weisbach, line Drawing, Doctrine, and Efficiency in the Tax Law 9 (Chicago Working Papers in Law and Economics (2d Series), Working Paper No. 62, 1998). 199

PwC, Paying Taxes 2011, the global picture (see www.pwc.com).

http://www.pwc.com/


62

excluded here. Capital flight should be understood as the situation where investors decide to

reallocate their assets due to changes in taxation.

Capital flight can be legal and illegal. Legal capital flight means a taxpayer will still

comply with all his legal obligations, but will try to place his capital in a country where the tax

regime is more favorable than in his country of residence. Illegal capital flight on the other hand

arises when a taxpayer reallocates his capital to another country, but has no intention to report

the income from this capital to the tax authorities of his country of residence.

6.5 Problems with capital flight

Capital flight posses several problems. There is for instance the clear impact on the state’s

budget. It does not need further explanation that the disappearance of capital, and therefore

capital income, could lead to less taxation of capital income and consequently lower state

revenues. Moreover, a state will have higher expenditures since remedies have to be found to

fight tax evasion and to repatriate capital flight. Another issue considers the principles behind

taxation in general. Taxes are levied by the government in order to afford certain facilities, for

example the road network or on a higher level, a well organized tax authority. In this respect it

makes sense that a country levies tax from taxpayers who benefit from these facilities. When

capital flight occurs a taxpayer does not contribute his fair share to the government’s budget.

Also there is the ability-to-pay principle, which is represented in most tax systems. A wealthier

taxpayer will be more able to pay his taxes, but he will also be the one to avoid taxation by

placing his capital abroad. Therefore the possibility exists that the ability-to-pay principle,

although represented within a country’s tax system, can turn out to be not very effective.

6.6 Taxing capital income (?)

As explained in the previous section, flight of capital posses several problems. One may wonder

whether it would be best to not tax capital income at all in order to make sure there are no tax

incentives for people to place their capital abroad. When making this statement, one must keep

in mind that there might be other reasons besides tax for someone to place their capital abroad,

for example because of a possible higher return on an investment. Getting back to the idea of


63

not taxing capital income, immediately inequality might come to mind. However, there are

those who state that capital has already been taxed, because it is generated out of earlier

earned labor income on which taxes have already been paid.200 Another argument to support

not taxing capital income can be found in the discouragement of saving. People will be less

inclined to save their money, when they know this money is taxed. Given the financial and

economic crisis, it might not have been as bad if people had more savings to ‘catch the blow’.

On the other hand, instead of saving, people will be more likely to spend their money which is

beneficial to the economy.

Returning once more to the equality principle, taxing capital can be explained as

discriminatory on one’s preference to save. Also, by taxing capital income, a piece of welfare is

taxed away.201 Taxation of capital income leads to less saving, therefore less spendable capital

which would lead to less productiveness and consequently lower wages. According to Judd and

Chamley taxation of capital income may feel as more equality between the poor and the rich,

but due to the process before described, Joe Average would suffer the consequences of

taxation of capital income. Ideally, taxation of capital income should find the middle ground

between not discouraging saving and encouraging spending.202 The question remains, what this

ideal system is and applied to the Dutch system, does the system of box 3 approach this ideal

system? This final question will be dealt with later on in this master thesis.

Another theory worth mentioning is that of Erosa and Gervais.203 They claim that by

taxing capital income, future consumption is taxed more heavily than current consumption.

Also in the future one is going to have more free time, so in fact taxation of capital income is a

tax levied on free time and conversely argued, a subvention on work. When applying this

200 Among others R.E. Lucas jr., ‘Supply-Side Economics: An Analytical Review’, Oxford Economic Papers 1990, 42 p.

293-316. 201

K.L. Judd, ‘Redistributive Taxation in a Simple Perfect Foresight Model’, Journal of Public Economics 1985, 48 p. 59-83 and C. Chambley, ‘Optimal Taxation of Capital Income in General Equilibrium With Infinite Lives’, Econometrica 1886, 54 p. 607-622. 202

S.R. Aiyagari, ‘Uninsured Idiosyncratic Risk and Aggregate Saving’, Quarterly Journal of Economics 1994, 109 p. 659-684. 203

A. Erosa and M. Gervais, ‘Optimal Taxation in Life-Cyce Economies’, Journal of Economic Theory 2002, 105 p. 338-369.


64

theory on today’s social-economical field, Erosa and Gervais imply to levy more tax on capital

income, because of the continuing aging of the population.

According to Jacobs capital income should be taxed, though not so much because of

justice reasons, but because it is more efficient and a cheaper way for governments to

redistribute income.204 Jacobs has in cooperation with Bovenberg developed a theory that pleas

in favor of taxation of capital income.205 They state that when capital income would not be

taxed, people would invest more in capital than in their own development by higher education

to achieve a higher wages. This is an unwanted effect, especially for a knowledge based

economy like the Netherlands is. Another point that can be made here is that capital income

can also be considered the result of labor, because of the commitment, information benefits

and investment talent. When benefits increase due to this investment talent that not everyone

has, redistribution of the generated capital income may be wanted.206

Assessing these various theories whether or not tot tax capital income I personally side

with those in favor of taxation of capital income. Mainly because I am worried about the effects

on the taxation of labor income when no taxation of capital income would exist. In order to

complete the government’s budget the taxation of labor income needs to go up to compensate

for the missed income from capital income taxation. This would lead to more inequality,

because mainly the wealthier people would benefit from having no capital income taxation and

the person who’s income consists only of labor income pays the price. Building on the idea that

capital income should be taxed, the question arises in what way the capital income should be

taxed. The problem of capital flight still is not resolved. A further investigation into the various

tax systems of the Eucotax-Wintercourse participating countries might be helpful in finding an

answer.

204 B. Jacobs, ‘De prijs van gelijkheid’, Amsterdam: Uitgeverij Bert Bakker 2008, p. 154.

205 B. Jacobs and L. Bovenberg, ‘Human Capital and Optimal Positive Taxation of Capital Income’, 2005 Working

Paper No. 2250, Londen: CEPR. 206

P.A. Diamond and J.A. Mirrlees, ‘The Base for Direct Taxation’, in: ‘Reforming the Tax System for the 21st

Century: The Mirrlees Review 2007, London: Institute for Fiscal Studies.


65

6.7 Wealth taxes

In each country taxes on wealth in the broad sense are in force. Wealth taxes do however

differentiate from one country to another. It is not hard for the taxpayer to conclude that he

should better invest in a country with a more favorable tax regime. In this respect it is

necessary to do research on the various wealth tax measures in the member states of the

European Union. This research might give us an answer to the question whether there are

specific tax measures which stimulate flight of capital more than others. Some topics that are

often object of serious debate are the introduction of net wealth taxes (wealth is taxed,

regardless of the question whether income is obtained), the taxation of capital gains and the

level of tax rates. As displayed in the matrix,207 the inherent tax systems of most countries do

provide for sufficient measures to prevent capital flight. Each country is thus aware of the

problem and tries to find a balance between sufficient taxation on the one hand and

investment opportunities on the other hand.

Regarding the taxation of net wealth tax, only two countries have this type of

taxation.208 The Netherlands levy a 4% assumed investment yield of the value of the assets in

box 3. The introduction of this system in 2001 will probably have had an influence on capital

flight, since it was no longer a possibility to avoid taxation by not selling assets. Today the effect

has probably stabilized. The wealth tax in France is payable on net assets above €800,000 held

on January 1st. Solemnly the existence of the French wealth tax is not considered as a significant

reason for most taxpayers to move away from France. Moreover changes will be made to the

existing wealth tax in France. Other countries do not have net wealth taxation provisions in

force and legal doctrine is often convinced of the negative effects of such provisions in the end.

Nonetheless the debate is vital again due to the financial crisis and for instance in Austria,

Belgium, USA and Spain net wealth tax became an issue again. Often these measures are an

object of debate between left wing orientated parties and more liberal parties.

207 See Annex 4.

208 C. Heckly, “Wealth Tax in Europe: Why the Downturn?” in M. Taly and G. Mestrallet (ed.), Estate Taxation: Ideas

for Reform, Institute Reports, Paris, Institut de l’entreprise, 39-50.


66

6.8 Various tax systems and capital flight

Concerning the taxation of capital gains on investment income of individuals, most countries do

levy a tax. Only in Belgium and the Netherlands capital gains taxation is in some circumstances

absent. The Netherlands do not tax capital gains in box 3. In Belgium there is renewed attention

for this issue on the occasion of the financial crisis and it is not unthinkable that adjustments

will be made in the future.

It can be useful to look at the tax rates in force in the different countries.209 In this

respect it can already be mentioned that many countries adopted (semi-)dual income tax

systems.210 The evolution towards dual income tax systems took place in the Nordic countries

and now Belgium, Germany, Poland, Spain and Sweden are examples of countries with a (semi-

)dual income tax system.211 The main characteristic of a dual income tax system is the division

of a taxpayer’s total income into capital and labor income.212 These categories of income are

treated separately. Progressive tax rates are levied on labor income, whereas a flat rate is

imposed on capital income. By consequence capital income is taxed less heavily than labor

income.

Nonetheless differences between for instance the dual income tax systems regarding

the tax rate remain. Sweden and the USA for example have remarkably higher tax rates than

other countries which mostly do not exceed a proportional 25% tax rate. It is however hard to

assess the influence of the level of the tax rate on the existence of capital flight, since the

situation after tax can differ a lot from the situation before tax and not only the tax rate has to

be taken into account when a comparison between tax systems is made. Nonetheless often is

stated that dual tax systems are better in encountering economic troubles and capital flight

than comprehensive tax systems. Firstly, it is assumed that a low proportional rate on capital

reduces the negative results of inflation. The second advantage of this system, which is put

forward by its proponents, is that the lower rate can reduce tax arbitrage of capital income.

209 See annex 2.

210 See chapter 5.

211 W. Eggert and B. Genser, “Dual Income Taxation in EU Member Countries, CESifo DICE Report, 1/2005, p. 10.



67

Taxpayers have to rely less on tax avoidance methods in order to enjoy favorable tax rates. The

decisions of taxpayers concerning the allocation of capital investments are not dependable on

tax rates. Then, distortions in allocation of investments are reduced, which favors the economic

welfare of a country.

Several countries prefer to levy their taxes on investment income through a (final)

withholding tax.213 This is the case for Austria, Belgium, France, Germany and Poland. In Italy,

Hungary and the Netherlands a withholding tax is in force sometimes too. A final withholding

tax should increase the efficiency of the tax collection and is thus also a measure that can

contribute to a solution against capital flight.

Another issue worth mentioning is exit taxation.214 Exit taxation is used by countries to

not lose their taxation rights when a taxpayers is emigrating. This can be an extra measure in

counteracting capital flight, because although a taxpayer might move away to another country,

he still needs to pay taxes in his former resident country. The USA imposes taxes an any citizen,

no matter what their country of residence is. Citizens renouncing their citizenship and

permanent residents terminating their U.S. residency if their annual incomes or net worth

exceed thresholds for ten years after changing their status.215 Within the European Union

several principal freedoms are in place, for example the free movement of capital. This means

no obstructions are allowed when capital is transferred to another EU member state. Even

more so, free movement of capital is the only EU freedom that is also applied to transfers to

non-EU member states. Nevertheless there are several countries who levy some kind of exit

taxes and use the coherence of their national taxation as an argument to do so. The

Netherlands are an example of a country that has a type of exit taxation.216 When a resident

emigrates he receives a preservative assessment for the amount he would have had to pay

when he would have sold his shares right before the moment of emigration. If this taxpayer

213 See annex 2.

214 See annex 4.

215 USA I.R.C. §877(a)(2).

216 The Netherlands Article 4.16 section 1 sub h PITA.


68

sells his shares within the next ten years from the moment of emigration he needs to pay the

tax amount of this preservative assessment. If this taxpayer does not sell his shares within ten

years, the preservative assessment is remitted. Germany applies a similar system and Austria

also taxes at the moment of alienation, but does not apply any time limit.

Given the description above, it is hard to make exact statements on the relationship

between capital flight and tax provisions. As mentioned the wealth tax in France did not give

rise to serious capital flight. Moreover it is clear that other elements have to be taken into

account than tax provisions alone. Nonetheless capital flight remedies are still often sought in

the implementation or adjustment of tax measures. The fear of capital flight is for instance

often used by legislators to justify a tax system that violates the principle of equality by taxing

investment income differently than other types of income.217 The dual income tax system is

assumed to be justified by the fear of capital flight. The question is whether or not this

‘blackmail’ is sufficiently supported by taxpayers actually emigrating or transferring their capital

abroad due to the tax system.218 Unfortunately it is almost impossible to determine how much

the capital flight will increase due to, for example, an increase in taxation of (capital) income of

1%.

However, what can be determined is the general opinion whether capital flight is

considered to be a problem and especially at the time of the outburst of the financial and

economic crisis. As the matrix shows flight of capital is not really threatening the economy of

any country at a large scale.219 Hungary is an exception, however not really due to its tax

system, but more because of its social-economical situation and its history of being a former

communist state. Referring to the matrix again,220 in some countries the flight of capital has

become a bigger issue due to the financial and economic crisis, which makes sense because the

governments budgets have decreased.

217 S.R.F. Plasschaert, ´schedular and global systems of income taxation; the equity dimension´, Antwerpen:

Centrum Derde Wereld, Universitaire faculteiten St. Ignatius, 1986. 218

A.C. Rijkers, ‘Vermogen en vermogensinkomsten in de Nota ’Belastingen in de 21e eeuw’, WFR 1998, p. 165. 219

See annex 4. 220

See annex 4.


69

As said, to counteract flight of capital some countries started to tax investment income

in a more beneficial manner than other types of income, which would mean a violation of the

equality principle. This might have prevented capital flight to some extent, but also in these

countries capital flight still occurs. While for instance Belgium has favorable tax provisions

regarding the taxation of investment income, many residents still keep their private estate in

Luxemburg. There will always be countries where the tax base and tax rate will lead to less

taxation for a taxpayer than the tax system of its own country. The danger exists that in the

struggle to counteract capital flight and to attract foreign investments, countries will lower

their tax rate on investment income continually, which can lead to a race to the bottom where

the tax base is eroded and the rate is (close to) zero.

A solution for capital flight might be found in a common European or even global system.

When the tax system in another country is no different from the national system, there would

be no reason for taxpayers to attempt capital flight. Moreover, an investor’s decision about in

what and where to invest will no longer be limited by tax incentives, which will have a positive

result on the economy. However, every country has its own culture with its own values and

habits. Therefore it is important for every country to be able to come up with their own tax

system, which is most compatible with these values and habits. Also, sometimes it can be

necessary to steer investments in a certain direction, for example for environmental reasons.

When there is an European or even global system in place, this regional steering will be more

difficult, due to the cultural differences. Worth mentioning here, is the European Union

principle of free movement of capital. Even with no common system, it was obviously

considered to be acceptable for taxpayers to freely transfer their capital to EU member states,

including countries with a more favorable regime for taxation of investment income than their

own. Until fiscal autonomy of the member states is no longer considered ‘sacred’, it is not likely

that a serious change will be made on this autonomy in the future.

Consequently it will be hard to present a complete and harmonized European or global

system. However, when it comes to counteracting capital flight, and illegal capital flight in

particular, an European or even global approach could provide remedies in certain areas. In this


70

respect can be thought of measures that try to reduce possibilities for anonymous investment.

The financial and economic crisis shed a new light on these possibilities. By reducing the

possibilities for anonymous investment, the incentives for (fraudulent) taxpayers to move to

more lenient tax regimes will decrease and capital flight too will diminish. Worldwide measures

have been taken in these areas to restructure the international financial market.221 The

introduction of these measures should then contribute to a better collection of taxes and

should improve fiscal solidarity amongst taxpayers. Tax evasion by some taxpayers will indeed

lay a pressure on the tax revenues and increase the tax pressure, which will eventually have to

be fulfilled by other non-fraudulent taxpayers. Tax fraud will also disturb the market and fair

competition.

Measures that are often introduced to reduce the practice of anonymous investment

abroad include the reduction of banking secrecy laws, possibilities for fiscal amnesty, the

exchange of information and the fight against money laundering. Answers to this topic are

often sought at an international and European level already. The OECD takes the lead in trying

to encounter tax evasion for many years now and pleads for transparency and international

cooperation between tax administrations. The European Union also took the initiative to

improve the exchange of information between tax administrations. Important here is the

Directive on Mutual Assistance and the Savings Directive. Probably even greater effect can be

attached to these initiatives than to the work of the OECD. Firstly, because of the legal value of

these directives. The OECD is a politically inspired organization and strictly no legal value can be

attached to the model-treaties or proposed international standards. Moreover, the proposed

working method by the OECD standards provides for exchange of information on request,

whilst the savings directive provides for instance for automatic information exchange. The

European Commission did adopt an amending proposal in 2008 with a view to closing some

existing loopholes.222 Some complex and denatured financial products should be included in the

221 See for example the so-called Bretton Woods II-plan and the G20-meeting in Washington, 15 november 2008.

222http://ec.europa.eu/taxation_customs/resources/documents/taxation/personal_tax/savings_tax/savings_direct

ive_review/com(2008)727_en.pdf.

http://ec.europa.eu/taxation_customs/resources/documents/taxation/personal_tax/savings_tax/savings_directive_review/com(2008)727_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/personal_tax/savings_tax/savings_directive_review/com(2008)727_en.pdf


71

scope of the Directive after this change too. One of the direct causes of the financial and

banking crisis was exactly the creation of complex, non-transparent and denatured financial

products. With the new proposal on the Directive on Mutual assistance the EU will aim to make

it no longer possible for tax administrations to refuse an appeal by another tax administration

on the exchange of information from financial institutions.223

6.9 The Dutch system

Now that a normative framework has been formed and the several tax systems of the Eucotax-

Wintercourse participating countries have been investigated when it comes to investment

income of individuals, something more can be said concerning the Dutch income tax system,

more specifically about the way the Netherlands taxes capital income. As described earlier in

this master thesis, the main reason for the implementation of the current system was the

prevention of tax avoidance. 224 The constructions that used to take place are no longer possible,

so in that matter the current system has been successful. The question however is, whether the

assumed investment yield meets the requirements of a good taxation system, such as meeting

the principles of equality and efficiency.225 Relevant in this respect is that the assumed

investment yield does not only apply to those who used certain tax avoiding constructions, but

to everyone with capital. The taxpayer that has a lower return than the 4% assumed investment

yield is still taxed as if his return was 4%.226

This simple short example clarifies that the assumed investment yield does not take the

ability-to-pay principle into account. Naturally this would be the case with any type of such an

assumption and the legislator attempted to repair this failure in the system by a relatively low

tax rate.227 Still the question remains whether the system is in line with the principles of

equality and ability-to-pay since every taxpayer with capital is confronted with a raw system

223 Proposal of 2 februari 2009 for a new directive concerning mutual assistance within the European Union in the

area of taxation, COM (2009)29. Adopted by the Commission on 1 february 2011. 224

See section 2.7. 225

See sections 6.2 and 6.3. 226

For a more detailed description of the box 3 system see section 2.6. 227

See annex 2.


72

that was developed to cross a quite small group of tax constructors. This question becomes

more pressing when one realizes that the assumed investment yield contradicts the ability-o-

pay principle in other areas as well.228

First of all, no rebuttal is allowed, so no serious deviations of the actual generated

income from capital are taken into account. The opposite can also be the case, for example

with speculation profits that can turn out to be much more than 4%. Because of the economic

and financial crisis, these days the first example will be more likely to occur. The benefit of the

practical efficient approach of box 3 is also its weakness, reality will always deviate from the tax

base.

Secondly, as Dusarduijn and Gribnau note, those with a relative smaller capital will be

disadvantaged by the assumed investment yield, because most smaller capitals are treated risk

avoiding and placed on a savings account with a low interest. It will not come as a surprise that

(also due to the financial and economic crisis) the interest on savings has been under 4% most

of the time. Those with more capital, can afford to take more risk with their capital and

therefore achieve a higher return on their investments.229 Dusarduijn and Gribnau also note

that the assessment dates infringe on the ability-to-pay principle. A time proportional

application of the assumed investment yield is missing with the exception of partial domestic or

foreign tax duty.230 The implementation of only one assessment date on January 1st 2011 does

not change this.

Also needs to be mentioned that the tax base cannot be negative and therefore no

negative income can arise. Carry back or forward of losses with other years is consequently

impossible. The settlement of losses has always been the tool of choice to soften the

unreasonable consequences of the annual tax levy. The only reason for this seems to be the

whish of the legislator to ensure a more consistent tax revenue on capital income. Perhaps this

228 L.W. Sillevis and M.L.M. van Kempen (red.), ´Cursus Belastingrecht´, Deventer: Kluwer 2010, p. 849.

229 S.M.H. Dusarduijn and J.L.M. Gribnau, ‘Vermogensredenmentsheffing’, in: Vijf jaar Wet IB 2001, Deventer:

Kluwer 2006, p. 519. 230

S.M.H. Dusarduijn and J.L.M. Gribnau, ‘Vermogensredenmentsheffing’, in: Vijf jaar Wet IB 2001, Deventer: Kluwer 2006, p. 522-523.


73

was for the best in the light of the financial and economic crisis, since no capital losses (in box 3)

have to be taken into account and because of the tax levy on 4% in spite of possible losses

suffered continued.

The legislator decided the tax rate on capital income could not be more than 30%,

because of the fear of capital flight. Dusarduijn and Gribnau rightly note that the legislator has

not made a convincing connection between the investment climate and the tax base, so this

argument posses no justification for the assumed investment yield at a rate of 30%.231 A more

pressing question that follows is whether the combination of the assumed investment yield

with the 30% tax rate favors capital owners compared to entrepreneurs and wage-earners

who’s labor income is taxed at a rate up to 52%.232

It should be obvious that the difference in tax rate stimulates taxpayers to come up with

constructions to create transitions between box 1 and box 3. For capital with a return (much)

higher than 4% a year it is more attractive to place this in box 3, because a part of the value

increase remain untaxed and the levy that does occur is at a low tax rate. The legislator

implemented this system to counteract tax arbitrage under the former tax regime, but has

created a system to do so that has many construction opportunities of its own. The legislator

has tried to repair some of these effects, for example the rules around making assets

available,233 but has not fully succeeded.

As suggested sometimes before in this master thesis, the financial and economic crisis

might not have hit as hard and will be overcome faster, when people have a greater buffer to

be more able to ‘role with the financial punches’. Though box 3 does not allow negative income

and does not allow any cost deductions, it too contains an incentive to finance things with loans,

because loans decrease the tax base.

Up to now most of the criticism on box 3 had something to do with the principle of

equality and in line with that the ability-to-pay principle. Though the system of box 3 is built on

231 S.M.H. Dusarduijn and J.L.M. Gribnau, ‘Vermogensredenmentsheffing’, in: Vijf jaar Wet IB 2001, Deventer:

Kluwer 2006, p. 518. 232

S. Cnossen, ‘Kabinet verlaagt belasting welgestelden’, WFR 1998, p. 758-759. 233

See section 2.4.4.1.


74

the principle of efficiency, there is something to be said that the legislator has also in this area

not been very successful. In order to determine the 4% assumed investment yield, something to

determine this from is necessary. This will not be much of a problem for a bank account, but it

becomes more difficult when certain assets need to be valued at their fair value. In practice this

means a tax on an assumed investment yield of a guessed value of an asset. It does not get

much more complicated, while the legislator’s goal was to simplify. Another question that can

be asked in this respect is why the real value cannot be used. As said, the value of a bank

account is easy and the fair value of an asset needs to be determined anyway, with or without

an assumed investment yield.

Taking all things discussed in this section in consideration, I must join many of the

mentioned authors in their plea against box 3. However, I believe that changing the income tax

system, or any other tax system for that matter, drastically at this point in time will only cause

more uncertainty in an economic market that is already walking on eggshells due to the

financial and economic crisis. The discussions about box 3 should definitely continue in order to

eventually come up with a system that satisfies the elementary principles more.

6.10 Conclusion

Determining a clear cause for the economic and financial crisis is hard enough as it is, let alone

zooming in on the taxation of investment income of individuals. The same goes for linking this

taxation to the prevention of the financial and economic crisis. Looking at the reaction of the

Eucotax-Wintercourse participating countries, an indirect link can be distinguished between the

economic and financial crisis and the governments’ budgets as well as the budgets of individual

taxpayers. If the governments and/or taxpayers had more budget, perhaps the impact of the

crisis would not have been as hard as it has been.234 At least more budget is needed in

overcoming the financial and economic crisis. This is the reason why for most countries, capital

flight has become a bigger issue. The question can be raised whether capital income should be

234 Whether this would have actually made a difference remains to be seen, because more budget may have only

let to more expenses.


75

taxed at all, but in my opinion the arguments to tax capital income are stronger than the

arguments not to tax capital income. However, the way the countries try to achieve less flight

of capital varies. One may also wonder whether preventing flight of capital is an achievable goal,

since it seems there will always be a country where the taxation is more favorable than in the

country of residence. Governments are aware of this fact and therefore more cooperation

between countries on tax matters is wanted and many initiatives have already been taken.

Finally I considered it interesting to get into the Dutch system more deeper now that a testing

framework was developed and the systems of the various countries had been described. In my

opinion there is a lot not right about the Dutch income tax system and box 3 in particular, but

at this point in time it is not wise to make any drastic changes because the economic market is

already very sensitive due to the financial and economic crisis.


76

Chapter 7: Conclusions

7.1 Summary

The Dutch personal income tax system consists of three boxes. Box 1: income from work and

home ownership, box 2: income from the substantial shareholding regime and box 3: income

from savings and investments. Each box has its own tax regime and tax rate, these tax rates are

respectively a progressive rate up to 52%, 25% and 30%. At first glance it seems that

considering the topic of this master thesis, taxation of investment income of individuals, it

would suffice to only take a look at box 2 and 3. However, in order to prevent box arbitrage by

making sure some types of income fall in a box with a more favorable regime and rate than

desired by the legislator, some types of investment income are taxed in box 1 under certain

circumstances.

Nevertheless, the most striking aspect of the Dutch personal income tax has always

been box 3, because here taxes are levied on an assumed investment yield of 4%. To prevent

capital flight was chosen for a separate (lower) taxation of income from savings and

investments. From efficiency point of view the legislator came up with the 4% assumed

investment yield. The legislator decided it would be too difficult to determine the actual

generated income in box 3. However, questions are raised whether this is true, because in

order to calculate the 4% assumed investment yield, something to calculate it from is necessary,

so taxpayers need to declare the value of their assets in box 3 anyway. Another benefit for the

legislator of the box 3 system is the consistent revenue for the treasury. When considering the

economic and financial crisis, box 3 softened the blow a bit for the treasury, because box 3

cannot result in a refund, due to the fact that negative income can only be set-off against

positive income in box 3.

Another aspect of an income tax system besides its technical aspects and its background

is the way it treats non-residents. In the Netherlands non-residents are taxed when there are

certain sources of income derived from the Netherlands. This can be different when an agreed


77

upon tax treaty states otherwise. Like for residents, the income for non-residents is determined

per box. However, non-residents are not entitled to income tax credits, levy rebates and

personal deductions. This is different when a non-resident taxpayer opts to be treated as a

resident taxpayer. This choice can be made each year, however, when a non-resident stops

opting to be treated as a resident taxpayer, the tax deductions he received over the past eight

years can be reclaimed, with the exception of deductions every non-resident taxpayer receives

even though he did not opt to be treated as a resident taxpayer. Avoidance of double taxation

is primarily arranged through tax treaties. When avoidance of double taxation is not regulated

in any way, the Netherlands have a unilateral decree in place. Avoidance of double taxation is

also calculated per box and the unilateral decree describes the methods of avoidance that need

to be used. Also there is the issue of the assumed investment yield of box 3. It has a lot of the

characteristics of a wealth tax. The problem is that a lot of tax treaties and conventions treat

wealth taxes differently from income taxes. After much discussion it was decided that box 3

should be considered an income tax.

When comparing the different tax systems that are used in Europe, a clear trend can be

identified. Earlier the majority of the European countries adopted the comprehensive tax

system of which the underlining values are the principle of equality together with the

redistribution of wealth. Since the 1990’s, with the introduction of the dual income tax system

in the Nordic countries, the trend seems to go towards increased efficiency at the cost of

equality. The principle of equality is recognized in the constitutions of most of the participating

countries. However, solemnly in a minority of these countries the taxpayers have the possibility

to take legal action against tax provisions on the ground that the provisions violate the principle

of equality. Nevertheless, the success rate to challenge the compatibility of a tax provision with

regard to the constitutional right to equality is very low.

Interesting to point out is that in the Netherlands, where the principle of equality could

be considered to be least respected due to the taxation of investment income at an imputed

rate of return of the box 3 assets, no such constitutional right is provided. The box system

however seems to meet the requirements to manage efficiency. Where equality is a


78

fundamental principle in a comprehensive system, its importance is less visible in the schedular

tax systems. In this system neutrality, efficiency and simplicity are favoured. These

characteristics, and the use of a flat rate, seem to be more attractive for investors. The dual tax

system seems to be the intermediate between the comprehensive tax system and the box

system to deal with the principle of equality and at the same time manages to be efficient. This

is probably the main reason for the popularity of the system. Interesting is also that Sweden,

which has taken the dual income tax system the furthest, is about to implement an optional

investments savings account for the most common securities to be taxed as a fixed assumed

yield much similar to the third box in the Dutch system. The main reason for this new tax form

is to increase the simplicity of investments and to prevent lock-in effects caused by the use of

the realization principle and thereby increase the efficiency of the system.

Like with the taxation of residents, the systems of the various Eucotax-Wintercourse

participating countries considering the taxation of non-residents vary a lot. No clear trend can

be discovered. However, due to treaties that exist between most of the Eucotax-Wintercourse

participating countries, more clarity is given which country had the right to tax a certain type of

income. Still, because of national legislation, double taxation can occur. This is even more so

the case when the non-resident comes from a country with whom no tax treaty exists.

Determining a clear cause for the economic and financial crisis is hard enough as it is, let

alone zooming in on the taxation of investment income of individuals. The same goes for linking

this taxation to the prevention of the financial and economic crisis. Looking at the reaction of

the Eucotax-Wintercourse participating countries, an indirect link can be distinguished between

the economic and financial crisis and the governments’ budgets as well as the budgets of

individual taxpayers. If the governments and/or taxpayers had more budget, perhaps the

impact of the crisis would not have been as hard as it has been.235 At least more budget is

needed in overcoming the financial and economic crisis. This is the reason why for most

countries, capital flight has become a bigger issue. The question can be raised whether capital

235 Whether this would have actually made a difference remains to be seen, because more budget may have only

let to more expenses.


79

income should be taxed at all, but in my opinion the arguments to tax capital income are

stronger than the arguments not to tax capital income. However, the way the countries try to

achieve less flight of capital varies. One may also wonder whether preventing flight of capital is

an achievable goal, since it seems there will always be a country where the taxation is more

favorable than in the country of residence. Governments are aware of this fact and therefore

more cooperation between countries on tax matters is wanted and many initiatives have

already been taken. Finally I considered it interesting to get into the Dutch system more deeper

now that a testing framework was developed and the systems of the various countries had

been described. In my opinion there is a lot not right about the Dutch income tax system and

box 3 in particular, but at this point in time it is not wise to make any drastic changes because

the economic market is already very sensitive due to the financial and economic crisis.

7.2 Final statements

The goal with this master this was to answer the following research question:

What has been the role and the position of the taxation of investment income of individuals in

causing the financial and economic crisis and what should be the role and the position of the

taxation of investment income of individuals in overcoming the financial and economic crisis?

In my opinion taxation had no direct or clear role in causing the financial and economic crisis.

What can be said is that in a lot of income tax systems, including the Dutch system, incentives

are in place for financing with loans instead of equity, due to the deductibility of interests or

the decrease of the tax base. This has a negative effect on the State’s revenue and also on the

financial buffer of individual taxpayers. Another issue that might be important concerning the

financial an economic crisis is the reallocation of income, e.g. the equality and ability-to-pay

principles. When capital income is not taxed, this leads to inequality, because this is only

beneficial to those who enjoy capital income. A more economical approach is necessary to

determine whether or not this type of income should be taxed at all. I think taxation of capital

income is necessary, because otherwise to compensate the lack of income to the treasury, the

taxation on labor income will be increased which will lead to even more inequality in taxation.


80

On the other hand, taxing capital income to harshly will lead to capital flight. When capital flight

happens on a larger scale, the effects are similar to when no tax is levied on capital income at

all. The legislators of most Eucotax-Wintercourse participating countries are well aware of this

effect and therefore chose a different tax regime for capital income which of course includes

investment income.

The second part of the research questions is what the role and position of taxation on

investment income of individuals should be in overcoming the financial and economic crisis. As

said, I believe in the taxation of investment income of individuals, but I also believe in an

different regime for this type of income. While most Eucotax-Wintercourse participating

countries already have a system in place that compliment my opinion, I do not suggest any

major changes for these countries. More so, because the economic market is now starting to

get back on its feet and is still very sensitive , it would not be wise to implement any drastically

different tax regime. An area where in my opinion is room for expansion is in the counteracting

of capital flight. I believe that it is necessary for countries to be able to make up their own,

specifically suited for their countries’ values, tax regime. Different tax regimes automatically

lead to capital searching its most favorable tax regime. In principle, I do not have any problems

with that, because it is a result of my believe that each country should be able to determine its

own regime. However, I also believe that everyone should pay their fair share in their own

home country. That can be achieved through more exchange of information, though with the

right amount of privacy protections rules.


81

Annex 1


82

Annex 2


83


84

Annex 3

Investment income subject to taxation (tax base):

Type of income included in tax base?

Taxed unconditionally

Taxed, with qualifications

Not taxed

Dividends Austria, Belgium, France, Germany, Hungary, Italy, The Netherlands, Poland, Spain, Sweden, the US

Interest income Belgium, France, Hungary, Italy, Poland, Spain, the US

Austria, Germany, The Netherlands*

Sweden

*The Netherlands: Interest income: taxed if it is from profit-sharing bonds.


Taxed Taxed, but not regarded investment income

Not taxed

Rent on real estate Poland, Sweden, Spain, the US

Austria, Belgium, France, Germany, Hungary, Italy

Royalties Belgium, France, Italy, Poland, Spain, the US

Austria, Germany, Hungary, Sweden


Taxed Not taxed, except under certain conditions

Not taxed


85

Capital gains from disposal of shares

Hungary, Poland, Spain

Austria, France, Germany, Italy, The Netherlands*, Sweden, the US

Belgium

Capital gains from disposal of real property

France, Germany, Hungary, Italy, Poland, Spain**, Sweden, the US

The Netherlands*, Austria***

Belgium

*The Netherlands: Capital gains from disposal of shares: Not taxed in box 3, but taxed in box 2; Capital gains from disposal of real property: not taxed in box 3, but taxed in box 1. **Spain: Taxes capital gains from disposal of real property, but not as investment income. ***Austria: Taxable if the property has been under ownership of the seller not more than 10 years.

Tax Rates

COUNTRY TYPE OF INCOME TYPE OF RATE (Highest Marginal Rate)

France Dividends (residents of tax havens)

Flat (50%)

France Royalties Flat (33.33%)

United States

All investment income other than capital gains Flat (30%)

Sweden All investment income Flat (30%)

Italy Royalties Flat (30%)

Netherlands Box 3: income from savings and investments Flat (30%)

France Dividends (Residents of EEA)

Flat (29%)


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Italy Dividends Flat (25%) (12.5% for saving shares)

France Dividends (All other nonresidents)

Flat (25%)

Austria All investment income Flat (25%)

Germany All investment income Flat (25%)

Netherlands Box 2: dividends, other profit distributions, interest, and capital gains derived from substantial shareholdings

Flat (25%)

Belgium Dividends and other interest Flat (25%) (exemptions 15%)

Spain Royalties and payments to artist and sportsmen Flat (24%)

Spain Dividends and interest over 6,000 euro Flat (20%)

Poland Interest and royalties Flat (20%)

Poland Capital gains, dividends, and income from capital funds Flat (19%)

Spain Dividends and interest below 6,000 euro Flat (19%)

Hungary All investment income Flat (16%)

Belgium Interest Flat (15%)

United States

Capital gains from immovable property Flat (10%)

United States

Capital gains from disposal of shares Flat (0%)

France Interest Flat (0%)

Italy Investment income other than dividends and royalties Progressive (43%)

Netherlands Box 1: income from home-ownership Progressive (52%)

Poland Rent Progressive (32%)


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Collection Mechanism

COLLECTION MECHANISM COUNTRY

Withholding Austria Belgium France Hungary Italy The Netherlands (Box 3) Poland Sweden (dividends) United States

Self-assessment The Netherlands (Box 1 and Box 2) Poland (rents and capital gains from immovable property) Sweden (investment income other than dividends)


88

Annex 4


89

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