High-Tax Country Resident Planning To Go Offshore: Netherlands

If you are resident in the Netherlands (which will be the normal situation for a native-born Dutch individual) then you are taxable on your world-wide income and capital gains from 'substantial participations'). The wealth tax applies, as do inheritance and gift taxes.

There is no precise statement of what constitutes residence, but the criteria include the length of time spent in Holland during a tax year, ownership of real property, family or other personal connections. If an individual is registered in a municipal register then there is a presumption of residence.

Establishing non-residence for a Dutch tax resident usually amounts to demonstrating that residence has been established elsewhere, and that the normal tests for Dutch residence are not fulfilled.

If a Dutch resident becomes non-resident, then his 'substantial participations' in foreign Dutch entities are subject to a 'preservative assessment' of capital gains tax, which is not collected as long as the shares are not alienated within 10 years of departure.

If a Dutch non-resident transfers a Dutch 'substantial participation' (= a holding of greater than 5% in a corporate entity) out of the jurisdiction then there is a deemed disposal, and gains will be taxed.

It will be seen that a Dutch resident planning to move offshore needs to avoid the creation of 'substantial participations' inside Holland in the period before leaving. On the other hand, there are plenty of asset types that do not fall under the 'substantial participation' rules. In order to avoid income taxation while residence continues, some type of capital appreciation asset would be preferable, and it should be outside Holland, to minimise difficulties with terminating residence.

Dutch estate (inheritance) tax applies to the world-wide assets of a Dutch resident for up to 10 years after residence has ceased; after that it applies only to his Dutch assets. Dutch tax law does now recognise trusts, and it is possible that they can be used to shelter some types of asset, although the transfer of 'substantial participations' into offshore trust may give rise to a disposal. If rapid capital appreciation within the participation is expected, and if departure is a firm intention, then it may pay to make the transfer early on. Assets outside the capital gains tax rules which are vulnerable to estate tax may be prime candidates for transfer into trust.

Once a definite decision to move offshore has been made, careful thought should be given to existing Dutch capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains or income tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

Once Dutch residence has been terminated, and if non-residence is expected to be permanent, then an ex-Dutch resident is free to invest offshore in order to obtain the best possible returns, although the 10-year reach of estate tax after departure must always be remembered.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 35 of the main offshore jurisdictions, including the Netherlands Antilles and Aruba, which offer especially suitable offshore regimes for Dutch citizens. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

Individuals who have significant Dutch business income need to take the residence rules into account. They may be able to make use of offshore corporate tax structures, but anyway need to take expert advice on how to structure this income once emigration has taken place, to ensure that they do not fall within the residence rules.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, including the Netherlands Antilles and Aruba, which offer especially suitable regimes for Dutch companies. www.lowtax.net has descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.