High-Tax Country Resident Planning To Stay Put: 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.

Due to the absence of a comprehensive capital gains tax, Dutch residents are able to invest into many types of domestic or foreign asset and to take advantage of capital appreciation without fear of capital taxation (there is always the wealth tax, of course). Income from many foreign countries will come with a tax credit if there has been local taxation, either under the Netherlands' many double tax treaties, or under the Dutch unilateral foreign income tax credit rules. However, if the foreign asset is in a jurisdiction which does not apply a high enough rate of tax, the unilateral rules will not apply, and there will probably be no tax treaty.

However, investments by Dutch residents into offshore holding companies, closely-held investment funds or other private entities are likely to fall within the 'substantial participation' rules, whereby a stake of 5% or more is subject to capital gains tax on disposal or realisation.

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

The availability of domestic tax-privileged investment instruments in Holland, and particularly the absence of capital gains tax, means that for many individuals it will be necessary to balance the advantages of domestic investment against the superior returns that may be achievable offshore.

Pensions investment can also include an offshore element, although the tax advantages of pensions have been steadily eroded vis-à-vis other tax-efficient investments, which are more flexible. In particular, for high earners, pensions provision over and above that allowed for tax purposes has often been invested in offshore Funded Unrecognised Retirement Benefit Schemes (FURBS). The foreign (offshore) life assurance sector has been particularly innovative in these types of product.

For an individual wishing to explore the investment opportunities further afield, 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.

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.