Patricia van der Hut is partner at Finsens. Finsens is specialized in rendering services to expats i...
Dutch Tax: Announced measures for severance payments30 October 2013, by Patricia van der Hut
Recently the Dutch government finally came to an agreement on the 2014 budget. One of the new budget’s savings measures will be to abolish the option to defer taxes on a golden handshake.
Current golden handshake rules
Currently, when a lump sum payment is made in lieu of a termination of an employment contract, the employee has a choice: he can either settle payroll and income taxes upon receipt of the lump sum, or to defer taxes on the lump sum by depositing the cash for a so-called "standing right," a right to receive annuities in the future.
The money should then be deposited with a bank on a special blocked account or with an insurance company.
A third alternative is setting up a stamrecht B.V., an entity that can act as the insurer for the annuity. Often, this B.V. is then also used to finance and run the startup of a new business.
Requirements for "standing rights"
› Payment date
Under the Dutch Wage Tax Act, the annuity must start no later than the employee’s 65th birthday. The settlement can accrue until age 65 and must then be converted into an annuity.
› 1% mortality probability
The "uncertain criterion" must be satisfied, which means that the mortality probability during the term of the annuity must be at least 0,94%.
Put differently, it means that the payment period must be at least so long that, according to objective mortality tables, the probability of death within this period is at least 0,94%. This is also known as the 1% criterion.
Advantage of standing rights
› Tax advantage
The settlement will be paid out as an annuity, spread out over a certain period.
So instead of paying tax on the full amount, people will now be able to pay tax on a part of the settlement, which may offer an advantage for people who are in a lower income tax bracket than 52%.
Furthermore, there is no need to pay any net asset tax in Box 3 on the after-tax lump sum.
› Postponement advantage
The first installment of the annuity has to be paid on the recipient’s 65th birthday at the latest.
So if the money is not needed at the moment the settlement is granted, it is possible to postpone the payment and tax on the payment. This way the annuity can be used as a supplement to an old age pension.
Disadvantage of standing rights
What if the recipient decides he would still like to receive the funds as a lump sum after the settlement has been transfered into a standing right?
Then the payment is not only taxed at the 52% tax rate, there is also a 20% tax on the total amount.
Photo by Flickr user Victor1558
Proposed rules as of 2014
Receiving a golden handshake in lieu of a termination of an employment contract will mean the lump sum payment will be taxed.
The applicable rate depends on the total amount of earnings during the year, but in general it will be 52%. It will therefore no longer be possible to postpone taxation through standing rights.
For those who have already opted for the standings rights prior to January 1, 2014, the government has announced the option to have it paid out as a lump sum, without having to pay the 20 per cent interest. Furthermore, only 80% of the total lump sum payment will be taxed.
This option is only applicable if the full amount were to be paid out, rather than as a part of the standing rights.
It may therefore be interesting for those who are already in the possession of either a stamrecht B.V. or have deposited the funds into a blocked account or with an insurance company to see if it may be worthwhile taking advantage of this option.
Currently, this option is only applicable for 2014.
Points for attention
For those who are about to receive a golden handshake, it is important that, the severance payment is paid out by your former employer before November 15, 2013 in order to take advantage of the 80% rule.
So, even if you would prefer your golden handshake to be paid out as a lump sum rather than transferring it into standing rights, it may be worthwhile to choose the standing rights option anyway, and have it paid out as a lump sum in 2014, using the 20% discount.
Patricia van der Hut is a partner at Finsens, specialists in rendering services to expats in the areas of tax, mortgages and investment advice. For more information, please comment below or contact them directly.