Godelijn Boonman, of GMW Lawyers, explains why taking up the option of Stamrecht BV in the case of redundancy needs to be done sooner rather than later.
The option of forming a Stamrecht BV (an annuity company) is often discussed when an employee who is being made redundant receives a severance payment.
Forming such a company is an attractive option if the gross severance payment is more than 75.000 euros. For smaller amounts, annuity products offered by banks and insurers are suitable.
A Stamrecht BV is formed by the redundant employee himself, and the employer then transfers the gross severance payment directly to the company. This means that, for the time being, no tax is paid.
The Stamrecht BV then makes periodic payments to the former employee, which are taxed. Because these payments are smaller, they are normally taxed at a lower rate. This is a more tax-efficient arrangement than having the severance payment disbursed in a single instalment, in which case the tax rate is usually 52 per cent.
Moreover, as long as the money remains in the Stamrecht BV account, the owner is also exempt from capital gains tax (1,2 per cent per annum). The funds held by the Stamrecht BV can actually be used to start your own business or be invested according to your own preferences.
The Dutch Cabinet has decided to abolish the annuity exemption with effect from January 1, 2014. From then on, it will no longer be possible to transfer severance payments tax-free to banks, insurers or the employee's own Stamrecht BV.
The move to abolish tax-free receipt of a severance payment was prompted by government spending cuts. The tax benefit simply costs the government too much money and the Cabinet expects to claw back over 800 million euros by abolishing this tax option.
Existing annuities will be unaffected by the Cabinet's decision, which means it is still possible to invest a severance payment tax efficiently.
An annuity agreement must have been signed before January 1, 2014, stipulating that the employer grants the employee an entitlement to periodic payments in lieu of past or future lost salary, and that the payments will commence no later than in the year in which the employee reaches retirement age.
The agreement must also stipulate that the amount used to finance the entitlement will be transferred to a provider designated by law. The date of termination of employment must also have been finalised by December 31, 2013.
However, this does not mean that the actual termination date itself must be in 2013, merely that the redundancy must have been announced prior to December 31, 2013 and be taking place in the near future. This is always the case if the statutory notice period is applied.
Including the statutory extension period, a statutory notice can be anything up to a maximum of six months, which means an employee's employment must end by June 30, 2014 at the latest.
There are currently around 125.000 Stamrecht BV accounts in the Netherlands, which are estimated to contain assets totalling approximately 10 billion euros.
As part of its spending cuts, the Cabinet wants to try to persuade the owners of these annuity companies to withdraw a large percentage of those assets.
Owners who surrender their right to annuity payments in return for a single instalment payment receive a 20 per cent rebate: they are only charged payroll tax on 80 per cent of the single instalment, provided they do this in 2014.
Incidentally, this "80 per cent scheme" also applies to annuities held at banks and insurers, but it remains to be seen whether they will be willing to co-operate with the single instalment buyout, since many policies contain a clause prohibiting surrender.
In order to use this "80 per cent scheme," the amount used to finance the annuity entitlement must have been transferred by the employer before November 15, 2013 - a tight deadline.
Whether this "80 per cent scheme" is purely for show is a moot point, since the financial benefit of the one-off rebate is partially negated by the fact that money withdrawn from Stamrecht BVs is added to annual earnings in 2014.
Consequently, a person's annual earnings may enter a higher tax bracket, meaning that this income - largely comprising the severance payment - will be taxed at a slightly higher rate. This is particularly relevant for people on a low income.
Moreover, the 20 per cent rebate applies only to the nominal value of the Stamrecht BV, i.e. the amount originally paid into the company, plus accrued interest.
In certain situations, therefore - one example being a Stamrecht BV that has suffered a loss - annuity payments cannot be surrendered under the scheme at the lower value of the annuity provision held by the company.
The essential question is, however, how many potential beneficiaries will actually take up this scheme? It may be worth talking to the tax inspector.
Given the tax benefits of a Stamrecht BV, it is advisable to make use of this option while it still exists. Keep a close eye on the deadlines, such as finalising the termination date and the end of the notice period, and seek expert advice in plenty of time. After all, missing a deadline could now prove costly.
Godelijn Boonman is Attorney-at-Law at GMW Advocaten / Legal Expat Desk. For more information, please comment below.