This article discusses the Dutch tax treatment regarding Dutch and foreign trusts.
Trusts take various forms, including revocable trusts and irrevocable trusts. In a revocable trust, the settlor can bring the trust assets back into his own estate and in an irrevocable trust he cannot. In addition, a distinction can be made between a non-discretionary (fixed trust) and a discretionary trust. If a beneficiary has a concrete right to receive periodic payments from the trust or can dispose of the trust assets as if they were his own, then it is a non-discretionary trust. On the other hand, in a discretionary trust, the rights of the beneficiary are not determined, and the beneficiaries have no concretely determinable rights. Thus, whether a discretionary or non-discretionary trust exists depends on the facts, circumstances and what is provided in the trust’s certificate of formation.
Below, we discuss in more detail the discretionary trust and the non-discretionary trust and the tax treatment of both trust forms.
Discretionary trust
A discretionary/ revocable trust can be used to segregate the economic interest and legal control of assets. The difference of a trust over other common (Dutch) family structures (e.g. certification by using a foundation trust office (in Dutch called: stichting administratiekantoor, ‘STAK‘)), is that the potential rights holder is only a beneficiary of the trust. The beneficiary has the possibility of receiving distributions at any time but does not yet have concrete economic rights and is therefore at a much greater distance from the assets than, for example, certificate holders are from the assets in a STAK. The lack of concrete rights offers great flexibility, as it is still easy to determine which beneficiaries receive distributions and of what amount.
In most cases, a discretionary trust falls under the Dutch tax regime for Separated Private Wealth (‘SPW‘), known as the SPW regime. Below, we discuss the implications of the application of this regime for the taxation of trusts.
Personal income tax
Under the SPW regime, the assets and debts as well as the proceeds and expenses are allocated to the contributor. The trust is thus considered transparent and the tax on the assets is levied on the contributor. The contribution of assets to the trust takes place untaxed.
Depending on the nature of the asset, it is taxed in box 1, 2, or 3 of the Dutch income tax return. For example, if a shareholding is transferred into a trust, the contributor will be taxed in box 2 if it is an interest of more than a 5% and in box 3 if the shareholding is less than 5%.
Gift tax
The contribution of the assets into a trust is not a taxable event for gift tax. At the time distributions are made from the trust to the beneficiary, this is considered a gift originating from the person to whom the assets are allocated. The contributor is taxed on these distributions with gift tax. If distributions are made from a foreign trust to a resident of the Netherlands, whether gift tax is due depends on the circumstances of the contributor. To the extent the contributor is not a Dutch national and has not lived in the Netherlands, no gift tax is due on the distributions.
Inheritance tax
If the contributor dies, inheritance tax is payable because the assets in a trust are allocated to the heirs of the contributor. In most cases, the heirs are also the beneficiaries, but there can be situations where a beneficiary is not an heir, or vice versa. Allocation to the heir does not take place if the heir and/or his or her (fiscal) partner are not and cannot become a beneficiary.
In the case of a foreign trust with a foreign contributor and an heir in the Netherlands, whether Inheritance tax is due depends on the circumstances of the contributor.
Non-discretionary trust
A non-discretionary trust is not subject to the APV regime. This means that such a trust may be treated differently for Dutch tax purposes.
Personal income tax
The value of the entitlement is included in the beneficiary’s income or asset base. Depending on the nature of the asset, the entitlement is taxed in box 1, 2 or 3 of the income tax return.
If the contributed assets are assets on which capital gains are taxed, such as business assets and substantial interest shares, the contributor will be liable for tax on any capital gains on contribution to a trust.
Gift tax
In a non-discretionary trust, the assets are deemed to be transferred from the contributor to the beneficiary. The contributor must therefore pay gift tax on the assets that has been contributed.
If the trust is a foreign trust with a foreign contributor and a beneficiary resident in the Netherlands, whether gift tax is due depends on the circumstances of the contributor. To the extent the contributor is not a Dutch national and has not lived in the Netherlands, no gift tax is due on the contribution of assets to a trust.
Inheritance tax
In the case of a non-discretionary trust, no Inheritance tax is levied when the contributor dies since the assets of the trust are not allocated to the heirs of the contributor. This is because the assets were already allocated to the beneficiary at the time of their contribution to the trust.
Finally
If you have any questions because of the above or are curious about what this means for your specific situation, please feel free to contact us.