The House of Representatives published the Spring Memorandum on 28 April to update the 2023 budget. This includes a number of changes to the business succession scheme for gift and inheritance tax (BOR) and the pass-through scheme in income tax (DSR).
By doing so, the government hopes to improve the efficiency and practicability of the schemes and remove any difficulties for entrepreneurs. In the Spring Memorandum, the government proposes a number of measures, which we will discuss below.
First, the government wants to change the exemption in the BOR: it is currently 100% for a going concern value – the enterprise value if the company is continued as a whole – up to €1,205,871 and 83% on the value above that amount. Under the proposal, this would become 100% for a going concern value up to €1,500,000 and 70% on the value above that amount.
In practice, entrepreneurs who own and rent out property often report it as business assets, while it is actually investment property. After all, business assets are for the most part exempt from tax, so there is a substantial tax advantage to be gained. In its memorandum, the government therefore proposes to lump all real estate leased to third parties together and classify them as investment assets.
A third change is the abolition of the 5% efficiency margin in both schemes. This margin means that in the case of private companies with limited liability, investment assets up to 5% of the business assets are regarded as business assets. According to the review, the efficiency margin does not achieve its objective and is also open to constructions.
For certain business assets that are used mixed – both privately and within the company – an option exists: it is up to the entrepreneur whether he qualifies the asset as business assets or private assets.
In the Spring Memorandum, the government proposes a new rule that limits the choice: business assets that are mixed use can only qualify as business assets and thus fall under the BOR or DSR to the extent they are actually used within the business. Say you use a car in your business for 70% and privately for 30%, only that 70% can fall under the BOR or DSR, instead of the current possibility of 100%.
Curtailing ‘substantial interest’
Currently, the rule is that any substantial interest qualifies for application of the BOR or DSR. In the Spring Memorandum, the government proposes to limit this to regular shares with a 5% interest that participate fully in the profit entitlement and liquidation proceeds. The rationale behind this is that it will simplify the implementation of the schemes and discourage constructions.
Possession and continuation requirement
The government also wishes to relax the possession and continuation requirements so as not to hinder changes in activities or restructuring. Under the current BOR, the donor must have owned the substantial interest shares for at least five years before he can actually gift them. Moreover, the new possessor must hold the shares for at least five years and continue the business during that time. How the government envisages this relaxation is not yet clear from the memorandum. It does appear that the employment requirement for the DSR will be abolished: the new owner no longer needs to have been employed by the company in question for at least 36 months.
Finally, the government wants to combat improper use of the BOR. Practice shows that people of age convert their personal assets into business assets while no real business transfer takes place. The government is therefore thinking of actually extending the period of the possession and continuation requirement from a high age. An anti-abuse provision may also come into play.
Current state of affairs
Currently, the government is waiting for a follow-up study regarding the proposed measures. The House of Representatives will be informed about the outcome of this study at the end of June 2023, where the measures will also be explained in more detail. The measure regarding leased real estate will be part of the Tax Plan 2024, the other measures probably in the Tax Plan 2025.