Since 2001, ‘box hopping’ has been a way of optimising one’s income tax burden. ‘Box hopping’ refers to structuring one’s income and assets in such a way as to make the best possible use of the way in which income tax is levied.
Boxing
For the purposes of income tax, income is divided into the following three categories:
– box 1, which includes (among other things) profits, wages, other work and the owner-occupied home;
– Box 2, containing income from a substantial interest;
– Box 3, covering other income.
In boxes 2 and 3, tax is calculated at a fixed rate of 25% and 30% respectively. In box 1, a progressive rate applies, which means that the rate increases as income rises.
In boxes 1 and 2, the income actually received is taxed. In box 3, the income is equal to 4% of the value of the assets belonging to that box as at 1 January of the tax year.
Saldinist
The law sets out a fixed order for allocating income to the tax brackets. First, it is determined whether an item of income is taxed in bracket 1. If this is not the case, it is then determined whether bracket 2 applies. Any income components that do not fall into Box 1 or Box 2 are allocated to Box 3. Apart from exemptions, an income component is therefore always taxed in one of the three boxes.
Saldinists believe they have found a solution to this. Just before the turn of the year, they withdraw cash from their bank accounts and deposit that money back into those accounts just after the turn of the year. They do not declare the cash as income in Box 3 on their income tax return. This is incorrect, as cash too – if it exceeds €500 on 1 January – forms part of the assets on which the flat-rate return of 4% is calculated in box 3 (on which 30% income tax is payable). The fact that no actual return is realised on the cash is irrelevant. Incidentally, ‘balance-hoppers’ do not actually ‘box-hop’. After all, they are merely pretending to hop ‘out of the box’!
Unusual transaction
Will the tax authorities discover this illegal practice of “box-hopping”? If the ‘saldinist’ uses this ‘trick’ every year, the amount withdrawn will not appear in the bank account statements that the bank submits to the tax authorities annually. As a result, the tax authorities usually do not discover that part of the assets has not been declared in box 3. However, the bank is required to report unusual transactions to the Financial Intelligence Unit (FIU). A cash withdrawal of €15,000 qualifies as such an unusual transaction. The report of an unusual transaction (MOT report) is forwarded by the FIU to the Tax and Customs Administration. The FIOD has recently launched six criminal investigations into a total of 11 ‘saldinists’, who, for several years running around the turn of the year, withdrew sums of between €100,000 and €800,000 from their bank accounts.
Box hopping
Anyone wishing to engage in legal ‘box-hopping’ must pay close attention to the anti-abuse provisions included in the law specifically with box-hopping in mind. One popular legal method of ‘box hopping’ in recent years – partly as a result of the very low interest rates on savings – is to place savings within a private limited company (B.V.). Those savings then ‘hop’ from Box 3 to Box 2. As the actual return is taxed in box 2, the tax burden is considerably lower than when tax is levied in box 3 on the flat-rate return of 4%. It appears that this legal method of ‘box-hopping’ will soon be made less attractive. During the debate on the 2016 tax plans, a motion was passed in the House of Representatives requiring the Government to take measures to put a stop to the undesirable flight from Box 3. We will find out next year what form these measures will take. See also our End-of-year tips for 2015.