Just like oliebollen and champagne, end-of-year tax tips have become a traditional feature of the festive season. But you do need to get started on these tips a bit earlier than you do with the oliebollen.
What’s in the barrel ….
… that won’t go sour! But when it comes to taxation, there seem to be a few proposals in the pipeline that could well turn out to be rather bitter.
We are referring to the measure announced some time ago, under which loans from a director’s own private limited company in excess of €500,000 (plus the director’s own mortgage debt) will be taxed as income from a substantial interest (Box 2). This tax is due to be levied for the first time on the basis of the outstanding loan balances as at 31 December 2022. However, directors and major shareholders must already take this fully into account in their financial and tax planning for 2019, even though the exact details have not yet been finalised.
Another measure concerns the plans for Box 3, which are due to come into force on 1 January 2022. Only the excessively high tax burden on bank balances will be addressed. However, this will be offset by a higher levy on other assets. The bill is expected to be tabled in the first half of 2020. As the new Box 3 will not come into force until 1 January 2022, savings private limited companies (or funds) can remain in operation for (at least) another two years. With a time horizon of just two years, it is often even worthwhile to set up another savings private limited company (which must, of course, be done before 1 January 2020).
Income tax rates for Box 1
It is clear that tax rates are falling. In 2019, you will still pay 51.75% in income tax on any income above €68,507. In 2020, this rate will be “only” 49,5%. The rate will also fall for income up to €68,507: from 38.1% in 2019 to 37,35% in 2020 (and in 2021, probably to: 37,1%).
For those receiving the state pension, a lower rate applies of 19,45% on the first €34,300 of their income. This lower rate is due to the national insurance contributions levied on this portion of their income.
Deduction rate
These tax rates are calculated on the basis of your income. From 2020 onwards, most tax deductions (see below) will no longer be deducted at the highest rate (49.5%), but at 46%. In the years following 2021 and 2022, this will deduction rate reduced in stages, so that, with effect from 2023, the deduction will be made at the rate applicable to the first tax bracket: 37.1% (the rate provided for in the current proposals for 2021 and subsequent years).
The tip that goes with this is obvious:
- postpone drawing your income until later: the tax rate will be lower then;
- Bring forward your tax deductions so that they are applied at the higher rate.
PLEASE NOTE! Key factors to bear in mind when it comes to taxation are the general tax credit, the working tax credit and the allowances. These are, in fact, income-dependent. Consequently, the rates outlined above are not the only factor in determining the tax burden.
Items reducing the tax base
The deduction rate applies to what are known as ‘tax-base-reducing items’. These are:
- entrepreneur’s allowance (self-employed person’s allowance, start-up allowance, research and development allowance, spouse’s allowance and cessation allowance);
- SME profit exemption (14% of the profit);
- TBS exemption (12% relating to income under the assignment scheme);
- deductible costs relating to your own home (PLEASE NOTE: you must look at the deductible costs, NOT the ‘own home balance’);
- personal allowances (maintenance obligations – including spousal maintenance –, healthcare costs, weekend expenses for children with disabilities and charitable donations).
The deduction rate does not apply to expenditure on income provision schemes. This means that premiums for annuity insurance policies and contributions to annuity savings accounts, as well as premiums for disability insurance, are deducted at the highest marginal rate.
The self-employed person’s allowance referred to above will be reduced in annual increments of €250, from the current €7,280 to €5,000 in 2029. For 2020, the self-employed person’s tax allowance amounts to €7,030. The self-employed person’s tax allowance may be claimed by entrepreneurs who work 1,225 hours or more in their business.
Collect costs
Threshold amounts apply for income tax purposes to the deduction of (among other things) healthcare costs and charitable donations. By consolidating these expenses into a single year, you only have to deal with these thresholds once. Donations are, of course, easy to accumulate. After all, you decide for yourself when to donate what amounts to charities (PLEASE NOTE: there is also a maximum deduction limit for donations). But you can also plan your healthcare costs to some extent.
The gift threshold does not apply to so-called periodic gifts. In such cases, you undertake to donate an annual sum to a charity for at least five years. The rules on periodic donations may also be applied to donations to associations that are not liable for corporation tax, have full legal capacity and have more than 25 members.
You can reduce the cost of maintenance by buying off (part of) the maintenance obligation. Of course, the maintenance recipient must agree to this (as he or she may face higher tax liability). In addition, your income must be sufficient to claim the deduction.
You can pay your mortgage interest in advance (up to a maximum of 6 months). You will, however, need to persuade your bank to agree to this. If you have borrowed from your own private limited company, getting the bank to agree to this should not be a problem.
Donate
For the purposes of income tax, (grand)children do not qualify as charitable organisations. You are therefore not allowed to claim tax relief on gifts to (grand)children.
The recipient of a gift is liable for gift tax. In view of the gift tax exemptions, it may be worth making annual gifts to (grand)children.
The annual gift tax exemption for children in 2019 is € 5.428 (For children – and in some cases other beneficiaries too – there are exemptions of up to €102,010; see our factsheet Gift tax exemptions) and for grandchildren € 2.173.
Beneficiaries who received a taxable gift in 2019 or who wish to apply an exemption other than those mentioned above must, by 29 February 2020 at the latest, gift tax return have done.
Corporation tax rates
These rates are also falling. In 2020, this still applies only to the lower rate. This rate is payable on the taxable amount up to €200,000. For 2019, the private limited company pays 19% in corporation tax on this portion of the profit. This will be 16.5% in 2020 and (most likely) 15% in 2021. The rate applicable to the taxable amount above €200,000 will remain the same in 2020 as in 2019: 25%, but is set to fall (in all likelihood) to 21.7% in 2021.
Dissolve a tax group?
In view of the incremental corporate tax rate, it may be worth considering not forming a fiscal unity or dissolving an existing one. A tax unit can be dissolved on request, but such a request cannot have retrospective effect (if you wish to dissolve the tax unit with effect from 1 January 2020, the Tax and Customs Administration must have received your request by 31 December 2019 at the latest).
In order to be able to make use of the tax bracket step on multiple occasions, the entities forming part of the fiscal unity must, of course, generate a taxable amount independently, based on commercial principles. When dissolving the fiscal unity, please pay close attention to the penalty provisions!
If you are a fiscal unit wish to bring about, you have a little more time. You must have submitted the application within 3 months of the intended date on which the fiscal unity is to take effect.
Prevent evaporation losses
For the purposes of corporation tax, losses may be set off against profits in the nine years following the year in which the loss was incurred. For losses incurred in 2020 and subsequent years, this period is reduced to six years.
It is, of course, a shame when losses can no longer be carried forward after the ninth year (loss carry-forward). There are often ways to prevent this.
Significant interest rate (Box 2)
The income tax rate in box 2 will rise from 25% in 2019 to 26.25% in 2020 and 26.9% in 2021. The higher rate also applies to profits retained within the private limited company.
Despite the increase in the tax rate, it is by no means always worthwhile to pay out (additional) dividends in 2019. This depends on the return that can be generated by the private limited company using those funds, and on when dividends are expected to have to be paid out in the future. It is also important to consider the tax implications for the shareholder’s personal circumstances following the payment of the dividend.
Provisional assessment
With all this juggling of income and tax deductions, keep a close eye on your provisional tax assessment. If you end up having to pay additional tax, tax interest will quickly start to accrue on that amount. And the rates for that are still exorbitant! You pay income tax on an annual basis 4% and even on corporation tax 8%.
Tax interest is not charged on tax assessments issued within 6 months of the end of the tax year.
For the sake of completeness: the Tax and Customs Administration does not pay tax interest on any tax refunds you receive.
Take advantage of the early-payment discount
The Tax and Customs Administration grants a payment discount on provisional assessments, which are issued in the year to which they relate. This discount is also based on the high interest rates mentioned above. If you pay the provisional tax assessment in a single instalment, you may deduct the payment discount. This can result in a significant interest saving. For corporation tax, the payment discount will be abolished after 2020.
Self-administered pension: last chance
Directors and major shareholders who have placed their pension scheme within their own private limited company may continue to reduce the value of this pension until 31 December 2019 inclusive, and subsequently surrender it or convert it into a retirement benefit obligation: Self-administered pension: Last chance.
Company car
With effect from 1 January 2017, the basic additional tax liability percentage for company cars is: 22%. In the years prior to 2017, this was 25% and reductions applied to cars with lower CO₂ emissions. These reductions apply for the 60 months following the month in which the car was first registered. This means that for cars registered in 2015, the reduction will expire during 2020. The additional tax liability will then be 25%.
Buy an electric car before the end of this year
If you’re thinking of buying a fully electric car, it’s best to do so before the end of 2019, bearing in mind the company car tax. This is because the company car tax for these vehicles is set to rise to 22% in the coming years. See our article Higher tax liability for electric cars.
Working expenses scheme
Only a few minor changes are being made to the work-related expenses scheme. The increase in the tax-free allowance from 1,2% to 1.7% is limited to the first €400,000 of the wage bill and therefore makes little difference to individual employers (after all, it amounts to a maximum of €2,000 in additional tax-free allowance).
The end-of-year tip is therefore no different from previous years. It is advisable to optimise the allowances and benefits in kind paid to your employee in such a way that as little payroll tax as possible is payable. Although you process the work-related expenses scheme in the first tax return period following the calendar year (if the tax plans for 2020 are adopted: no later than the second filing period following the calendar year), you must not wait until after the turn of the year to allocate salary components to the WKR pot.
Tax-efficient company bike
There appears to be a great deal of interest in the flat-rate additional tax liability for the, which comes into force on 1 January 2020 company bike. This additional tax liability amounts to 7% of the value of the bicycle. This applies to bicycles made available to the employee by the employer, partly for business use (including commuting).
WAB
A number of changes are due to take effect in employment law. We outline these changes in our article Labour Market Balance Act (WAB).
Small Business Scheme (VAT)
With effect from 1 January 2020, the current small business scheme will be replaced by an exemption. Business owners with a turnover, on a calendar-year basis, of less than €20,000 may choose to be exempt from VAT. If you wish the new exemption to take effect from 1 January 2020, you must notify the Tax and Customs Administration of this by 20 November 2019. See our factsheet Small Business Scheme (KOR) under VAT legislation.
Quick fixes (VAT)
For businesses operating internationally, the ‘quick fixes’ coming into force on 1 January 2020 are important in the context of VAT. These include, amongst other things, call-off stocks, the proof of the carriage of goods in the context of intra-Community supplies and a simplification regarding ABC transactions.
The new rules on the levying of VAT on e-commerce will not come into force until 1 January 2021. See our article Simplification of VAT for e-commerce.