Fairness and taxation of different
types of income
EUCOTAX Wintercourse 2013/2014 – Fairness and taxation
Name:
Student number:
Study:
Date:
Exam Committee:
Betül Gümüs
239198
Master Tax Law
12 June 2014
dr. C.A.T. Peters (supervisor)
prof. dr. P.H.J. Essers
prof. mr. E.C.C.M. Kemmeren
Fairness and taxation of different types of income
2
Preface
With this master thesis that is lying in front of you, I have completed the final phase of my
Tax Law studies at Tilburg University. I am really satisfied to have chosen Tax Law early on,
already in my first year. Since then, my enthusiasm has increased thanks to the offered
possibilities both on the taxation and personal level. This master thesis forms a good
example of it, as it is written in the context of the EUCOTAX Wintercourse 2014. By
participating in this international project, I have had the great opportunity to become aware
of the impact of (un)fair taxation on a global level. It was a great experience to meet new
people in Paris, and to share and exchange information on international tax systems. With
this in mind, I would like to thank several people who supported me during this project and
the writing process of my thesis.
First of all, I really would like to thank my supervisor Cees Peters for his guidance and
support during the writing process for the EUCOTAX Wintercourse and for my master thesis.
His valuable advice and feedback motivated me to continuously improve and finish my
research. I also want to thank professor Essers, professor Kemmeren, mr. dr. Smit and
Mark Vitullo. They all made valuable contributions with their comments and suggestions
during the EUCOTAX meetings throughout the whole year. Furthermore, I want to thank
Femke Poort for her organizational assistance to the EUCOTAX week. For the great
experience and nice cooperation during the EUCOTAX Wintercourse week in Paris, I would
like to thank professor Simonek, professor Eden and my EUCOTAX team: Katarzyna,
Celestine, Leslie, Florian, Sebastian, Eugenio, Nina, Nicolas, Anke, Tim and Zsófia. Another
big thank you goes out to all the members of my Dutch EUCOTAX team: Isabella, Ralf, Luuk,
Kevin and Naomi for the great time together.
I would like to express my gratitude to my parents, my brother Ahmethan and my friends
for their support during periods of going through ups and downs in writing my thesis. I also
want to thank my friend Matthijs for his support and advice during the final writing phase of
my thesis. Most importantly, I feel incredibly blessed with my mother, who supported me
during my thesis and throughout my studies. I can say with absolute certainty that she has
made me come so far, as I would never have been able to conclude this satisfactory phase
of my life without my mother’s love and support.
Betül Gümüs,
12 June 2014
Fairness and taxation of different types of income
Table of contents
Preface
2
Table of contents
3
List of abbreviations
7
Chapter 1 Introduction
8
1.1
Background
8
1.2
Research question
11
1.3
Limitations of research
12
1.4
Methodology
12
1.5
Research structure
13
Chapter 2 Normative framework
15
2.1
Introduction
15
2.2
General framework: fairness and taxation
17
2.2.1 The three elements of fairness
18
2.2.2 Legal and tax principles
20
2.2.3 Principle of equality
21
2.2.4 Conclusion
23
The benchmark: ability to pay
25
2.3.1 Development of the ability to pay principle
26
2.3.2 The notion of taxable income
29
2.3.3 Legal fictions in tax law
30
2.3.4 Applicable tax rate in the personal income tax
32
The benchmark: legal form neutrality
34
2.4.1 Tax neutrality
34
2.4.2 Legal form neutrality
36
2.3
2.4
2.5
2.4.2.1
Static and dynamic neutrality
36
2.4.2.2
Consequences of a lack of legal form neutrality
37
Conclusion
38
Chapter 3 Taxation of different types of income in the Dutch personal
income tax system
42
3.1
42
Introduction
3
Fairness and taxation of different types of income
3.2
Underlying source theory
43
3.3
Introduction of the new PITA in 2001
44
3.3.1 The box tax system
44
Tax treatment of different types of income in the personal income tax
45
3.4.1 The switch from a synthetic into an analytic box system
46
3.4.2 Box 1: income from work and home
47
3.4
3.4.2.1
Tax rate in box 1
48
3.4.2.2
Income from business profits
48
3.4.2.3
Income from home
49
3.4.3 Box 2: income from substantial interest
3.4.3.1
Historical background of box 2
50
3.4.3.2
Taxable income from substantial interest
51
3.4.3.3
Tax rate in box 2
52
3.4.4 Box 3: income from savings and investments
3.5
3.6
50
52
3.4.4.1
Historical background of the capital yield tax
52
3.4.4.2
Taxable income from savings and investments
54
3.4.4.3
Tax rate in box 3
54
3.4.4.4
Criticisms on box 3
55
Evaluation of the current personal income tax system
59
3.5.1 Introduction
59
3.5.2 Ability to pay
59
3.5.3 Tax neutrality
62
3.5.4 Conclusion
64
Conclusion
65
Chapter 4 Tax treatment of business income in the Dutch income tax
System
67
4.1
Introduction
67
4.2
Different tax treatment of business income
67
4.3
Special tax regimes under the CITA 1969
69
4.3.1 Participation exemption
70
4.3.2 Conduit entities
71
4.3.3 Object exemption for foreign business profits
71
4.3.4 Fiscal unity
72
4.3.5 Innovation box
73
4
Fairness and taxation of different types of income
4.3.6 Special tax regimes under the PITA 2001
74
4.4
Tax position of the director main shareholder
75
4.5
Different tax treatments of dividends and capital gains in the box system
77
4.5.1 Different tax treatment of dividends in the box system
77
4.5.2 Different tax treatment of capital gains in the box system
78
4.6
4.7
Evaluation of the current income tax system with respect to the tax
treatment of business income
80
4.6.1 Introduction
80
4.6.2 Ability to pay
80
4.6.3 Static legal form neutrality
82
4.6.4 Conclusion
86
Conclusion
87
Chapter 5 Comparative law analysis
89
5.1
Introduction
89
5.2
Tax treatment of different types of income in the personal income tax
89
5.2.1 Introduction
89
5.2.2 Legal comparison
90
5.2.2.1
Countries with a dual income tax system
90
5.2.2.2
Countries with an overall income tax system
92
5.2.3 Analysis
5.3
5.4
96
5.2.3.1
Ability to pay
96
5.2.3.2
Structure of the tax systems
98
Tax treatment of business income
99
5.3.1 Introduction
99
5.3.2 Legal comparison
100
5.3.3
106
Analysis
5.3.3.1
Partnerships
106
5.3.3.2
Structure of the tax systems
107
Conclusion
109
Chapter 6 Proposals for tax reform
112
6.1
112
Introduction
5
Fairness and taxation of different types of income
6.2
Proposal for taxation of different types of income in the personal income
tax
6.3
6.4
112
6.2.1
Introduction
113
6.2.2
Capital gains tax in box 3
114
6.2.2.1
Scope
114
6.2.2.2
Advantages
115
6.2.2.3
Disadvantages
116
6.2.2.4
Evaluation
118
Proposal for taxation of business income
120
6.3.1 Introduction
120
6.3.2 Business profits tax
121
6.3.2.1
Scope
121
6.3.2.2
Evaluation
123
Conclusion
127
Chapter 7 Conclusion
130
Bibliography
139
Appendix A – Overview of the personal income tax systems of the
EUCOTAX countries
152
Appendix B – Overview of the tax treatment of business income in the
EUCOTAX countries
155
6
Fairness and taxation of different types of income
List of abbreviations
BEPS
Base Erosion and Profit Shifting
BPT
Business Profits Tax
CGT
Capital Gains Tax
CIT
Corporate income tax
CITA 1969
Corporate Income Tax Act 1969
DMS
Director main shareholder
ECHR
European Convention on Human Rights
ECJ
European Court of Justice
ICCPR
International Convention on Civil and Political Rights
MNE
Multinational enterprises
OECD
Organization for Economic Co-operation and Development
PIT
Personal income tax
PITA 1964
Personal Income Tax Act 1964
PITA 2001
Personal Income Tax Act 2001
R&D
Research & Development
SME
Small or medium enterprises
7
Fairness and taxation of different types of income
8
Chapter 1 Introduction
1.1
Background
This master thesis is written in the context of the EUCOTAX Wintercourse 2013/2014. 1 The
general theme of the Wintercourse of this year is “Fairness and taxation”. Within this scope
of fair taxation, this thesis deals with the subject of taxation of different types of income in
the Dutch tax system regarding a fair tax burden distribution.
Nation’s governments pursue certain social goals and, must impose taxation to finance
these goals and public expenses on behalf of a peaceful coexisting community. Taxes
infringe the freedom of the individuals and are seen as compulsory contributions to the
Treasury, but without taxes no state and community is possible and therefore no freedom
for individuals.2 It should be determined how the tax burden between taxpayers must be
shared and defined what should be taxed; such as income, consumption, capital,
transactions and what type of tax regime should apply. Most tax regimes are laid down on
income, as this is seen as an appropriate indicator to measure ability to pay of individuals.
The question which then arises is how to define income. So far, this problematic concept has
led to many theories, perspectives and discussions.
The tax system of most countries distinguishes between different types of income and
applies different tax rules for the determination of the taxable income bases. The Dutch tax
system distinguishes between a personal income tax system for individuals and a corporate
income tax system for corporations. At the income tax reform in 2001, a box system with
three boxes has been introduced in the personal income tax. It means that different types
of income of individuals are allocated to one of the three boxes, each with their own
determination rules and tax rates. In many countries there is consensus that capital income
should be treated more favorably than other types of income as it is supposed to be more
1
The EUCOTAX (European Universities COoperating on TAXes) Wintercourse is an intensive program
in which fourteen European and American universities participate. The subject area of the EUCOTAX
Wintercourse has always been “The European Harmonization of Tax Law”. Each year there is a
different theme related to this subject area, see: http://www.tilburguniversity.edu/research/institutesand-research-groups/fit/education/eucotax_wintercourse/>.
2
J.L.M. Gribnau, Belastingen als moreel fenomeen, Den Haag: Boom fiscale uitgevers 2013, p. 9.
Taxes cannot be dependent of voluntary actions and own initiatives of the individuals, rules are
needed to reach mutual benefits, see J.L.M. Gribnau, Belastingen als moreel fenomeen, Den Haag:
Boom fiscale uitgevers 2013, p. 7.
Fairness and taxation of different types of income
9
mobile than labour income. This favorable treatment of capital income is also reflected in
the Dutch personal income tax system: a major differentiation in the box system is made
between the tax treatment of capital income and other types of income. Where labour
income is taxed at a progressive rate with a maximum of 52%, income from savings and
investments is set on a yield of 4% on which a fixed rate of 30% applies, the so-called
capital yield tax. The box system and the capital yield tax have been subjects of discussions
in the literature since their introduction. Recently, the Dutch Ministers of Social Affairs and
Finance also mentioned that a reform of the current taxation system was required,
especially regarding the tax burden on labour, in order to stimulate employment.3 In the
same context, the Dutch government created a Committee for income taxes and allowances
(Committee Van Dijkhuizen) in 2012 with the brief to improve and create a simple, solid
and fraud-resistant tax system. The final report of the Committee, with proposals for
structural reform of the income tax system, was presented to the Dutch State Secretary of
Finance in June 2013.4 However, the current State Secretary of Finance Wiebes has not yet
communicated the government’s response to the proposals of the Committee.5 Wiebes also
argues in a letter to the Dutch Second Chamber that simplification of the tax system is
crucial to keep the income tax system and the related processes sustainable.6 This political
discussion about the income tax system brings the political parties standing against each
other. Whereas the Dutch liberal party VVD calls to radically change and simplify the tax
system whereby taxes should not be used to influence the behavior of the individuals, the
left-wing party PvdA argues that the reform of the tax system should lead to the case that
the tax burden on labour income must decrease and the tax burden on capital income must
increase as they state that the capital allocation in the Netherlands is unfair. 7 Taxation on
capital income has also become an issue on an international level after the publication of the
book ‘Capital in the Twenty-First Century’ by the French economist Thomas Piketty. He
warns against significant consequences of the growing (economic) inequality in society
because of the accumulation and concentration of capital by an increasingly small number of
people. This problem is exacerbated by inheritances which form a growing share of the
3
R. Giebels, ‘VVD-leider Zijlstra: stop wildgroei fiscale prikkels’, de Volkskrant 11 April 2014.
4
The Committee for Income taxes and allowances is called to the chairman of the Committee, C. van
Dijkhuizen. See for the final report of the Van Dijkhuizen Committee: Final Report Committee Income
tax and allowances, Naar een activerender belastingstelsel, Den Haag 2013.
5
Letter of the State Secretary of Finance, 4 March 2014, no. DB/2014/121U.
6
Letter of the State Secretary of Finance, 19 May 2014, no. DGB/2014/2920 U, p. 3.
7
R. Giebels, ‘Samsom: rijken moeten meer belasting gaan betalen’, de Volkskrant 1 May 2014.
Fairness and taxation of different types of income
10
wealth accumulation.8 On an international level there is also a desire to reform the capitalist
system: Christine Lagarde, the director of the International Monetary Fund (IMF), has called
in a conference about the future of the capitalist system, to reform capitalism because the
growing of the excessive economic inequality prevents that people participate in the
economic process and utilize their opportunities. Besides this, it undermines the solidarity
that keeps the communities together.9
The capital yield tax itself is also strongly criticized as recently the actual yield has fallen
well below the assumed 4%. In line with this approach, the Dutch Association for Taxpayers
and a Dutch tax firm announced to bring a test case before the Dutch court, claiming the
capital yield tax is unreasonably high and might undermine the principles of fairness.10
Another differentiation made in the Dutch tax system is the tax treatment of business
income as the legal form of business chosen is relevant as it affects which tax regime will be
applied, with the result of a lack of legal form neutrality. In this way, business profits from
sole proprietorships are subject to the personal income tax (PIT) while business profits
incorporated in a legal entity are subject to corporate income tax (CIT) combined with PIT if
the profits are distributed to the shareholders.
These issues and discussions in politics, and indeed throughout society, illustrate the
importance and relevance of this subject with respect to an equal and fair tax system.
Different tax treatments of income involve the question whether such differentiations are in
conformity with the underlying (tax) principles of fairness. Dominating principles of taxation
worldwide are the principles of equality and ability to pay. Individuals under equal
circumstances should be treated equally and should pay the same amount of taxes.
Although the Dutch tax system is based on these principles, such different tax treatments
could clash with these principles. To put it succinctly, the tax system, while based on the
principles of fairness, does not always seem to adhere to these principles.
1.2
Research question
As many differences are made in the Dutch income tax system, the focus of this thesis will
be only on the abovementioned favorable tax treatment of capital income for individuals and
8
H. Wansink, ‘Kapitalistisch idealisme’, Annex to de Volkskrant 17 May 2014, p. 57.
9
P. de Waard, “Kapitalisme moet op de schop”, de Volkskrant 28 March 2014, p. 23. See for the
speech of Christine Lagarde: <http://www.imf.org/external/np/speeches/2014/052714.htm>.
10
Y. Hofs, ‘Fiscus gedaagd voor hoge belasting’, de Volkskrant 31 March 2014, p. 19.
Fairness and taxation of different types of income
11
the different tax treatment of business income depending on the legal form. It can be said
that these tax regimes on capital income and business income in the income tax system
may infringe the underlying principles of fairness. This thesis deals with these two
problematic issues of taxation of different types of income in the Dutch tax system with
respect to fair taxation. The research question of this thesis is defined as:
To what extend is the Dutch tax burden distribution amongst taxpayers with respect to the
taxation of different types of income in the personal income tax system and with respect to
the different tax treatment of business income based on the underlying principles of fairness,
and how can the Dutch tax system be improved in order to achieve a fairer tax burden
distribution?
The research question includes a descriptive and a normative element. In the descriptive
part, the current Dutch personal income tax system regarding the taxation of different types
of income in the box system with a special focus on the favorable treatment of capital
income has been included. The different tax treatment of business income in the
Netherlands will also be included in the analysis. For the normative part, a normative
framework will be formulated in order to evaluate the Dutch tax system and to put forward
proposals to improve the Dutch income tax system, taking into account these problematic
issues.
Sub-questions
The following sub-questions will serve as guidelines in this thesis in order to answer the
research question. The sub-questions can be classified in four parts.
Part A
1. What should be the underlying principles of fairness of taxation of different types of
income in an income tax system?
Part B
2. To what extend is the current Dutch income tax system based on the underlying
principles of fairness with respect to the taxation of different types of income in the
personal income tax?
3. To what extend is the current Dutch income tax system based on the underlying
principles of fairness with respect to the tax treatment of business income?
Fairness and taxation of different types of income
12
Part C
4. How do the income tax systems of the other participating EUCOTAX countries treat
different types of income in the personal income tax for individuals?
5. How do the income tax systems of the other participating EUCOTAX countries treat
business income?
Part D
6. How could the Dutch income tax system be improved in order to achieve a more fair
tax burden distribution between taxpayers in the personal income tax system?
7. How could the Dutch tax system be improved in order to achieve a more fair tax
burden distribution between taxpayers with respect to the tax treatment of business
income?
1.3
Limitations of research
This thesis covers the taxation of different types of income in the Dutch personal income tax
system and the corporate income tax system related to the treatment of business income.
Other Dutch tax regimes will not be examined. Although international and EU-law can have
importance on national law of the member states, it should be noted that this thesis only
focuses on the national personal and corporate income tax system of the Netherlands
regarding the taxation of different types of income. Other Dutch tax regimes, international
law and EU-law will only be addressed if relevant.
1.4
Methodology
This research aims to explore the subject and analyze the possibilities to improve the Dutch
tax policy with respect to different tax treatments of different types of income in the income
tax system. The research methods that are used, include a literature review and a
comparative law analysis.
Literature review
A literature review establishes the theoretical framework of the research with respect to the
underlying principles of a fair tax system regarding to the tax treatment of different types of
income. It also helps to understand the problematic issues and to identify the gaps and
weaknesses of the Dutch tax system regarding to a fair tax burden distribution. In this way,
the literate review will support to improve the tax system and to produce proposals for a tax
reform.
Fairness and taxation of different types of income
13
Comparative law analysis
This thesis also includes a comparative law analysis regarding the income tax systems of
the other participating EUCOTAX countries. These countries are Austria, Belgium, France,
Germany, Hungary, Italy, Poland, Spain, Sweden, Switzerland and the United States. This
analysis is based on the EUCOTAX Wintercourse workweek in Paris11 and the relating written
papers on the national tax systems with respect to the taxation of different types of income.
The aim of this comparative analysis is to assess how the other EUCOTAX countries deal
with similar issues regarding the taxation of different types of income and to compare the
systems with the Dutch tax system. The result of the analysis and comparison may be
included in the proposals for a tax reform.
1.5
Research structure
The thesis can be divided into four parts. The thesis starts with part A that addresses the
first sub-question by developing a normative framework in the second chapter of this thesis
by which the taxation of different types of income can be analyzed with respect to a fair tax
burden distribution between taxpayers. As the focus of this thesis will be on the taxation of
different types of income, especially the taxation of capital income in the Dutch personal
income tax system and the different tax treatment of business income, the principles of
ability to pay and neutrality will be introduced to serve as benchmarks for the
abovementioned two issues in the tax system. Part B, which deals with the second and third
sub-question, describes and evaluates the current Dutch income tax system. In this context,
chapter 3 covers the description and the evaluation of the box system in the personal
income tax system with a special focus on the capital yield tax and chapter 4 the different
tax treatment of business income. The tax regimes will be evaluated by the benchmarks,
which have been formulated under the normative framework in the second chapter of this
thesis. The comparative law analysis is included in part C; the fifth chapter describes how
the income tax systems of the other EUCOTAX countries treat different types of income in
the personal income tax for individuals and the tax treatment of business income. This
comparative analysis may be relevant for developing a proposal for the Dutch tax system in
order to contribute to a fair tax burden distribution amongst taxpayers. As the analysis will
be completed after these chapters, it leads to the last chapters 6 and 7 included in part D of
this thesis. In these chapters the last two sub-questions will be answered. After giving an
overview of the research findings, two proposals will be evaluated on the basis of the
11
The EUCOTAX Wintercourse was held at the University of Paris 1 Panthéon-Sorbonne in Paris from
10 to 17 April 2014.
Fairness and taxation of different types of income
14
formulated benchmarks in chapter 2 in order to improve the Dutch income tax system with
respect to the taxation of capital income and business income. The research question will be
answered in the last chapter of this thesis that covers the main conclusion of this thesis.
Fairness and taxation of different types of income
15
Chapter 2 Normative framework
2.1
Introduction
One of the main aims of the Dutch legislator at the tax reform in 2001 was to promote and
improve a balanced and fair distribution of the tax burden amongst the taxpayers.12 States
need to impose taxation to finance the public expenses and to attain their social and
economic goals on behalf of their communities. At the same time, taxes infringe the
freedom of individuals. This leads to the important question in tax law of how the tax
burden amongst the taxpayers should be distributed in a fair way. The principle of equality
in material form has an important place in this context: taxpayers under equal
circumstances should be treated equally. An equal burden distribution also takes into
account the unequal position of taxpayers, so it may be fair that taxpayers contribute in
accordance with their ability to pay. However, it is the government’s policy, the
effectiveness and efficiency that determine what does include the unequal treatment
through an unequal ability to pay. Tax law has a compromise character as it represents a
balance of interests by the government between on the one hand, the principles of
effectiveness, efficiency and simplicity, and on the other the principles of fairness.
The ability to pay principle is globally recognized as a fundamental principle of fair income
taxation.13 Global policy is that ability to pay is considered together with one of these three
tax bases: income, capital and consumption, and it seems that income is considered to be
an appropriate indicator to measure ability to pay and most states rely therefore primarily
on a direct income tax.14 The Dutch income tax system distinguishes between different
types of income, and this principle of ability to pay that underlies (the choice for) an income
tax, will therefore serve as benchmark to evaluate the taxation of the different types of
income in the Dutch personal income tax system, with a special focus on the favorable tax
treatment of capital income.
Another relevant differentiation of the equality principle is the concept of neutrality. As
mentioned before, besides the classic budgetary function of taxation, it also functions as
instrument to achieve certain economic and social goals. Thus the distribution of the tax
12
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 7.
13
H.J. Hofstra & L.G.M. Stevens, Inkomstenbelasting, Deventer: Kluwer 1998, p. 9.
14
H.J. Hofstra & L.G.M. Stevens, Inkomstenbelasting, Deventer: Kluwer 1998, p. 9 and K. Holmes,
The concept of income. A multi-disciplinary analysis, IBFD Publications BV 2000, p. 3.
Fairness and taxation of different types of income
16
burden is distorted by considerations outside the framework of the principles of the classic
budgetary function.15 Methods that are used to achieve goals of the tax legislator should not
lead to disproportionate consequences. However tax legislation establishes legal
consequences to various types of practices, taxation should not have distorting effect,
except where it aims to have.16 There should be an appropriate justification when a certain
practice is treated more favorable by the legislator than another type of practice. A tax
system is efficient if it disrupts the economic decisions of taxpayers as little as possible, socalled economic efficiency.17 Tax neutrality has a dominant place in this concept of economic
efficiency. The legislator also recognizes the importance of neutrality as promoting tax
neutrality was one of the aims of the legislator at the tax reform of 2001.18 There are
several dimensions of tax neutrality and one of them is legal form neutrality, which means
that the tax system should be neutral with respect to the choice of the legal form of a
business: the legal form should not make a difference in the tax burden. This principle of
neutrality and the concept of legal form neutrality will serve as benchmark to evaluate the
Dutch income tax system with respect to the tax treatment of business income.
It can be said that fairness consists of several dimensions, such as juridical, social and
economic dimensions. Two of these deriving principles will serve as benchmarks for the
purpose of this thesis. Paragraph 2.2 of this chapter gives a general framework of the
meaning of fairness in taxation. Afterwards, paragraph 2.3 addresses the principle of ability
to pay as benchmark for a fair tax burden distribution in the personal income tax system
with respect to the different types of income and the tax treatment of capital income, and
the principle of legal form neutrality for the purpose of serving as the second benchmark
with respect to the tax treatment of business income. The chapter’s overall conclusion will
be given in paragraph 2.4.
15
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 54.
16
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 54.
17
Report Tax System Study Committee, Continuïteit en vernieuwing. Een visie op het belastingstelsel,
Den Haag 2010, p. 15.
18
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 35.
Fairness and taxation of different types of income
2.2
17
General framework: fairness and taxation
It is demanding to define fair taxation in a way that it satisfies all parties concerned for all
time as there exists several different views on what a fair tax system should be based on
and should include. One of these views is the view of Gribnau and Radbruch that
corresponds the most to my vision on the general framework of fairness in tax law which
will be described below. Taxation has to be in accordance with the notion of fairness that
exists in the society; otherwise the result would be a loss of legitimacy. Legislation qualifies
as legitimate if it is in line with the underlying legal principles as Gribnau states.19 Aside
from the budgetary function, taxation also has an instrumental function: taxation serves as
an instrument for the realization of specific government policy goals. These both elements
should be recognized for the question whether or not the tax system is fair. 20 Fairness can
be distinguished between procedural justice and substantive justice. Where procedural
justice concerns justice in legal decision-making processes, fairness of the income tax
focuses mainly on the substantive justice, which means a focus on the substantive criteria
of tax law.21 Substantive justice in turn can be distinguished in social-political justice and
legal justice. The legislator gives substance to the social-political justice in concrete policy
goals. For instance, the policy goals of the Dutch legislator at the tax reform of the income
tax in 2001 has been “a balanced and fair tax burden”, and non-fiscal policy goals as
stimulating economic activity and promoting employment.22 Framework of legal justice
consists of general principles of proper legislation on which more concrete legislation can be
assessed. Legal principles form the common in the variety of laws.23 According to Radbruch,
justice is the ultimate value. This means that tax laws should aim to realize justice. Laws
should be intended to realize justice, even if they are not able to achieve this noble aim.24
None of the legal systems are perfect in this respect, but the law should always be assessed
to determine to what extend justice at a specific moment and place is realized. In this
19
J.L.M. Gribnau, Belastingen als moreel fenomeen, Den Haag: Boom fiscale uitgevers 2013, p. 40.
20
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 49.
21
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 29.
22
See Kamerstukken II, 1998/99, 26727, no. 3, p. 7.
23
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 31.
24
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 33: Radbruch’s view is based on G.
Radbruch, Rechtsphilosophie, Stuttgart: Koehler 1973.
Fairness and taxation of different types of income
18
respect, Hofstra states that the essence and the value of the law lies into the extent to
which the law approaches justice as it is perceived to time and place. 25
2.2.1 The three elements of fairness
According to Radbruch, justice consists of three elements: equality before the law,
purposiveness and legal certainty.26 The principle of equality requires an equal treatment of
equal cases and an unequal treatment of unequal cases in proportion to their inequality. It
is a formal provision; a substantially empty concept. This equality does not give any
information about which cases should be considered as equally or unequally and how to
treat equal and unequal cases.27 Therefore the second element of justice, the purposiveness,
is needed to give substantial content to fairness. The law aims to ensure the general wellbeing that in turn can be separated in a number of goals. According to Radbruch, the
general well-being is determined by the prevailing opinion about the social-political justice.
This prevailing opinion about the social-political justice influences the design of the law, in
which the opinion and the policy preferences of the political majority determine the
legislative process.28 This purposiveness directs the equality principle, as it were. The
purposiveness, the prevailing opinion, decides which cases should be treated equally and
which treatment thereby is appropriate. Thus, the substantive contents of the law in a legal
system depend on the balancing of political and social values and (policy) goals. Such a
balancing act is necessary because not all of these values and goals can be realized at the
same time. Their relative importance depends on personal, ethical and political opinions. A
choice must be made between these values and goals, a choice that applies to everyone and
that binds all people.29 This brings us to the third element of fairness: legal certainty. The
certainty of law requires that it has to be determined what law is and that the law is binding
on all citizens. Taxpayers have an interest in legal certainty. The consequence of unclear
legislation can be the limitation of the freedom of action of the taxpayers because they may
25
H.J. Hofstra, ‘Over belastingbeginselen’, WFR 1979/1213, par. 6.
26
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 33-34.
27
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 34.
28
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 34.
29
See paragraph 2.2.3 for the question on who should make this choice.
Fairness and taxation of different types of income
19
feel uncertain about their rights and obligations.30 Furthermore, tax law is very often used
by the government to control the behavior of the citizens for the purpose of several policy
goals as tax law is seen as an important policy instrument. 31 If tax law offers insufficient
direction to the actions of the taxpayers, the problem of legal uncertainty can raise.
Therefore it is necessary that the taxpayers are on time aware of the current rules and
regulations to know their legal position, rights and obligations.
None of these three principles are absolute. They have a relative value and will often be in
conflict with each other; political and policy goals need to be constantly assessed to the
principles of equality and legal certainty. There is a continuous search for a balance between
these equivalent values; there is a tension between these principles, but all of them are
aimed at fairness, even if they are contradictory in a specific case.32 Good arguments are
needed to motivate and convince why a specific legal value in a specific regulation has a
(more) strengthening position than the other relevant values. The equality and legal
certainty form in this way a legal filter, a “check”, for the political and policy goals that
serve the contents of the legal system.33
In practice, this balancing between these values should continuously take place in order to
find a balance of their relative position in the concrete situation. However Radbruch stresses
the danger of prioritizing of one of these values, in his later work he mentions that in
principle the positive law takes precedence over the formal equality: a more substantial
determined equality supersedes the purposiveness and the legal certainty, while the legal
certainty supersedes the purposiveness.34 Likewise, the Dutch Personal Income Tax Act of
2001 (PITA 2001) and related regulations are based on a balance of several values, political
and policy goals. The legislator has to make a choice about which objectives should serve as
the starting points of the tax regulations.35 By choosing these goals the legislator gives
meaning to the purposiveness and creates legal certainty by laying down the regime in the
tax legislation.
30
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 37.
31
J.L.M. Gribnau, Belastingen als moreel fenomeen, Den Haag: Boom fiscale uitgevers 2013, p. 46.
32
J.L.M. Gribnau, ‘Belastingrechtvaardigheid’, WFR 1995/1889, par. 4.
33
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 35.
34
J.L.M. Gribnau, ‘Belastingrechtvaardigheid’, WFR 1995/1889, par. 4.
35
See paragraph 2.2.3 for more about the making decisions process of the legislator.
Fairness and taxation of different types of income
20
2.2.2 Legal and tax principles
In law, these abovementioned values are mainly realized by legal principles. Legal principles
have an important role to achieve fairness; they realize and concretize these values.36
Legal principles reflect elements of fairness and effectiveness which both form essential
elements of the law.37 The Dutch legal system is (also) based on (un)written fundamental
legal principles. Next to the principle of equality which has a main position in Dutch law,
also other principles are relevant. One of the main formal principles of the Dutch legal
system is the principle of legality, which means in Dutch tax law that every tax a taxpayer is
being required to pay, must have a legal basis in a law. Levying taxes is based on the law,
the Dutch Constitution. According to article 104 of the Constitution, taxes imposed by the
State must be levied in pursuance of an Act of Parliament. In this approach, article 104 of
the Constitution reflects the principle of fiscal legality. As mentioned before, the principle of
legal certainty requires that individuals can rely on the law and legislation. It implies that
retroactive legislation is prohibited and that the legislation must be clear and consistent.
Besides, individuals are protected from the arbitrary of the government as they have a right
of effective judicial protection.38 As tax law and regulations are part of the total law system,
they should support these general objectives. That does not alter the fact that tax law has
its own particular objective; this is not a stand-alone one but forms a part of the attempt of
the legislation as a whole to function for the society according the underlying legal
principles.39 A balance of the contrast between on the one hand the theory that tax law is
bound by the (civil) law and on the other hand the theory of the autonomy of tax law can be
found in the work research of Geppaart. In Geppaart’s theory of “the unity of the legal order”
it is on the one hand recognized that tax law forms a part of the general legal order but on
the other hand the own specific nature of tax law justifies an independent conceptualization
in certain circumstances.40 In order to distort the coherence of the different elements of the
law as little as possible, this theory requires that the legislator may not use deviating
concepts if the general law consists ‘useful material’, but also that in certain circumstances
36
J.L.M. Gribnau, ‘Belastingrechtvaardigheid’, WFR 1995/1889, par. 6.
37
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 139.
38
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 53.
39
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 54.
40
Ch.P.A. Geppaart, Fiscale rechtsvinding. Een onderzoek naar de rechtsvinding door de rechter in
belastingzaken in het bijzonder aan de hand van de rechtspraak in de periode 1 maart 1957 – 1 maart
1965, Amsterdam: Fed 1965, p. 146.
Fairness and taxation of different types of income
21
independent concepts are necessary.41 I do not agree with this restraint of Geppaart; tax
law has its own background and characteristics which can justify to deviate from the civil
law concepts and to formulate own standards to define the financial benefits. This economic
reality can prevail whereby deviations from the general (civil) are allowed.42 But in my view,
tax law should indeed aim to achieve the same fundamental principles, such as the equality
principle, on which the general law system is based on, but then, by its own contents and
principles.43
2.2.3 Principle of equality
The traditional definition of the equality principle is “to treat equal cases equally and cases
uneqaually in proportion to the extent of (their) inequality.”44 The equality principle can be
separated in formal equality and material equality. Formal equality means equality before
the law: the government should be consequent in applying the rules on all cases that are
covered by the rules. In material equality the contents take a central place: rules are not
allowed to state unequal treatment of equal cases without an objective and reasonable
justification for such differentiation.45 As mentioned before, the formal equality does not
give any information about which cases should be treated (un)equally and how to treat
them. In my opinion, it is to the legislator to give substantial meaning to the material
equality principle because of his democratic legitimacy. It is the legislator to decide which
cases should be treated equally or not. As described above, the substantive contents also
depend on the balancing of the social values and the policy goals. In this context, the
legislator makes choices about which objectives should serve as starting points of the tax
41
Ch.P.A. Geppaart, Fiscale rechtsvinding. Een onderzoek naar de rechtsvinding door de rechter in
belastingzaken in het bijzonder aan de hand van de rechtspraak in de periode 1 maart 1957 – 1 maart
1965, Amsterdam: Fed 1965, p. 145.
42
J.L.M. Gribnau & R.H. Happé, ‘Convergentie en divergentie: Over begripsvorming in privaatrecht en
belastingrecht’, in: P.H.J. Essers, Verkenningen op de grens van burgerlijk recht en belastingrecht.
Opstellen over (fiscaal) ondernemingsrecht, erfrecht en insolventierecht, Den Haag: Boom Juridische
uitgevers 2000, p. 11.
43
Several studies have been done on the specific field on tax principles. See for an example of a
classification of fundamental tax principles of the Dutch tax system the work of De Langen: W.J. de
Langen, Grondbeginselen van ons belastingstelsel, Alphen aan den Rijn: N. Samsom N.V. 1950, p. 317. De Langen derived seven principles in tax law from an analytical-empirical research on the tax law
and regulations.
44
R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Deventer: Kluwer 1996, p. 289.
45
R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Deventer: Kluwer 1996, p. 290.
Fairness and taxation of different types of income
22
law. He distinguishes between different groups of taxpayers, so legislation is based on a
classification and distinctions. It is important that the perspective of the regulation is
decisive for the classification of the cases as (un)equally. The aim of this legislative
classification in tax law is the purpose of the law.46 It is now essential that sufficient and
clear reasoning is provided to justify these distinctions and the consequent different tax
treatments. The legislator interprets the substantive contents of the equality principle.
Starting point is that taxpayers have equal rights and duties, but based on the underlying
purposes the law makes any distinctions with the result of unequal tax treatments. So, the
prevailing opinions about the material equality serve as a reference for the government in
order to achieve a more fair and just society. The by the legislator made distinctions must
be able to be sufficient to the material equality principle. The contents, the purpose of the
law has a central role at the material equality principle; cases that are equal from the
viewpoint of the purpose of the law should be treated as such. Thus the material equality
serves as a guarantee against unjustified distinctions.47 But while tax legislation is more and
more used to regulate the behavior of the taxpayers, the legislator must not lose sight that
(his creation of) the tax legislations should stay in accordance with the equality principle in
my view. The role of the judge in this case is essential. However article 120 of the Dutch
Constitution states that the courts are not allowed to review the constitutionality of the Acts
of Parliaments and the treaties, courts are allowed to asses created legislation by the
legislator as statutory legislations are not applicable if such application is in conflict with
provisions of treaties that are binding on all persons.48 This implies that courts are allowed
to examine tax legislations in the light of the European Convention on Human Rights (ECHR)
and the International Convention on Civil and Political Rights (ICCPR) in which the essential
principle of equality is provided.49 So when the tax legislator has made a balance of values
and objectives whereby the (created) tax legislation includes an unequal treatment of
similar cases (similar group of taxpayers) without an objective and reasonable justification
in the light of the equality principle, the court can protect the taxpayers by the assessment
of the legislation in the light of the equality principle of the treaties. Even if the legislator
has a wide margin of appreciation to make distinctions between (groups of) taxpayers in
46
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 52.
47
J.L.M. Gribnau, ‘Rechtsbeginselen en evaluatie van belastingwetgeving’, in: A.C. Rijkers & H.
Vording, Vijf jaar wet IB 2001, Deventer: Kluwer 2006, p. 52.
48
See article 94 of the Dutch Constitution.
49
See article 14 ECHR and article 26 ICCPR.
Fairness and taxation of different types of income
23
order to achieve social and economic goals in behalf of the general national interest, the
court has relevant importance in protecting the equality principle in the interest of the
taxpayers.50 But in my opinion the court is not the only one who is responsible for the
application and observance of the equality principle; the tax legislator should also stay
aware of the equality principle, even if he has a margin of appreciation for establishing tax
legislations. In the same way, Happé argues that article 26 of the ICCPR would be too
narrowly interpreted if the equality principle could in practice only be enforced by the court;
article 26 ICCPR also implies a legal duty for the tax legislator to design and implement
legislation in line with the equality principle.51
2.2.4 Conclusion
It can be concluded that it is not possible to describe what fairness exactly includes as it is
interpreted and perceived to time and place and as there exists several views on what
fairness in taxation should mean and should include. The perspective on fairness in taxation
that I have argued is mainly based on the view of Radbruch and Gribnau whereby three
elements of fairness can be distinguished: the principles of equality, purposiveness and
legal certainty. None of these values can be one-side emphasized; in every case the right
balance between them must be struck. Legal principles have an intermediate role between
these legal values and the positive law. They concretize these values and thereby they
serve the fairness and increase the legitimacy of tax law. In tax law, fairness is pursued
mainly by a coupled combination of legal principles, which have developed continuously and
whereby an appropriate balance must be struck between these principles. It must be
determined and be argued which principles may have a role and which should be paramount.
In my opinion it is the legislator who has to make the essential principle of equality concrete
by making choices and balances between these values and the policy objectives as he is
democratic legitimated and represents the prevailing opinion about the social-political
justice. But because of the increasing use of taxation as instrument in order to achieve
economic and social goals, the legislator may lose sight on the principle of fairness of
equality, especially if we take into account that he has a wide marge of appreciation by the
design of legislation. The role of the court is in this case essential as it can “check” the tax
legislator by assessment of the designed legislation against the principle of equality in the
light of international treaties. So the court can examine whether the legislator has
reasonable and objective justifications in making differences between (groups) of taxpayers.
50
M.J. Hamer, Cursus Belastingrecht. Formeel Belastingrecht, Deventer: Kluwer 2013, p. 218.
51
R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Deventer: Kluwer 1996, p. 71.
Fairness and taxation of different types of income
24
The court is really important in this case to protect the fundamental principle of equality as
taxation nowadays is on a high level used as instrument to control the behavior of the
taxpayers. From my point of view, the tax legislator has even a more important
responsibility than the court has, to bear in mind the equality principle while designing
legislation. It is the legislator, democratic legitimated to make law, who must base its
legislation on the principle of equality. Otherwise, the instrumentalism of taxation in
combination with probably unjustified made differences in treatment between (groups of)
taxpayers that may result in unfair taxation, shall affect the legitimacy and the credibility of
the law and legislation.
In this thesis not all (sub) types of legal principles that concretize the values will be
discussed. As fairness includes several concepts, such as juridical and economic concepts,
only two principles of fairness are chosen: the ability to pay principle and legal form
neutrality as a dimension of the tax neutrality principle. The ability to pay principle will be
analyzed for the purpose of this thesis to serve as benchmark with respect to the different
tax treatment of capital income against the other types of income in the personal income
tax. The reason that I have chosen the ability to principle is that ability to pay is in my view
the most appropriate indicator to compare the (economic) positions of the taxpayers in the
light of equal tax treatments and justified unequal treatments for achieving a fair tax
system for individuals. In the context of the tax treatment of business income, I have
chosen the legal form neutrality which will be analyzed and will serve as benchmark.
Because in my view, a different tax treatment of business income put in different legal
forms, cannot be justified as these business profits are equal to each other; the legal form
does not change the nature of the business profit. As these two different principles reflect in
a way the equality principle, they will be analyzed for the aim of this thesis to serve as
benchmarks for the already mentioned (problematic) issues in the Dutch income tax system.
It does not mean that other principles of fairness are not important; they will be taken into
account where relevant. Paragraph 2.3.1 analyzes the principle of ability to pay and
afterwards in paragraph 2.3.2, legal form neutrality as a differentiation of principle of tax
neutrality will be analyzed.
2.3
The benchmark: ability to pay
The ability to pay principle seems to be the fundamental principle of a fair income tax
system. The idea of ability is a generally accepted starting point of the income tax. Adam
Smith considers ability to pay as the principle to distribute the tax burden amongst the
Fairness and taxation of different types of income
25
taxpayers; individuals should contribute to the support of the government, as nearly as
possible, in proportion of their ability to pay.52 This principle seeks to a fair tax burden
distribution; the levy must be in accordance with capacity of the individuals to contribute to
the State Treasury.53 Stevens mentions that ability to pay is strongly held in the legal
thinking and thereby it forms a strong argument in favor of an income tax system. 54 Also
Niessen considers that the ability to pay principle “emanates a strong power” and that
ability to pay reflects the general sense of justice. 55 Lang follows this line as he states that
the ability to pay principle is the most adequate fundamental guideline to equal taxation
despite, such as other principles, that there are limitations on this principle.56 Goode
describes that this perception that a personal income tax is the fairest of all taxes arises
from the strong belief that it accords best with ability to pay and that net income is a
measure of the capacity of an individual to command economic resources and it seems to be
a good indicator of ability to help finance government. 57
As the ability to pay principle is an abstract concept, it has to be made more concrete. I will
use three factors which are in my opinion relevant for the concretization of the ability to pay
of taxpayers: the notion of taxable income, fictions in tax law and the applicable rate. And
however a balance must be found again between the ability to pay principle and other
relevant principles such as effectiveness, in my opinion, the starting point should stay the
ability, the capacity of the taxpayer because it is the best way to compare the positions of
the taxpayers in terms of the equality principle and therefore there should not be made
excessive deviations in tax treatment of different types of income in the personal income
tax. So, this paragraph will address how ability to pay should serve as benchmark for this
thesis and should be understood in the light of taxation of different types of income in the
personal income tax with a focus on taxation of capital income by using the three mentioned
52
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 68 and J.L.M. Gribnau, Belastingen als moreel fenomeen, Den Haag: Boom fiscale uitgevers 2013, p.
43.
53
J.L.M. Gribnau, Bijdragen aan een rechtvaardige belastingheffing, Amersfoort: Sdu Fiscale &
Financiële Uitgevers 2007, p. 46.
54
L.G.M. Stevens, Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 11.
55
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 72.
56
J. Lang, ‘The influence of tax principles on the taxation of income from capital’, in: P.H.J. Essers &
A.C. Rijkers, The notion of income from capital, Amsterdam: IBFD 2005, p. 13.
57
R. Goode, The Individual Income Tax, Washington D.C.: The Brookings Institution 1964, p. 11.
Fairness and taxation of different types of income
26
factors. But first, a short overview of the development of the view on the ability to pay
principle will be described.
2.3.1 Development of the ability to pay principle
The classic economists where the first ones who concretized the ability to pay principle that
can be found in their libertarian expression of “Leave them as you find them rule of
taxation”.58 Within their social perception, taxation according to ability to pay means such a
taxation whereby from everyone’s ability to pay an equal percentage is eliminated with the
result that after taxation everyone maintains an equal percentage of its ability to pay; this
theory aims to a neutral taxation related to wealth relations. This idea is based on the view
that rejects every public intervention in the created welfare relations. 59 The notion “taxation
according to ability to pay” does not cover the aim at income redistribution. Taxation
according to ability is based on the present income distribution and focuses on the
distribution of the tax burden.60
As after that time and in recent times the government actually aims to influence the social
and wealth relationships in society, this related thought of a pure proportional tax regime
has been left. The theory of ability to pay found its way more towards the theory of the
“proportional pleasure sacrifice” of Cohen Stuart which had a great influence on the
conceptualization of progressive taxation.61 The starting point of the theory of the
“proportional pleasure sacrifice” of Stuart is also based on the present income distribution.
The starting point of Stuart is that “taxation according to ability to pay” means “equality of
sacrifice”.62 According to Stuart, an equal sacrifice of money should be achieved if everyone
should pay an equal amount; an equal sacrifice of utility by letting pay everyone such that
for them all the lack of quantum pleasure is equal; and an “equal sacrifice” (which is called
by Stuart “proportional pleasure sacrifice”), by letting pay everyone such, that for all the
58
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 151, this is the so-called
“Edinburger rule”, which has been named to an article of the Edinburg Review from April 1833.
59
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 72-73.
60
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 151.
61
A.J. Cohen Stuart, Bijdrage tot de theorie der progressieve inkomstenbelasting, ’s-Gravenhage:
Martinus Nijhoff 1889.
62
See A.J. Cohen Stuart, Bijdrage tot de theorie der progressieve inkomstenbelasting, ’s-Gravenhage:
Martinus Nijhoff 1889, p. 33 and L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980,
p. 152.
Fairness and taxation of different types of income
27
total pleasure is proportionally reduced, meaning taking a proportionate amount of
pleasure.63 Also Pierson agrees with this thought as he states that after taxation the ratio
between the wealth of the taxpayers should stay unchanged; the lack of pleasure that
taxpayers encounter should stand in an equal proportion to their available level of
pleasure.64 So, according to this theory the amount payable of tax should reflect the
pleasure sacrifice that is proportional to the (monetary value of) total pleasure possibilities.
Besides, Stuart stresses that the ability to pay “starts” when the income exceeds the
minimum income. However Stuart shows that the proportional pleasure sacrifice does not
necessary require a progressive tax rate, but that also a degressive or proportional tax rate
are one of the possibilities, a moderately progressive tax rate is considered as acceptable.65
The fundamental criticism on the proportional pleasure sacrifice theory addresses on the
impossibility to measure the individual utility that is being turned into monetary value and
the critic consists of the problematic of an acceptable income distribution: the ability to pay
principle should include ethical redistributing elements. 66 In this context, in the beginning of
the 20th century, a trend arose towards strong progressive taxation together with the
developments of the other functions of taxation; next to the budgetary function, taxation
has also an important function to achieve income redistribution in terms of social income
policy and as third function it forms as in instrument for economic and social policy goals. 67
Next to the libertarian principle of “Leave them as you find them” a second tendency
developed: the aim to a fair income distribution by way of taxation from a social political
viewpoint. With this aim of income redistribution of income and wealth, the level of
progression in taxation has increased. It means a higher progression than based on the
ability to pay principle, can be justified.68 So, the ability to pay principle nowadays has not
only got the element of a fair tax burden distribution, but also the element of social income
redistribution.
63
A.J. Cohen Stuart, Bijdrage tot de theorie der progressieve inkomstenbelasting, ’s-Gravenhage:
Martinus Nijhoff 1889, p. 33
64
See L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 153.
65
A.J. Cohen Stuart, Bijdrage tot de theorie der progressieve inkomstenbelasting, ’s-Gravenhage:
Martinus Nijhoff 1889, p. 124-127 and further. A progressive tax rate means, in this context, a rate
structure with an increasing marginal tax burden, see L.G.M. Stevens, Belasting naar draagkracht,
Deventer: Kluwer 1980, p. 179-180.
66
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 159.
67
R.S. Avi-Yonah, ‘The Three Goals of Taxation’, 60 Tax Law Review 1 2006-2007, p. 3.
68
R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Deventer: Kluwer 1996, p. 19.
Fairness and taxation of different types of income
28
Recently, the discussion about the inequality in society arose with the publication of the
research by the French economist Thomas Piketty. He states in his book ‘Capital in the
Twenty-First Century’ that capital in a capitalist society is accumulated by a still smaller
group and that therefore inequality is an essential feature of such a society. 69 He also shows
that on the long-term, returns on capital increase faster than the economic growth and the
income from labour. This growing inequality will be further embedded by inheritances, which
form a growing share of the capital and wealth accumulation.70 In order to prevent crucial
consequences of the growing economic inequality in society, he proposes to introduce a
worldwide progressive taxation on (private) capital income whereby he requires a worldwide
disclosure of all bank balances.71 On the same international level, there was a conference
about the future of capitalism whereby Lagarde, the director of the IMF, warns against the
growing economic inequality in society which not only cause that people do not participate
in the economic process, but that it also undermines the solidarity that binds communities
together.72 In her view, the reform of the capitalist system is not to “destroy” capitalism,
but the reform should give a new form to capitalism: the so-called inclusive capitalism. She
states namely that most recently, capitalism has been characterized by “excess” and that it
has also been associated with high unemployment, rising social tensions and growing
political disillusion, all in the time of the recession.73 The main cause is seen in the fact that
there is no trust anymore in the leaders, institutions and the free-market system itself.
Trust can be restored and sustained by the two dimensions of inclusive capitalism: inclusion
in economic growth by, for example, making income taxes more progressive without being
excessive and integrity in the financial system. 74
2.3.2 The notion of taxable income
As ability to pay reflects the capacity to pay taxes and most countries rely primarily on an
income tax, there may be a global consensus that income is the most appropriate indicator
for ability to pay.75 The tendency from a liberal to a moral social dimension of the ability to
pay principle has also lead to a subjectivity of the ability to pay principle; personal
69
H. Wansink, ‘Kapitalistisch idealisme’, Annex to de Volkskrant 17 May 2014, p. 57.
70
H. Wansink, ‘Kapitalistisch idealisme’, Annex to de Volkskrant 17 May 2014, p. 57.
71
H. Wansink, ‘Kapitalistisch idealisme’, Annex to de Volkskrant 17 May 2014, p. 58.
72
P. de Waard, “Kapitalisme moet op de schop”, de Volkskrant 28 March 2014, p. 23.
73
See for this speech of Lagarde: <http://www.imf.org/external/np/speeches/2014/052714.htm>.
74
See for this speech of Lagarde: <http://www.imf.org/external/np/speeches/2014/052714.htm>.
75
K. Holmes, The concept of income. A multi-disciplinary analysis, IBFD Publications BV 2000, p. 3.
Fairness and taxation of different types of income
29
circumstances of the taxpayers should be taken into account, which are relevant for the
determination of the ability to pay.76 Stevens describes in this context that it was unclear
how to define ability to pay, but that there was consensus about the fact that ability to pay
is a subjective notion that relates to the personal circumstances of the individuals. 77 The
standard of the income tax thus is taxation according to ability to pay of the taxpayer. So,
the notion of “taxable income” is the starting point of taxation of different types of income
of individuals. It determines the taxable income base which upon the PIT is relied. Therefore
an income tax should have a good and clear income notion as basis: this is required and
essential in order to distribute the tax burden equally (in accordance with the ability to pay)
between the taxpayers.
Defining taxable income led to many theories on this concept.
78
The periodicity theory and
the source theory are similar to each other; where the periodicity theory defines income as
everything that periodically occurs to the individual, the source theory considers income as
that which arises from a certain source of income. The revenue theory defines income as all
that is being received by participation in production.79 A point that indeed can be made
towards the source theory is that other activities can exist that can have an income
character. The more wide comprehensive income theory (the so-called Schanz-Haig-Simons
notion of income) views income as the increase in an individual’s economic power over a
period. In this theory, taxable income is defined as the sum of the consumption expenditure
plus net increases in wealth plus imputed income during a period.80 It does not matter how
the capital mutation has existed and it includes all types of income; the source of income is
irrelevant. In the light of the taxation of different types of income, it would mean that both
labour income and capital income are subject to the same determination rules, but it would
also mean that unrealized value changes of capital (such as dividends, interest, real estate)
are taxed.
76
R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Deventer: Kluwer 1996, p. 18.
77
L.G.M. Stevens, Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 11.
78
Stevens set out some income theories which I will mention here, see L.G.M. Stevens,
Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 49-56. Stevens also mentioned that none of
these theories may give a comprehensive and practical definition.
79
H.J. Hofstra & L.G.M. Stevens, Inkomstenbelasting, Deventer: Kluwer 1998, p. 41.
80
K. Holmes, The concept of income. A multi-disciplinary analysis, IBFD Publications BV 2000, p. 83.
Fairness and taxation of different types of income
30
However the comprehensive income theory includes a clear definition of taxable income, in
my opinion, only net realized income of the taxpayer reflects ability to pay and therefore the
comprehensive income theory is not suitable. The fact that it seems practically impossible to
determine the exact net increase of wealth and capital mutations because of value changes
that will arise, not yet discussed that income is even not realized, does infringe the ability to
pay. In my view, the ability to pay of a taxpayer with realized labour income cannot be
compared with the ability to pay from another taxpayer with accrued income by unrealized
capital increases as the latter’s real ability to pay will be known in the case that he realizes
capital income by, for example, the sale of his capital assets. So, on this point I may
support in theory that income that taxpayers receive from sources should be included in the
taxable income on the condition that other types of income beyond the sources should be
covered as well and that all types of income from the source should form part of the taxable
income base. Applying this to the taxation of different types of income in the personal
income tax, all types and forms of income should be a part of the taxable income. For
example, employees, owners of sole proprietors, shareholders, and investors should be
subject to personal income tax for all forms of their realized income from the sources, which
means that not only regular received income such as dividends form taxable income, but
also net realized capital gains of all types of the individuals as they definitely does increase
(or decrease) their ability to pay. For a fair and equal income tax system, the legislator
must be consequent in this case: realized regular income and realized income from capital
gains of all types of individuals must be taken into account in the personal income tax.
2.3.3 Legal fictions in tax law
A phenomenon that can be related to a lack of a consistent notion of income is the use of
legal fictions in tax law. Whereas in the 1980s fictions in Dutch tax laws were not often
used,
81
introduction of (more) fictions in tax law increased in the last years.
notion ‘fiction’ can be differently defined, depending on the point of view,
83
82
Although the
‘fiction’ in tax
law can be described as ‘a statutory provision on the basis of which the reality is partly or in
whole obliged to be setting aside which directly affects the taxable basis of the taxpayer in
81
L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 380.
82
R.M. Freudenthal, In de ban van de vervlakking; een inkomstenbelastingsprookje in drie delen,
Amersfoort: Sdu Fiscale & Financiële Uitgevers 2004, p. 13.
83
Dusarduijn mentions three definitions of a legal fiction depending on different points of view on the
legal fiction with focus on the function, wording or outcome of the fiction. See S.M.H. Dusarduijn, ‘De
rechtsfictie: Een (on)uitwisbaar doen alsof?’, WFR 2013/1224.
Fairness and taxation of different types of income
the personal income taxation.’
84
31
Notwithstanding that simplicity, effectiveness of tax
legislation, predictability of tax returns and anti-abuse tax rules are called to be the
advantages of using fictions in (tax) law, Freudenthal mentions that the disadvantages of
using fictions in tax law are more extensive and drastic.
85
No clear definition of taxable
income combined with using fictions infringes the relation with principles as equality and
ability to pay.
As I argued before, real income that has been obtained by taxpayers should form the basis
for the personal income tax and in this way I support Freudenthal who states that fictions
therefore must be only used as ultimum remedium and if they will be introduced, than
under strict conditions.
86
For the different tax treatment of income in the personal income
tax, it means that even if legal fictions and fictitious income can be used in the light of
effectiveness and simplicity of the system, fictions should not prevail over the ability to pay
principle. In my opinion therefore, real income received by the taxpayers must stay the
basis instead of fictions. The taxable basis in the personal income tax should only include
real economic benefits. Illusory gains that are taxed as income while there is in reality no
actual improvement of the taxpayer’s position, is conceptually not logic.87 Such taxation
does definitely infringe the ability to pay principle and the principle of equality and is
therefore not fair. For example, a taxpayer with fictitious income from capital (which does
not reflect his real capacity to pay taxes) is placed in the same position as the taxpayer with
the same income, but the latter’s income reflects his real income from capital gains on
which his ability to pay is to determine.
2.3.4 Applicable tax rate in the personal income tax
After determining the taxable income in the personal income tax for the different types of
income with the real and realized income as basis for all types of income (including both
labour and capital income), the question that than arises is which tax rate should apply. In a
84
R.M. Freudenthal, In de ban van de vervlakking; een inkomstenbelastingsprookje in drie delen,
Amersfoort: Sdu Fiscale & Financiële Uitgevers 2004, p. 16.
85
R.M. Freudenthal, In de ban van de vervlakking; een inkomstenbelastingsprookje in drie delen,
Amersfoort: Sdu Fiscale & Financiële Uitgevers 2004, p. 35.
86
According to Freudenthal, the introduction of the capital yield tax is therefore unacceptable, see
R.M. Freudenthal, In de ban van de vervlakking; een inkomstenbelastingsprookje in drie delen,
Amersfoort: Sdu Fiscale & Financiële Uitgevers 2004, p. 25 and 35.
87
K. Holmes, The concept of income. A multi-disciplinary analysis, IBFD Publications BV 2000, p. 341.
Fairness and taxation of different types of income
32
global income tax system all income, regardless the source, are subject to one tax schedule.
The aim of this system is to distribute the tax burden amongst taxpayers horizontally and
vertically according to the ability to pay principle; horizontal as this approach does treat all
income from different sources the same and vertical as the tax rate under this regime is
usually progressive.88 Under a scheduler income tax system income is identified by source;
different tax rates apply on different income groups. A typical distinction is that capital gains
are treated more favorable than (other passive) and labour income and the tax competition
between states just increased the tendency towards a scheduler income tax by lowering the
tax burden on income from (mobile) capital.89 So, progression is based on vertical equality,
which not only means that taxpayers with a higher income pays a more absolute amount of
taxes than taxpayers with lower income, but it also reflects that higher income taxpayers
pay proportionately more of their income to taxes.90 As mentioned in the previous
paragraph, taxation also got the function to achieve income redistribution of income and
wealth between taxpayers, which may require a (strong) progressive income tax rate under
the name of ability to pay. The strong progression in taxation must be based on the case
against inequality; meaning that there is a non-fiscal aim at reducing the wealth disparities
resulting from market forces in the society by rejecting a proportional tax rate which was
aimed at the original (liberal) ability to pay theory.91 But on the other hand, Lang argues
that it is a political misunderstanding that the principle of ability to pay serves the vertical
equality by a progressive tax rate; he states that the vertical equality meaning that
taxpayers with a higher ability to pay should pay more taxes does not necessarily require a
progressive tax rate, but that it also supports a flat proportional tax rate as under a flat tax
rate taxpayers with higher incomes pays more than those with lower incomes.92 In that way,
he prefers a flat proportional tax rate corresponds with the equal treatment of taxpayers
regarding to the amount of his income, which is the best indicator of ability to pay and in
this function, the principle of ability to pay only justifies a proportional tax rate and claims
for a correct notion of income. He states that the ability to pay principle does not aim at
88
K. Holmes, The concept of income. A multi-disciplinary analysis, IBFD Publications BV 2000, p. 28.
89
J. Lang, ‘The influence of tax principles on the taxation of income from capital’, in: P.H.J. Essers &
A.C. Rijkers, The notion of income from capital, Amsterdam: IBFD 2005, p. 26-27.
90
See L.G.M. Stevens, Belasting naar draagkracht, Deventer: Kluwer 1980, p. 158-159.
91
See paragraph 2.3.1.
92
J. Lang, ‘The influence of tax principles on the taxation of income from capital’, in: P.H.J. Essers &
A.C. Rijkers, The notion of income from capital, Amsterdam: IBFD 2005, p. 9.
Fairness and taxation of different types of income
33
raising revenues as much as possible, but contrary, it protects the taxpayer against a too
high tax burden because of a wrong notion of income.93
In the case of taxation of different types of income of individuals I argued that the basis of
the different types of income should be the same: the real economic benefits, the real
income of the taxpayer reflects his ability to pay for taxation and whereby he at the same
time can be compared with the tax position of the other taxpayers which reflects the
equality principle. As said before, differentiations in tax treatment, in this case by applying
different tax rates must be base on reasonable justifications. In this case, I do not have a
strong view on using progressive or proportional tax rates. But taking into account the aim
of keeping the inequalities in societies in balance, a reasonable progressive tax rate can be
justified. But also in line with the scheduler income theory, I do understand that different
groups of income can be subject to different tax rates, as I think that certain deviations can
be justified in the applicable tax rates by taking into account the different nature and
characteristics of the different types of income. For example, a business profit is different
from nature than labour income, capital is from nature more mobile than labour, and
business income has mostly already been taxed with corporate income tax. But in my view,
any differences between the tax rates on different types of income can be only justified on
reasonable and proportional grounds and under the condition that the difference in tax rate
stays reasonable and is not excessive for the purpose of an equal tax system. For example,
a too favorable tax rate on capital income of individuals compared with the mainly high
progressive tax rates on labour income. In my opinion, by taking into account the discussion
about the growing economic inequality in society, this difference must be brought back to a
lower extent, in the case that it is not. This does not necessarily require a progressive or a
proportional tax rate in this case; in my view it is important that in any case the difference
in tax rates should not be on a high extent.
2.4
The benchmark: legal form neutrality
The purpose of taxation in the first place is to raise revenues for the necessary
governmental functions. Besides, taxes have an important function for income redistribution
policy aimed at reducing the unequal redistribution of income and wealth that result from
the normal operation of a market-based economy.94 The third function is the instrumental
93
J. Lang, ‘The influence of tax principles on the taxation of income from capital’, in: P.H.J. Essers &
A.C. Rijkers, The notion of income from capital, Amsterdam: IBFD 2005, p. 10.
94
R.S. Avi-Yonah, ‘The Three Goals of Taxation’, 60 Tax Law Review 1 2006-2007, p. 3.
Fairness and taxation of different types of income
34
function of taxation; taxes are used to control the behavior of the taxpayers for
government’s (sub)policy goals. So, the distribution of the tax burden is distorted by other
considerations than the developed rules in the tax system in the context of the classic
budgetary function. The instrumental measures of the tax system affect the social and
economic relations in the society. However, outside the context of the intended purpose of
the provision, taxation should not have distorting effects on the behavior of the taxpayers.
In the context of the tax treatment of business profits, neutrality means that the legal form
of the business may not lead to a difference in the tax burden. So, the chosen legal form of
a business should not make any difference in the tax treatment of business income.
Therefore, the principle of legal form neutrality (as a derivation of tax neutrality) will serve
as benchmark to evaluate the Dutch income tax system and to propose a reform. Before the
legal form neutrality will be discussed, first the concept of tax neutrality will be discussed for
the purpose of this thesis.
2.4.1 Tax neutrality
Tax neutrality plays a major role within the concept of economic efficiency and by choosing
neutrality consequently, the tax system would be more logic and consistent and would not
distort the behavior of the individuals and the companies. The legislator also considered the
neutrality as it was one of the aims of the tax reform in 2001.95 An efficient tax system
ensures positive welfare effects. To achieve economic efficiency, taxation should distort
economic decisions as little as possible. In general, a tax system is considered efficient if it
does not distort or distort as little as possible the decisions of the taxpayers that they
otherwise take based on merely economic considerations.96 As said before, taxation may
have an important effect on the economic behavior of individuals and companies. Such
influencing behavior can also be the result of the instrumental function of taxation which is
used as instrument for achieving certain policy goals.
According to Niessen and Hofstra, the principle of tax neutrality is an outdated concept. 97 In
the 19th century, there was a dismissive attitude towards the use of taxation for secondary
purposes; the taxation had to seek to a tax burden distribution which should not be
95
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 35.
96
Report Tax System Study Committee, Continuïteit en vernieuwing. Een visie op het belastingstelsel,
Den Haag 2010, p. 15.
97
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 122.
Fairness and taxation of different types of income
35
distorted by other considerations. This requirement of neutrality took a central place in the
tax theory of the 19th century.98 They argue that it is inevitable in these days that the tax
system influences the relations in the society and that taxation is intentionally used for
secondary purposes and policy goals. That is why, in their view, the neutrality does not
longer fit in the current system.99 In my view, the neutrality principle has not lost her
meaning. Taxation should aim to distort the economic decisions of the taxpayers as little as
possible. The legislator is also aware of the concept of neutrality.100 In addition to this
economic concept of neutrality, neutrality can be also seen in a more juridical dimension:
even if the legislator uses the instrumental function of taxes, these instrumental tax rules
can influence the economic relations in a society in a disproportionate or unacceptable way.
In this way, the principle of neutrality forms a differentiation of the equality principle:
methods that are used for achieving the goals of the legislator should not lead to
disproportionate consequences. In this case, such a more favorable treatment of a certain
behavior than another type of behavior must be reasonable justified. As Van der Geld states,
a fair and balanced tax burden distribution is not possible without the principle of tax
neutrality.101
The described concept of neutrality above is too general in nature. It includes all economic
behavior of all economic operators. There are several dimensions of tax neutrality. As it was
one of the aims of the tax reform in 2001, the tax legislator aimed, with the introduction of
the capital yield tax, at more neutrality in the capital markets by reducing the economic
distortion on the capital income regime; this should lead to a more efficient allocation of
capital.102 Besides, the legislator argued that the international tax neutrality would increase
as well, which shows that the neutrality does play a significant role. Another dimension of
tax neutrality is to not influence, or at least as little as possible the private decisions of the
taxpayers in the context of the choice for the type of cohabitation; these personal decisions
98
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 122.
99
R.E.C.M. Niessen & H.J. Hofstra, Inleiding tot het Nederlands belastingrecht, Deventer: Kluwer 2010,
p. 122.
100
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 35.
101
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.
102
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 35.
Fairness and taxation of different types of income
36
laid down in the private sphere of the taxpayers should not be distorted by taxation. 103
Legal form neutrality with respect of the tax treatment of business profits is another type of
the neutrality principle that will serve as benchmark for this thesis and that will be discussed
in the following paragraph.
2.4.2 Legal form neutrality
Legal form neutrality means that the taxation of business profits should not be depended on
the legal form of business: business profits should be taxed in the same way. This means
that business income should be treated the same, regardless the legal form of the business
is a sole proprietorship, partnership or corporation. This legal form neutrality thus is a form
of tax neutrality. The income tax system should be neutral towards the choice of legal form;
this decision should be only made on the basis of economic factors. Van Dijck also prefers
taxation regardless the legal form as he defines it as a starting point of taxation of
businesses.104 A different tax treatment of business income may influence the choice of legal
form and this will not always be efficient in the context of economic efficiency. 105
2.4.2.1 Static and dynamic neutrality106
According to Doornebal, legal form neutrality itself has also two dimensions: static neutrality
and dynamic neutrality. Based on static neutrality, the PIT-burden and the CIT-burden on
the profits of the company together with the possible PIT-burden on labour income plus the
income from substantial interest of the (director main) shareholder may not differ as such
for the available legal forms of a certain type of business, with the aim that the choice of
the legal form is not purely based on this difference in tax burden. Dynamic neutrality
implies that the tax legislation should not constitute an obstacle or at least as little as
possible in changing the legal form into another type of a legal form.
103
See N.C.G. Gubbels, Samenlevingsverbanden in de inkomstenbelasting en de schenk- en
erfbelasting (diss. Tilburg), Tilburg: Tilburg University 2011, p. 30. The neutrality for private decisions
of the taxpayers will not be further discussed for the purpose of this thesis.
104
J.E.A.M. van Dijck, Belastingheffing van ondernemingen ongeacht de rechtsvorm, Deventer: FED
1984, p. 18-19.
105
C. Crawford & J. Freedman, Small Business Taxation, A special study of the structural issues
surrounding the taxation of business profits of owner managed firms, 6 Augustus 2008, par. 4.
106
The description of the static and dynamic neutrality in this paragraph is based on: J. Doornebal, De
terugkeer uit een BV, Deventer: Kluwer 1991, p. 241-242.
Fairness and taxation of different types of income
37
In the case that there is no such thing as static neutrality of the tax legislation regarding the
legal form of a business, the desire will increase to change the legal form of the business in
order to reduce the tax burden. Furthermore, the actual possibilities to change the legal
form mainly depend on the extent of the dynamic neutrality; the legal form of a business
will be rather changed at a high degree of dynamic neutrality than the case where the tax
legislation does contain obstacles.107 It can be said that the greater the level of dynamic
neutrality, the less taxpayers are harmed by a lack of static neutrality. On the other hand,
when the static neutrality is of a high level, the need to change the legal form will decrease,
so the dynamic neutrality, but even if the tax legislation is static neutral on a high level,
taxation still may not harm the change of the legal form as it can be deemed necessary for
the continuity of the business or based on other economic considerations.108 In the context
of a different tax treatment of business income and legal form neutrality, the focus of this
thesis will be only on the static neutrality as the legal form of a business should not make
difference to the tax treatment.
2.4.2.2 Consequences of a lack of legal form neutrality
As stated before, it may not be economic efficient if taxation does influence the choice of
legal form of a business. For example, Van den Berge describes taxation as a negative
factor if it increases the tension between the most rational economic legal form of a
business on the one hand and profit-seeking on the other. He argues that in this case,
neutrality must be pursued as much as possible.109 However the influence of taxation on the
choice of legal form will depend on all relevant circumstances, and as such it can be said
that the impact of taxation seems to form a strong factor for this choice.110 No static
neutrality has the result that taxpayers choose for a certain legal form of a business based
on tax considerations, while the chosen legal form may not suitable for that type of business,
107
J. Doornebal, De terugkeer uit een BV, Deventer: Kluwer 1991, p. 247.
108
J. Doornebal, De terugkeer uit een BV, Deventer: Kluwer 1991, p. 248.
109
W.H. van den Berge, Beginselen van de belastingheffing, Alphen aan den Rijn: N. Samson N.V.
1949, p. 87.
110
C. Crawford & J. Freedman, Small Business Taxation, A special study of the structural issues
surrounding the taxation of business profits of owner managed firms, 6 Augustus 2008, par. 3.1. and
P.H.J. Essers, Knelpunten bij de hervorming van de belastingheffing van ondernemingen, Deventer:
Kluwer 1992, p. 9 and Report Tax Study Group of the “Katholiek verbond van
werkgeversvakverenigingen”, Hervorming van de belastingheffing van ondernemingen, Den Haag,
April 1960, p. 2.
Fairness and taxation of different types of income
38
viewed from the (non-fiscal) economic consequences of the chosen legal form. 111 For this
reason, the tax system should not distort decisions of the taxpayers of the legal form of a
business.
Taking into account the equality principle,, in my view, there is economically no relevant
difference between the business profits of a sole proprietor (subject to PIT) and business
profits of corporations (subject to CIT). As Mol-Verver states, the legal form does not alter
the nature of the business profit.112 Business profits stay business profits regardless the
legal form of the business. Therefore it is in my opinion not justified if there is a different
tax treatment of these business profits purely based the juridical difference of the chosen
legal form of the business.
2.5
Conclusion
It can be concluded that fairness includes several dimensions, such as a juridical, economic
and social dimension. Fairness is interpreted and perceived to time and place and there
exists several views on what fair taxation means and should include. In my view, three
elements of fairness can be distinguished: the principle of equality, purposiveness and legal
certainty. These values are concretized by legal principles. To my opinion, it is the legislator
who should continuously find an appropriate balance between these fairness principles and
the principle of effectiveness and simplicity in distributing the tax burden between taxpayers
in order to find an “acceptable” taxation as he is democratic legitimated. It is essential that
this interaction of principles should be in accordance with the society view on the fairness
values to maintain and enhance the level of legitimacy. In this context, the legislator should
continuously bear in mind that the legislation should be in accordance with the fundamental
principle of equality, even though he has a margin of appreciation at achieving certain social
and economic goals. However the court can “check” whether the legislator acts in line with
the equality principle, the legislator has an own responsibility to keep the equality principle
in mind while designing and implementing tax legislation.
For the purpose of this thesis, I have chosen two different principles of fairness whereby can
said that the ability to pay is a more legal principle and legal form neutrality an economic
one. Both of the principles are differentiations of the equality principle. These principles
serve as benchmarks to formulate how the Dutch income tax system should contribute to a
111
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 2.3.
112
S.J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, par. 2.3.4.
Fairness and taxation of different types of income
39
fair tax burden distribution between taxpayers with respect to the taxation of different types
of income and to evaluate the current Dutch income tax system. In this context, the starting
point of a fair income tax system should be the principle of ability to pay with respect to the
tax treatment of different types of income in the personal income tax system. Mostly, a
favorable tax treatment of capital income applies with respect to the other types of income
such as labour income. For taxation of business income, legal form neutrality as a
dimension of tax neutrality serves as benchmark. Business profits should be fiscally treated
the same as in economic sense their source is the same regardless of the choice of the legal
form of the business; the legal form of sole proprietor or a corporation does not alter the
nature of the business profit.
Ability to pay
The ability to pay principle is globally recognized as the fundamental principle for fair
income taxation. And as it is embedded in the legal thinking of the society, it justifies
income taxation as income is considered to be an appropriate indicator to measure ability to
pay and there is a strong belief that it accords best with ability to pay. I described ability to
pay by using three relevant factors: the notion of taxable income, legal fictions in tax law
and the applicable tax rate. For a fair and equal income tax it is necessary, in my view, to
include only realized net income in the taxable basis: only then can the real ability to pay of
the taxpayers be compared in order to determine their tax position. This should apply on all
types of income; for both labour income and capital income mainly. A good and consequent
notion of income would be therefore relevant. Even if no clear definition can be given of
taxable income, the legislator should use it as starting to point to distribute the tax burden
between taxpayers equally. The use of legal fictions (especially in combination with a lack of
a consistent notion of taxable income) does infringe the principles of equality and ability to
pay. Even that it can be used for simplicity and effectiveness reasons, in my opinion the real
realized income of the taxpayer must stay the starting point instead of fictitious income.
Fictitious income does not reflect the real capacity to pay of the taxpayer with the result
that it also infringes the equality principle: taxing unequal cases the same. After real and
realized net income is determined which reflects the ability to pay of the taxpayers, a
different tax rate can apply on different types of income. In the case of different types of
income, capital income is mostly taxed more favorable than labour income. In my opinion,
certain deviations in tax rates can be justified by taking into account the different nature
and characteristics of the income types and the instrumental function of taxes, but under
the condition that in all income types the realized income is included in the taxable base and
Fairness and taxation of different types of income
40
that the difference in tax rate must be from a low level: the difference must be reasonable
justified and must not be excessive. In this way, the difference in tax rate between labour
income and capital income should not be on a high extent.
Legal form neutrality
In the context of the tax treatment of business income, tax neutrality and especially static
legal form neutrality serve as benchmarks for the purpose of this thesis. In general, tax
implications should not influence investment decisions of taxpayers in order to achieve
economic efficiency. A tax system is efficient if it does not distort the decisions of the
individuals. The income tax system should be neutral and should achieve to distort decisions
as little as possible, which means that the methods that are used for achieving certain
government policy goals should not lead to disproportionate consequences. Legal form
neutrality is a dimension of this neutrality principle as it requires that business profits must
be treated equally regardless the legal form of the chosen business. The nature of the
business profits is in economic way the same, the legal form whether it is a sole proprietor
or a corporation, does not change this case. The consequence of lack of legal form neutrality
is that different tax treatment of business income otherwise does influence the choice of
legal form which may not be economic efficient. Fiscal considerations should not be decisive
in the case; taxpayers should base their decision of a legal form mainly on economic factors.
Static legal form neutrality implies therefore that the tax burden of the available legal forms
for a certain type of business may not differ as such with the aim that the choice of the legal
form is not purely based on this different tax burden.
As mentioned earlier, for the taxation of different types of income I have formulated this
normative framework by using two different deviating principles of fairness. Two principles
for the two different issues of the taxation of different types of income with a focus on a
favorable treatment of capital income, and the tax treatment of business income. While the
ability to pay principle leads the first issue, legal form neutrality as a dimension of tax
neutrality serves the taxation of business income. Both principles reflect the equality
principle, and although they seem mutually exclusive at first sight, from the discussed
issues it can be gathered that coherence and coexistence between these two principles is
not impossible in the context of the equality principle. In taxation of different types of
income, next to the ability to pay principle, it is also important that reasonable justifications
should exist for a wide deviation of different tax treatments of income. So, instrumental tax
rules can also influence the economic relations in society in a disproportionate way, whereby
Fairness and taxation of different types of income
41
therefore the juridical dimension of neutrality requires that legislation that is used for
achieving certain policy goals should not lead to such consequences. On the other hand, the
tax treatment of business income that should be legal form, it can be said that only
corporations are seen as taxpayers with a separated tax liability with a certain level of
ability to pay as they are subject to a separated tax (CIT), and enterprises under the PIT
not. In the third and fourth chapter of this thesis, the current Dutch income tax system will
be evaluated on the two discussed issues against the benchmarks of ability to pay and tax
legal form neutrality.
Fairness and taxation of different types of income
42
Chapter 3 Taxation of different types of income in the Dutch personal income tax
system
3.1
Introduction
Under the PITA 2001, taxpayers are resident individuals liable for income tax on their
worldwide income (from domestic and foreign sources) and non-resident individuals only for
their income from a Dutch source.
113
A non-resident individual is only entitled to a limited
number of tax deductions. However, certain non-resident individuals can opt to be treated
as residents for tax purposes.
114
The result is that they will be entitled to all tax deductions,
but it also means that they will be taxed on their worldwide income. The Dutch PITA 2001
does not include a definition of (taxable) income, which is the indicator to measure ability to
pay for income taxation. It suffices with an exclusive enumeration of certain types of income.
The Dutch income tax system for individuals is based on boxes with the effect that different
types of income are taxed separately and at different rates. Based on the three boxes of the
PITA 2001, PIT is levied on taxable income:
1. from work and home (box 1);
2. from substantial interest (box 2);
3. from savings and investments (box 3).
This chapter gives an overview of the Dutch personal income tax with respect to the
taxation of different types of income in the box tax system. The aim of this chapter is to
analyze whether the current Dutch personal income tax system, especially the taxation of
capital income, contributes to a fair tax burden distribution amongst taxpayers by
evaluating the system against the benchmarks of ability to pay and neutrality. Firstly, the
underlying source theory and introduction of the box tax system in the PITA in 2001 will be
described, followed by the application and criteria of the boxes. After this explanation, the
criticisms on the Dutch box tax system, in particular on the capital yield tax will be analyzed.
This discussion is mainly based on the conformity of the Dutch box tax system with the
principles of equality and ability to pay. Lastly, the personal income tax system will be
evaluated against the abovementioned benchmarks and the related main conclusion will be
given.
113
Articles 2.1 and 7.1-7.7 PITA 2001.
114
Article 2.5 PITA 2001: non-resident individuals can choose to be treated as resident individuals, In
2015 this right of option for non-residents will be abolished and replaced by a new regulation for
qualifying non-residents (with a same effect).
Fairness and taxation of different types of income
3.2
43
Underlying source theory
Defining taxable income led to many theories on this concept.
115
The source system which
forms the basis of the Dutch PIT system nowadays is mainly based on the source theory.116
The periodicity theory and the source theory are similar to each other; where the periodicity
theory defines income as everything that periodically occurs to the individual, the source
theory considers income as all that arises from a certain source of income. The revenue
theory defines income as all that is being received by participation in production. Under the
comprehensive income theory taxable income may be defined as the algebraic sum of all
capital mutations plus consumptions over a period. It does not matter how the capital
mutation has existed and it includes all types of income; the source of income is
irrelevant.117 Also other (not mentioned) developed theories are possible as underlying
theories on this notion of income, but they will not be further described in this chapter.
According to the Dutch legislator, all these theories have the objection in common that the
set criteria do not have a distinctive character with the effect that the notion of taxable
income will be strongly depended on subjective insights.
118
Every theory has its pro- and
contra arguments and because of the unsolved theoretical discussion, the notion of income
created its own notion as a “practical and empirical notion of income, which with the years
has been formed in behalf of this ability to pay-taxation.”
119
The Dutch PITA is based on the
source theory, which does not mean that these income theories were irrelevant; they all
contribute to the contents of the notion of income. However, the source theory has still
been the starting point of the notion of income in the Dutch PITA of 1914, 1964 and 2001.
Under the source theory profits can be only taxed if they arise from a “source of income”,
under the prerequisites of participation in the economic movement, and profits must be
aimed at or must be reasonably expected.
115
Stevens set out some income theories which I will mention here, see L.G.M. Stevens,
Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 49-56. Stevens also mentioned that none of
these theories may give a comprehensive and practical definition.
116
See Kamerstukken II, 1958/59, 5380, no. 3, p. 17.
117
See footnotes 78-80.
118
See Kamerstukken II, 1958/59, 5380, no. 3, p. 17.
119
See Kamerstukken II, 1958/59, 5380, no. 3, p. 17.
Fairness and taxation of different types of income
3.3
44
Introduction of a new PITA in 2001
The Dutch box tax system has been introduced in 2001. The PITA 1964 was replaced by the
PITA 2001. In 1997 ministers released an examination on the direction in which the Dutch
tax system should develop in the beginning of the 21st century.
120
This examination
represented an analysis of the strong and weak points of the Dutch tax system in the light
of current and future developments. The new Dutch tax system should respond to the
globalization and digitization of markets and the ageing of the Dutch population. These
changing developments required a tax system with broad and solid tax bases and lower tax
rates. Furthermore, the new tax system should be internationally tax competitive, should
stimulate employment and by greening, contribute to a sustainable economic development.
The tax system should also provide a solid, financial support to the public and social system
expenses. In order to achieve a most possible widely social support, the new tax system
should lead to a balanced tax burden distribution.121 These examinations were used as
bases of the legislative proposal of the Dutch PITA 2001. The introduction of the box system
and the capital yield tax (in box 3) has been the two main changes in the new PITA in
122
2001.
3.3.1 The box tax system
The Dutch box tax system was introduced in 2001 within the reform of the PITA 1964 into
the PITA 2001. The Dutch personal income taxation is based on the source system. Under
this source approach, a benefit only qualifies as (taxable) income if it results from a certain
source. There is a source of income when the following three conditions are fulfilled:
1. the individual takes part in the economic movement by gaining the profit;
2. the individual has the aim to gain profits (subjective element);
3. the individual can reasonably expect profits (objective element).
123
The notion of source must function for taxability of income, however, a clear and legal
124
definition lacks.
Furthermore, the existence of two types of sources of income with a
subjective character and an objective character led to many implementation problems,
120
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 3.
121
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 3.
122
See paragraph 3.3.4.1.
123
These criteria are based on Dutch jurisprudence. Over the years the subjective element lost
importance in favor of the objective element.
124
L.G.M. Stevens, ‘Synthetisch of analytisch?’, WFR 1999/6330, par. 1.
Fairness and taxation of different types of income
45
especially in the atmosphere transition.125 Under the PITA 1964 sources of income could be
divided in two types: subjective sources and objective sources.
126
They differ in the way of
income calculation. By objective sources the income character was assessed from the
source; the individual was taxed for his profits independently of the question whether these
profits caused a capital increase or not. By subjective sources the income calculation was
based on the comprehensive theory. The source theory lost its importance; the income
character was assessed from the viewpoint of the individual.
However, the source of income is essential for determining the taxable income;
interpretation of this notion of source was still problematic. This was a reason to reform the
Dutch PITA. The main problem under the PITA 1964 was primarily the income from capital.
Income from this source was too easily to be manipulated than to what a sustainable tax
base is responsible for. The PIT could not respond anymore to its ability to pay principle.
127
The problem arose that within this source of income from capital a difference have been
made between taxable profits (income) from capital and untaxed value-increases of this
capital. This qualification of capital as source of income resulted in many tax avoiding
constructions whereby taxable profits from capital were switched into untaxed valueincreases. The legislator was forced to solve and change the tax legislation in order to keep
the tax system sustainable and to keep it in conformity with its ability to pay principle-basis.
That led to the introduction of the capital yield tax in the PITA in 2001, which will be
discussed in paragraph 3.4.4.1.
3.4
Tax treatment of different types of income in the personal income tax
With the introduction of the box system in the PITA 2001 the income tax system changed
from a synthetic into an analytic tax system. Unlike under the synthetic PITA 1964, there is
no overarching concept of the three types of taxable income from the boxes as a whole.
128
Other characteristics of the box system are that no loss compensation is possible between
the boxes and that every box has its own rules to determine the tax base and its own tax
125
In Dutch: sfeerovergang.
126
L.G.M. Stevens, Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 68.
127
L.G.M. Stevens, ‘Synthetisch of analytisch?’, WFR 1999/6330, par 1.
128
Article 2.18 PITA 2001 only describes the total income as the sum of the incomes from work and
home, substantial interest and from savings and investments. However, this article is not essential for
the structure of the PITA 2001 as it does not serve for the calculation of the taxable basis of the levied
PIT.
Fairness and taxation of different types of income
46
rate (respectively a progressive tax rate in box 1, a fixed rate of 25% in box 2 and a fixed
rate of 30% in box 3). The PITA 2001 includes a ranking order regulation which provides
that once the income qualifies under the first source it will not be qualified again under the
next source. Consequently, it is essential to determine to which box certain income belongs
to.
The PITA 2001 is based on the following three boxes:
129
1. box 1 includes taxable income from work and home;
2. box 2 includes taxable income from substantial interest;
3. box 3 includes taxable income from savings and investments.
3.4.1 The switch from a synthetic into an analytic box system
An accommodated question arose whether a synthetic or an analytic tax system should
prevail.
130
The PITA 1964 was based on a synthetic approach: all profits and losses from the
legally enumerated sources of income were put together to a gross income. This gross
income was corrected with ability to pay increasing and decreasing items and with
deductible losses. This result of the taxable income was taxed to (one) progressive rate.
Also the pressurized taxation of income from capital does not only have negative impacts on
the tax revenues, but it also affects the fair tax distribution between taxpayers. Furthermore,
it could affect the tax morality and misallocation of capital. Tax base measures could not
prevent it; it could not solve the underlying problem of insufficient social support to pay
progressive tax rates on an adequate calculated tax base of income from capital. 131 But, if
only the tax bases would be corrected without decreasing the tax rates to lower rates,
fraudulent capital flight and other tax arbitration possibilities would increase. Within this
context, the synthetic tax system of the PITA 1964 with one progressive rate would not be
sustainable anymore. A broader tax base in combination with lower tax rates would be the
solution: a separate tax rate for income from capital, as part of an analytic tax system. 132
The analytic tax system would be within this framework more in consistence with the
circumstances and developments in other countries and besides, this approach would lead
129
Article 2.7 PITA 2001.
130
In their examination the ministers also recommend an analytic income tax system, as the synthetic
system (under the PITA 1964) would not be longer sustainable, see Kamerstukken II, 1997/98, 25
810, no. 2, p.61.
131
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 61.
132
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 61.
Fairness and taxation of different types of income
47
to reduction in the tax burden on labour as this approach avoids tax base-erosion by
deducting capital income losses from taxable labour income. In order to ensure the aim of a
fair taxation, to keep in conformity with the ability to pay taxation and to prevent further
erosion of the tax base, in 2001 the PITA has been reformed and by introduction of the box
system the PITA changed from a synthetic to an analytic income tax system.
133
A source only qualifies as a source for tax purposes if they belong to one of the enumerated
income categories in the PITA. The PITA 2001 has seven income categories. The categories
are (1) profits from business activities, (2) wages, (3) benefits from miscellaneous activities,
(4) income from periodic payments, (5) income from the owner-occupied home, (6) income
from substantial interest, (7) and income from savings and investments. Each category has
its own rules in determining the tax base. The source system and the related income
categories have been in generally maintained under the PITA 2001, income from savings
and investments excepted. By the introduction of the box system the seven categories now
solely are attributable to one of the three boxes; the first five income categories to box 1,
income from substantial interest to box 2 and income from savings and investments to box
3. At the same time, the qualification of income from a source has been, in fact, eliminated.
Under the PITA 1964, there was no box 3 but an income category with income from capital.
As aforementioned, the source question arose due to the fact that income from capital was
taxable but value-increases of that capital itself untaxed, which led to many tax avoiding
constructions. In the current regime in box 3 income from savings and investments is based
on a capital yield tax.
3.4.2 Box 1: income from work and home
Taxable income from work and home consists of the sum of income from the following
income categories (art. 2.7 PITA 2001):
1. profits from business activities (art. 3.2 PITA 2001);
2. wages (art. 3.80 PITA 2001);
3. benefits from miscellaneous activities (art. 3.90 PITA 2001);
4. income from periodic payments (art. 3.100 PITA 2001);
5. income from the owner-occupied home (art. 3.110 PITA 2001).
Furthermore, there are three types of allowances from which two of them related to the
incomes from periodic payments and the owner-occupied home and so, exclusively
133
L.G.M. Stevens, ‘Synthetisch of analytisch?’, WFR 1999/6330, par. 2.
Fairness and taxation of different types of income
deductible in box 1.
134
48
The third allowance includes the personal deduction which is box
crossable; it means that if the taxable income from box 1 is not sufficient of itself, the
remainder can be deducted from the income of the other boxes.
135
Lastly, there are
negative expenditures for income provisions and negative personal deductions.
3.4.2.1
Tax rate in box 1
Income from work and home is taxed at a progressive tax rate with a maximum of 52%.
The progressive tax rate is based on the principle of ability to pay and the idea of income
redistribution.
136
The progressive tax rate is incorporated in four tax brackets of 5,10%,
10,85%, 42% and 52%.
137
Since 1990, the levy of the income tax is combined with the
social security contributions, which lead to a combined total income tax and contribution
rate of 36,25% in the first tax bracket, 42% in the second, and the rates of the third and
the fourth tax brackets remain unchanged (42% and 52%).
3.4.2.2
138
Income from business profits
Natural persons/personal entrepreneurs in box 1, who operate businesses at their own risk
and for their own account, are taxed for their business profits (from the sole proprietor).
Natural persons can have next to business assets, also private assets (in contrary to legal
entities under the CITA). The PITA does not include a definition of an enterprise, but the
classic and general definition of an enterprise is a sustainable organization of labour and
capital which aims at participating in the social-economic progress with the purpose of
making profits. There is a distinction between the total profit derived from an enterprise and
139
the annual profit.
The total profit (total profit, in any form and in any name, derived from
an enterprise) determines the taxable income; the annual profit provision attributes the
total profit to the years. The annual profits are calculated in accordance with the principle of
“sound business practice” and in a consistent manner. This concept of sound business
practice is not defined in the law, but is mainly developed in case law.
140
However it is
134
Articles 3.123a and 3.124 PITA 2001.
135
The ranking order of the personal deduction is box 1, box 3 and box 2, see article 6.2 PITA 2001.
136
D.A. Albregtse, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 75.
137
Articles 2.10 and 2.10a PITA 2001.
138
The third and fourth tax brackets remain unchanged as the maximum contribution threshold is set
to the upper limit of the second tax bracket (€ 33.363 and € 33.555).
139
Articles 3.8 PITA 2001 and 3.25 PITA 2001.
140
Supreme Court 8 May 1957, ECLI:NL:HR:1957:AY2274, BNB 1957/208.
Fairness and taxation of different types of income
49
based on generally accepted accounting principles, it is a fiscally autonomous concept that
derives its contents from the purpose and scope of tax law.
141
Based on the broad concept
of total profit, also income from liquidation of the business is taxed at the progressive rate.
But certain facilities apply on income from liquidation: the liquidation deduction, certain
pass facilities and certain deferment rules.
3.4.2.3
Income from home
Article 3.110 PITA 2001 defines taxable income from home as profits from home less the
relating deductible expenses. The net profit from home is determined on a fixed base, the
notional rental value.142 This notional rental value is calculated by using statutory tables in
article 3.112 PITA 2001. That means that taxable profits are exclusively determined by this
table and that other profits from home are not being taken into account. As certain
expenses are already included in the notional rental value, only specific other expenses are
deductible: expenses related to the financing of the home. Most common example is the
mortgage interest.143 These expenses are deductible for a maximum of 30 years. Based on
article 3.111 PITA 2001, a house qualifies as own home if the taxpayer posses the house
and if it is his main residence. Second homes and other types of property fall within the
scope of box 3.
Income from the owner-occupied home has a special position in box 1 as it seems more
logical to involve it in box 3 as income from capital. For political reasons, the legislator has
chosen to tax income from own home and mortgage interests in box 1. The favorable
treatment of the own home owner is namely caused by the low notional rental value with
the high deductible mortgage rents; also home owners without mortgage debts benefits
from this. Bavinck states that the own home and the mortgage debt are capital elements
which belong to box 3, such as other investments and properties.
144
Own home owners in
box 1 are allowed to deduct maintenance costs whereby other private capitals in box 3 are
not allowed to deduction of costs. Another point to note is that no loss compensation is
allowed between the boxes, but horizontal loss compensation is possible between the
141
Stevens states that the function of this concept should be providing help to aim at a fair
distribution of the tax burden as it fits in the income tax system, see L.G.M. Stevens,
Inkomstenbelasting 2001, Deventer: Kluwer 2001, p. 259.
142
This notional rental value is calculated by using statutory tables in article 3.112 PITA 2001.
143
Article 3.120 PITA 2001.
144
C.B. Bavinck, ‘Voorstel voor overheveling van de eigen woning naar box 3’, WFR 2006/879, par. 2.
Fairness and taxation of different types of income
50
sources of income within box 1. In this case, a personal entrepreneur in box 1 with a loss
from his business profits can compensate this loss with income from own home in box 1,
whilst another entrepreneur (not in box 1) with income from capital in box 3 has no right to
loss compensation.
145
3.4.3 Box 2: income from substantial interest
Based on article 4.6 PITA 2001, a shareholder/natural person has a substantial interest if
he, individually or together with his fiscal partner
146
, either directly or indirectly, holds 5%
or more of the shares in a company of which its capital is wholly or partly divided into
shares. As substantial interest also qualify: purchasing options to buy 5% or more of the
shares, redeemed shares related to 5% of the annual profit or to the liquidation payments,
and 5% of the total voting rights in a cooperative. It is not allowed to adding up the amount
of the different types of shares in a company. For instance, if a shareholder has 3% of the
shares and 3% redeemed shares in the same company; he cannot be qualified as
substantial interest-shareholder as it is not allowed to sum up the amounts of shares.
Nevertheless, it is possible that if the shareholder has 5% shares and 3% voting rights in
the same company, he qualifies as substantial interest-shareholder for his 5% shares and in
this capacity, the voting rights, in which no substantial interest is being held, are deemed to
be part of the substantial interest.
147
Another facility is that a substantial interest-
shareholder ‘pulls along’ his relatives in the ascending en descending line which have less
than the substantial interest-threshold of 5%.
3.4.3.1
148
Historical background of box 2
Historically, the substantial interest regime is an anti- fiscal evasion measure.149 The regime
was also based upon the idea that the substantial interest-shareholder is comparable both
with the personal entrepreneur (in box 1) and the investor (in box 3). Until the PITA in 2001,
capital gains on private capital (elements) were not taxable, while income (such as dividend)
from that capital was taxable at a progressive rate. Main shareholders, who are in the
145
A.J.M. Arends, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 1578.
146
Fiscal partner is a partner for tax purposes.
147
This is the so-called ‘meesleepregeling’: shares which, on stand-alone basis, do not qualify as
substantial interest will be ‘pulled along’ with the substantial interest of the shareholder in the same
company, see article 4.9 PITA 2001.
148
This is the so-called ‘meetrekregeling’, see article 4.10 PITA 2001.
149
See for an explanation Kamerstukken II, 1995/96, 24 761, no. 3, p. 1.
Fairness and taxation of different types of income
51
position to decide whether or not to distribute profits, could simply choose to retain the
earnings as far as possible and on a long-term to realize the earnings in the form of capital
gains on shares; distributing profits lead to dividend payments, retained earnings to valueincreases which were not taxable by realization.
150
In order to prevent this kind of
construction ideas, a provision has been introduced that alienation of shares was taxable at
a rate of 20%. The comparison of the substantial interest-shareholder with the entrepreneur
was shown by the fact that the substantial interest regime was a part of the provisions
applicable to income from business profits. Under the PITA 1964 this regime still maintained,
but the place of substantial interest changed from the regime of business profits to a
separate source of substantial interest. Until 1996 alienation profits were taxed at a fixed
rate of 20% and income from regular profits at a progressive rate as ‘income from capital’;
for this type of income the substantial interest-shareholder has been equated to the ‘normal’
investor.
151
This ambivalent approach led to the case that shareholders were setting up
constructions whereby, on the one hand, they get distributed profits in the form of
dividends, and, on the other, to not pay the progressive rate but the fixed 20%-rate.
152
In
1997, this regime has been reformed on this point. From that moment regular profits
derived from substantial interest would be taxed at the same fixed rate instead of the
progressive rate; both as dividends as capital gains from substantial interest are taxed at a
fixed rate of 25%. This change “infringed” the classical system: now the legislator takes into
account the already levied CIT, and the combined CIT/PIT. 153
3.4.3.2
Taxable income from substantial interest
Based on article 4.12 PITA 2001 taxable income from substantial interest consists of:
1. regular profits less deductible expenses. Most common regular profits are dividend
payments. The PITA also enumerates other types of regular profits.
150
154
Most common
Final Report Committee Income tax and allowances, Naar een activerender belastingstelsel, Den
Haag 2013, p. 23.
151
A.C. Rijkers, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 1426.
152
These constructions led to the so-called ‘money and cash’-case law (kasgeld- en
holdingjurisprudentie).
153
The classical system means a double taxation on distributed business profits, whereby one object
(the profits) are taxed at two different subjects (the corporation and the shareholder). Before 1997
the accumulated “double” tax burden could be up to 74% (35% CIT + 60% PIT x (100%-35%)) and
in 1997 the tax burden changed to 52,5% (35% CIT +25% PIT x (100%-30%)).
154
Article 4.13 PITA 2001.
Fairness and taxation of different types of income
52
deductible expenses are interest expenses, for example, expenses related to (bank) debts
for acquiring such shares.
2. profits from alienation. Income from alienation is the difference between the transfer
price and the acquisition price of the substantial interest. Alienation includes more than the
sale of the shares; the PITA includes an enumeration of other transactions which qualify as
‘deemed alienations’ in order to prevent fiscal evasion (article 4.16 PITA 2001).
3.4.3.3
Tax rate in box 2
The tax rate of income from substantial interest is a fixed rate of 25% both for regular
profits and profits from alienation. In the year 2014, the box 2-rate is temporarily reduced
to 22% on the first € 250.000 and 25% on the income exceeding that amount. This
measure allows substantial interest-shareholders to distribute hoarded earnings (profits) to
themselves in the form of dividends, in a tax-attractive way.155
3.4.4
Box 3: income from savings and investments
One of the main elements of the tax reform in 2001 was the introduction of the capital yield
tax for savings and investments in box 3. Under the synthetic PITA 1964 income from
(private) capital was taxed for its real amount at a progressive rate and capital gains were
not taxed. By introduction of the capital yield tax income (together with the box system) an
analytic system has been introduced. Income from savings and investments is set on a yield
of 4%. On this 4%- yield basis a fixed tax rate of 30% applies, which means an effective
rate of 1,2%. The capital yield tax is a legal fiction; it is irrelevant whether real income has
been received and the amount is of the income. Neither deduction of costs as such nor
counter-evidence on the real amount of the income is allowed.156 A negative tax base is not
possible and there are no possibilities for loss compensation. The switch from a real and
progressive rate into a fictive and lower fixed rate is remarkable; none of the other
countries does have a fictitious flat-rate levy on capital income.
3.4.4.1
157
Historical background of the capital yield tax
Under the PITA 1964, a distinction was made between taxable income from capital (such as
dividend, interest and rent) and non-taxable value-increases of capital (income from selling
155
See Kamerstukken II, 2013/14, 33 752, no. 13, p. 17. (The rest of) this thesis is based on the
(normal) box 2-rate of 25%.
156
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 39.
157
A.J.M. Arends, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 1569.
Fairness and taxation of different types of income
53
capital was untaxed). The non-taxation of capital increases was not in accordance with the
ability to pay principle; surely, income from the sale of capital does increase the ability to
pay of the taxpayer. This clear and objective distinction between taxable income and nontaxable capital mutations had the consequence that many taxpayers set up constructions to
switch taxable capital income into non-taxable capital value increases.
158
Many related
investments products occurred and combined with the fact that loans were used to finance
investments, the interests were deductible at the progressive rate (against the untaxed
capital gain). The legislator was forced to change this system and he chose for a capital
yield tax in box 3. The source theory became irrelevant for box 3; income from savings and
investments is determined on a fiction of a 4% yield.
Next to the PIT, also a net wealth tax was levied on capital income. Even though the tax
rate of the wealth tax was 0,7% and exemptions were applicable, taxpayers experienced
this wealth tax (in combination with the progressive tax in the PITA) as heavy.
159
It led to
the situation that many capital owners emigrated, also caused due to the high mobility of
capital. At the tax reform 2001 the wealth tax has been abolished. The reason was that the
proposed capital yield tax should overlap the levy of wealth tax.
160
The literature shared the
criticism to abolish the wealth tax. Rijkers mentioned that the wealth tax had a weak legal
161
basis.
In his point of view factors of ability to pay are income, capital or consumption.
Only one of the factors should be taxed; there is no scope to tax saving (= capital), if the
legislator already chooses to tax income. So, wealth tax should not be levied if already PIT
is levied. Also Van der Geld argues that it was not fair to tax taxpayer with wealth tax, after
they were taxed with income tax.
162
With the introduction of the capital yield tax in 2001, the legislator aimed at a more stable
and broader tax base, simplicity, a decrease of tax avoidance possibilities, a more balanced
158
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 57.
159
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 57. One of the arguments that it was been
experienced as unreasonable is that especially savings investments are built op on labour income
which have already been taxed with income tax and wages taxes, see Kamerstukken II, 1998/99, 26
727, no. 3, p. 36.
160
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 76.
161
A.C. Rijkers, ‘Vermogen en vermogensinkomsten in de Nota ‘Belastingen 21 e eeuw’’, WFR
1998/160, par. 4.
162
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.
Fairness and taxation of different types of income
and fair tax burden, and (international) tax neutrality.
163
54
Another main argument was that a
yield tax would reflect to the mobility of capital. Mobility of capital is higher than from
employment; a too high tax burden on capital would be bad for the Dutch position and
would raise tax flight caused by capital owners who are able to hide their (mobile) capital in
other countries. Also international neutrality was aimed with the capital yield tax:
preventing choices for foreign investments (to avoid taxes) and fiscal emigration.
164
Relating to this argument of the legislator, Rijkers mentioned that ‘these tax evaders are so
strong that they are able to enforce a tax privilege (read: the capital yield tax)’.
165
It seems
that with the capital yield tax the legislator rather preferred the principle of effectiveness
and simplicity than the fact that the yield does not reflect real income with the result that
some taxpayers will be treated favorable and others would be disadvantaged.
3.4.4.2
Taxable income from savings and investments
Article 5.3 PITA 2001 defines the yield base as the value of the assets less the value of the
debts. The categories of assets are:
1. immovable property;
2. rights in immovable property;
3. movable property (for non private purposes);
4. rights in movable property;
5. rights which are not related to ‘items’, including money;
6. other property rights.
The assets must have a fair value. Debts are liabilities with fair value. Most common
examples of assets taxed in box 3 are savings, second homes, shares (not belonging to
substantial interest), receivables, rights and obligations. However, certain shares can belong
to box 1, the so-called “lucrative interests”.
3.4.4.3
Tax rate in box 3
The tax rate on income from savings and investments is 30% with a tax-free base of €
21.139.
166
The effective tax rate is 1,2% (30% on a 4%-yield).
163
See Kamerstukken II, 1997/98, 25 810, no. 2, p. 67-68.
164
See Kamerstukken II, 2005/06, 30 375, no. 2, p. 62-63.
165
A.C. Rijkers, ‘Vermogen en vermogensinkomsten in de Nota ‘Belastingen 21 e eeuw’’, WFR
1998/160, par. 5.1.
166
Article 5.5 PITA 2001.
Fairness and taxation of different types of income
3.4.4.4
55
Criticisms on box 3
As a step in the process of evaluating the box system and the capital income treatment, this
paragraph gives a short overview of the criticisms on the capital yield tax in box 3.
The introduction of the capital yield tax has been a major discussion topic in Dutch literature,
in particular, with respect to the principles of equality and ability to pay. 167
A main pro argument of the legislator at the time the capital yield tax was introduced was
that capital, which under the PITA 1964 could not be taxed due to the set up constructions,
would from now on be taxed. With this regulation both constructions were offset and a
simple and practical provision implemented. Van Kempen notes that this argument cannot
be justified through the simple statement that those taxpayers pay (more) taxes under the
current regime168
Although an effective rate of 1,2% seems not that heavy, the question arises whether this
system which is aimed at preventing tax constructions used by a relatively small group of
taxpayers, is in conformity with the principles of equality and ability to pay, as it effects all
capital owners. The capital yield tax does not take into account the principles of equality and
ability to pay, as individuals with equal income should be treated equally (horizontal
equality) and those with higher incomes should be treated unequally in proportion to their
inequality (vertical equality). Distribution of the tax burden amongst taxpayers is based on
the ability to pay principle; income tax is levied in proportion to their financial ability to pay.
The yield tax is not only aimed at tax evaders; but at all capital owners. That means that an
individual who only receives 2% yield, has to pay 30% taxes on a fixed yield of 4%. On the
other hand, capital owners with more than 4% yield just pay taxes on a 4% yield basis; box
3 is therefore also sometimes called a “fun box” for the wealthy individuals.169 It is very
clear that the capital yield tax does not take into account the ability to pay of the taxpayer.
Van der Geld further argues that taxpayers under the PITA 1964, who did not set up
constructions, are deemed to pay the costs of the capital yield tax, which is in the first place
meant to effect the tax evaders.
167
170
These taxpayers, who have less real gain than 4%, are
Another infringement of the equality to pay principle seems to be due to the business succession
facilities in the Dutch inheritance tax. See footnote 266.
168
M.L.M. van Kempen, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 3.
169
R.A. van Eijck, Het vermogen te dragen, Deventer: Kluwer 2005, p. 144.
170
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.
Fairness and taxation of different types of income
56
being taxed at a higher rate than under the PITA 1964, where they did not pay (or paid less)
wealth tax. He also mentions that if the legislator wants to achieve fiscal neutrality, he has
to apply it to all types of income, not only on income from capital.
171
Equal treatment of
income from capital within one box has the effect that there is no fiscal neutrality between
box 3 and the other boxes.
172
Income taxation is based on principles of ability to pay and
fairness; these principles should also be laid down in box 3. In his words: “However we do
not know what fairness exactly means, but what we all do really know is, what is not fair.
That is in this particular case, levying in one specific law fictitious income next to real
income and using progressive rates for labour income next to a degressive rate for capital
income.
173
Van der Geld prefers a capital gain tax or a capital growth tax.174
Another infringement on the ability to pay principle is the fact that no contra-evidence is
permitted. The capital yield tax assumes a fixed yield of 4%. If an individual has real
income lower than 4%, he is not allowed to prove contra-evidence. He is deemed to pay
taxes on the 4%-yield. Especially in these times of crisis this could be a real problem as the
saving interests are well below the 4%.
175
Gribnau and Dusarduijn state that the capital yield tax also infringes the ability to pay idea
in that the capital yield tax disadvantages individuals with a lower capital, as lower capital is
more risk adverse, and therefore placed on savings accounts with low interest (in the last
years the interest was lower than 4%). Contrary to individuals with a high level of capital
who are able to spread risk and therefore able to achieve more gain.
176
One of the
governments’ aims for a capital yield tax was to prevent capital flight outside the
Netherlands. They also mention that the legislator has not given convincing evidence
171
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.1.
172
In this context the providing regime and lucrative interest regime (and other regimes) are all
caused by the deviating regime of box 3. See for an explanation of the providing regulation paragraph
4.5.2.
173
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 5.
174
See paragraph 6.2.2 for the capital gains tax.
175
A.J.M. Arends, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 1586.
176
S.M.H. Dusarduijn & J.L.M. Gribnau, ‘Vermogensrendementsheffing’, in: A.C. Rijkers & H. Vordering,
Vijf jaar Wet IB 2001, Deventer: Kluwer 2006, p. 519.
Fairness and taxation of different types of income
57
between the link of the investing climate and the yield tax, by which this argument, in their
view, does not justify a capital yield tax with a 30% rate.
177
Another point to note is that the tax base of box 3 cannot be negative, contrary to box 1
and box 2 which do allow a negative tax base. The result is that within box 3 losses cannot
be compensated with profits from other years. It is not in line with the ability to pay
principle that losses cannot be compensated. Loss compensation (over certain years) (socalled vertical loss compensation) has always been allowed in the income tax system. It is
the feature of the box system that losses cannot be compensated between boxes (no
horizontal loss compensation), however, in box 1 horizontal loss compensation between
profits of the different types of source income within the box is allowed. For example, in box
1, losses from business profits can be deducted with profits from labour, while another
entrepreneur with losses from business profits in box 1 cannot compensate these losses
with income from capital in box 3. This seems unfair and not in accordance with ability to
pay, certainly when the allowed tax reduction from substantial interest losses in box 1 is
taken into account.
178
Another discussion point is about the question whether the favorable tax treatment of
capital income is in accordance with the principle of (horizontal) equality with respect to
labour income in box 1. The following example will illustrate this.
179
An individual with a
capital of € 1.000.000 with a real economic gain of 7%, has a real income of € 70.000 from
capital. The capital yield tax levy will be € 11.746 (30% x 4% x € 1.000.000 - € 21.139)
and after application of the general tax reduction € 9.643.
180
Another individual without
capital, but with labour income of € 70.000 in box 1, under equal circumstances, will pay
around € 28.000.
181
So, individuals with labour income almost pay three times more the
amount than those individuals with capital income pay. The main legitimation of the
legislator is that individuals, who paid no taxes under the PITA 1964 by setting up
177
S.M.H. Dusarduijn & J.L.M. Gribnau, ‘Vermogensrendementsheffing’, in: A.C. Rijkers & H. Vordering,
Vijf jaar Wet IB 2001, Deventer: Kluwer 2006, p. 518.
178
A.J.M. Arends, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 1578.
179
This example is based on: D.A. Albregtse, Cursus Belastingrecht. Inkomstenbelasting, Deventer:
Kluwer 2013, p. 86. For simplicity reasons tax reductions have been not taken into account.
180
The general tax reduction is € 2.103 (2014), see article 8.10 PITA 2001.
181
After application of the general tax reduction and the labour reduction, see article 8.10-8.11 PITA
2001.
Fairness and taxation of different types of income
58
constructions, are now paying more taxes under the current tax regime than they did in the
past. It seems logical that this legitimation is not (at all) in conformity with the ability to pay
and the equality principle. Taxpayers also tried under the current regime to profit from the
favorable tax treatment in box 3 by switching constructions from box 1 to box 3. So, the
problematic under the PITA 1964 switched to the PITA 2001 as the tax treatment of capital
income is still more favorable than other types of income. The legislator already considered
this problematic as he implemented anti avoidance rules as the providence regime and the
lucrative interests. Shortly, it can be said that the progressive levy on capital income
combined with the wealth tax in the PITA 1964 is simply exchanged in a ‘hidden’ wealth tax
in box 3.182
Cnossen and Bovenberg show that the capital yield tax in fact is a degressive rate: the
higher the real income from capital, the lower the effective tax burden.
183
Cnossen and
Bovenberg give two other arguments why the capital yield tax is not in accordance with
horizontal equality and ability to pay.
184
Firstly, the government does not tax excessive
returns due to superior investment insights which are the result of employment
performances and other production factors. Contrary to excessive returns due to
entrepreneurial qualities, which are taxed with corporate income tax. Secondly, the
government does not share the (bad) luck of investors. Non-taxation of speculative profits
and non-taking into account of losses are not in conformity with the ability to pay principle.
To summarize, literature provides here arguments to support the statement that the capital
yield tax on savings and investments in box 3 is not in accordance with the principles of
equality and ability to pay; which form the underlying principles of the Dutch tax system.
Within this framework of criticism, the argument of the legislator that the capital yield tax
would be more in accordance with the ability to pay, as the taxpayers would pay more taxes
than they did under the PITA 1964, seems unsustainable.
182
R.A. van Eijck, Het vermogen te dragen, Deventer: Kluwer 2005, p. 146.
183
S. Cnossen and A.L. Bovenberg, ‘Vermogensrendementsheffing, vondst of miskleun?’, WFR 2000/4,
par. 2.
184
S. Cnossen and A.L. Bovenberg, ‘Vermogensrendementsheffing, vondst of miskleun?’, WFR 2000/4,
par. 4.
Fairness and taxation of different types of income
3.5
59
Evaluation of the current personal income tax system
3.5.1 Introduction
In this paragraph the current box tax system in the Dutch personal income tax will be
evaluated against the benchmarks formulated in chapter 2. As mentioned previously, these
benchmarks are ability to pay and tax neutrality. This is done in order to assess whether the
income tax system contributes to a fair tax burden distribution between taxpayers with
respect to taxation of different types of income. The criticism on the box system as
described in paragraph 3.4.4.4, will be also taken into account.
3.5.2 Ability to pay
As described in the normative framework in chapter two, the starting point of levying
personal income tax is the ability to pay (which refers to the equality principle) of the
taxpayer. I will evaluate the box tax system for individuals by using the three factors of
ability to pay which are in my opinion relevant: notion of taxable income, legal fictions and
the applicable tax rate (analyzed under the normative framework).
Notion of taxable income and the use of legal fictions
Ability to pay forms the starting point of the income tax system, the Dutch legislator also
recognizes it, as he mentions in the parliamentary documents that the personal income tax
is a levy based on ability to pay and he also mentions thereby that the notion of income in
the tax system created its own notion as a practical and empirical notion of income. 185 The
Dutch income tax is based on the source theory. Under the source theory profits can be only
taxed if they arise from a “source of income”, under the prerequisites of participation in the
economic movement, and profits must be aimed at or must be reasonably expected. There
is thus no definition of taxable income in the income tax. Taxable income consists of
benefits from enumerated sources in the PITA 2001. In his farewell speech, Rijkers marks
the “empirical notion of income” as an empty an meaningless term. He sharply criticizes the
lack of a clear and consistent notion of income in the Dutch income tax system and which is
incomprehensible with respect to the ability to pay principle on which upon our system is
relied.
186
The result of this lack is that the personal income taxation has been a political
185
See Kamerstukken II, 1958/59, 5380, no. 3, p. 17.
186
See A.C. Rijkers, Een inkomensbegrip voor de 21e eeuw, Tilburg: Tilburg University 2013, p. 5.
Professor A.C. Rijkers held his farewell speech entitled ‘A fiscal notion of income for the 21 st century’
on the 27th of September 2013 at Tilburg University.
Fairness and taxation of different types of income
60
plaything (read: instrumentalism) which has led to privileges for certain social groups. This
inconsequent system necessary leads to unequal treatment of individuals.
187
Real net income, the real economic benefits, are, in my opinion, the basis of ability to pay
and should therefore apply on all types of income. This is not completely shown in the box
system. While in box 1 for the most income types net realized income forms the basis of the
taxable income (income from home excluded188) and box 2 also takes realized net regular
income and realized capital gains as starting point, box 3 fails on this point. Box 3 is based
on a deemed 4%-return on private capital. So, where the basis of box 1 and box 2 is real
income, box 3 is based on a legal fiction. In my opinion, the problem is not that 4% is taken
as yield, but the whole deemed yield as such whereby also private capital gains are not
taxed as such. According the legislator, the problem under the PITA 1964 was that capital
mutations could not be taxed. So you would think that he eliminates this problem under the
new PITA of 2001. But in fact, the situation did not change. Private capital gains are not
taxed as such, it is only deemed that yearly 4% yield arises. This seems to be arbitrary
taking into account that the taxable income basis of a sole proprietor in box 1 does includes
realized capital gains, in box 2 realized capital gains of the shareholder, but not in box 3 for
private capital gains. So, even if it is needed to treat capital more favorable than other
types of income, the basis should still be stay realized income.
I have not yet discussed the actual percentage of 4% itself. Taking into account that even
when taxpayers realize a lower gain than 4% of their capital, they are deemed to pay for 4%
gain, which definitely infringes the ability to pay principle as real income forms not the
basis.189 This is also confirmed by the announcement of the Dutch Association for Taxpayers
and a Dutch tax firm to bring a test case before the Dutch court as the capital yield tax is
unreasonably high, which might be against the principles of fairness.190 Since 2001
taxpayers in box 3 pay 30% on their 4% fixed return of their capital income (an effective
tax rate of 1,2%). After 2008, the saving interest decreased under the 4%. The average
saving interest is just below the 1,2%, which means that the capital yield tax forms for a
187
See A.C. Rijkers, Een inkomensbegrip voor de 21e eeuw, Tilburg: Tilburg University 2013, p. 16
and 29.
188
Income from home and the notion rental value will not be further discussed here, as the main issue
will be the different favorable tax treatment of capita income.
189
S.M.H. Dusarduijn, Vermogensrendementsheffing, Deventer: Kluwer 2010, p. 71.
190
Y. Hofs, ‘Fiscus gedaagd voor hoge belasting’, de Volkskrant 31 maart 2014, p. 19.
Fairness and taxation of different types of income
61
tax of (more than) 100% for many savers.191 On the other hand, investors with high returns
on their capital (more than 4% real gain), are just taxed for 4%. The capital yield tax
therefore is not in line with the ability to pay principle and the equality principle as the
concept of the capital yield tax itself is wrong and as there is an essential gap between real
earned income and the deemed 4% and as it treats unequal situations the same. Not at all,
if we consider that no contra-evidence is permitted to show that the real yield is lower and
no negative tax base is allowed in box 3. It means that loss compensation of capital income
is not possible, while it is in box 1 and box 2 (although with certain limitations) and what
should be allowed in accordance with net realized income for determination of the ability to
pay.
The applicable tax rate
As the box system is a form of a scheduler income tax, different tax rates apply on different
income groups. Box 1 has a progressive tax rate with a maximum of 52%, box 2 and box 3
has a proportional tax rate of 25% and respectively 30% whereby the box 3 tax rate is
degressive, as it has a tax-free basis. The yield is fixed set at 4%, which means that the
effective tax rate of box 3 is 1,2%. The legislator chose for this fixed tax rate from the point
of view of simplicity and tax avoidance considerations. Another argument was that the
international mobility of capital requires a competitive tax rate in order to prevent capital
flight. As I follow the line that taxes can be used as instrument in a proportionate way and
that different groups of income can be taxed differently based on their nature and
characteristics. But in this context, I support that this deviation on tax treatment should
only take place on the applicable tax rate, and not at the taxable income base. The taxable
income base must include real net income of all types of income. So in this case, I agree
with the worldwide consensus that capital income should be treated more favorably than
other types of income, as not doing so may result in capital flight due to the high mobility
factor. But the difference in tax rate must not differ too much and there should still be
reasonable justifications.
To assess whether there is a proportionate justification, the considerations of the legislator
are taken into account. With the income tax reform in 2001 the legislator had several aims
in mind. Not all of these aims will be analyzed, only the arguments of the legislator related
191
Y. Hofs, ‘Fiscus gedaagd voor hoge belasting’, de Volkskrant 31 maart 2014, p. 19. See for the
lower saving interest also S.M.H. Dusarduijn & J.L.M. Gribnau, ‘Vermogensrendementsheffing’, in: A.C.
Rijkers & H. Vordering, Vijf jaar Wet IB 2001, Deventer: Kluwer 2006, p. 516.
Fairness and taxation of different types of income
62
to the switch from a synthetic into an analytic box system and the introduction of the capital
yield tax. The aim of a more analytic tax system with broader tax bases was to achieve a
fairer and balanced income tax system based on ability to pay. 192 This is modeled by the
introduction of the capital yield tax and the box system. This would lead to a more adapted
income tax with the actual ability to pay of the taxpayers.193 The main consideration of the
tax legislator to introduce the capital yield tax has been the tax avoidance by construction
under the PITA 1964 in which income from capital was taxed at a progressive tax rate and
capital mutations were tax free. The capital yield tax would bring an end to this main
problematic and would be more in line with the ability to pay principle. The main argument
of the legislator in this context is that the capital yield tax is an adequate response on the
large scale tax avoidance under the PITA 1964 and that led to the infringement of the ability
to pay idea.194 The weak side of this reasoning is that the idea seems likely on macro-level,
but not on the level of the individual as it, as noted before, is not based on the real ability to
pay.195 Only the argument that taxpayers which did not pay taxes under the PITA 1964, pay
now (more) taxes which is more in line with ability to pay, cannot be seen as an appropriate
justification of the capital yield tax with the fixed 4% gain on capital in my view. It can be
true that there is in improvement of the ability to pay of those taxpayers, but it is based on
wrong principles, on a totally wrong basis: the deemed yield in the determination of the
taxable income itself. It can be true that there is a small improvement in ability to pay, but
to me it seems that the situation under the PITA 1964 still maintains as private capital gains
that definitely improve the ability to pay position of the taxpayers are now also not taking
into account. The effective tax rate of 1,2% on capital income makes, in my opinion, from
the capital yield tax a wealth tax instead of a real income tax. The differences in tax rates
between the boxes would not have be excessive, as it is now, through the effective tax rate
of 1,2%. If the 30%-tax rate of box 3 would have been applied on realized income from
capital, it would be much more in line with the principles of ability to pay and equality.
3.5.3 Tax neutrality
In the normative framework, the purpose was to let only the principle of ability to pay serve
as benchmark for the different tax treatment of income in the personal income tax.
However, there is a relevance of the tax neutrality as well which was at the beginning only
192
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 4.
193
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 5.
194
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 6-7.
195
P.H.J. Essers, ‘De boxenstructuur van de Wet inkomstenbelasting 2001’, WFR 1999/1463, par. 2.
Fairness and taxation of different types of income
63
supposed (more intended the legal form neutrality) to serve as benchmark for the taxation
of business income.
In general, a tax system is considered as neutral if it does not distort the decisions of the
taxpayers, or at least as little as possible; it may not be always economic efficient if
taxpayers base their choices on mainly fiscal considerations. The tax legislator had in mind
with the tax reform in 2001 that the income tax system should be neutral. In order to
stabilize the tax revenues and prevent the large scale of tax avoidance constructions, he
mentioned that the different tax treatment of income from different investment categories
has lead to distortive effects on the functioning of the capital market and that investors let
themselves more guided by fiscal considerations rather than economic considerations. 196
Because, the result is an establishment of a less efficient allocation of capital. To prevent
further erosion of the tax base by tax avoidance, the legislator chose for a more neutral
taxation of different types of capital income. He argues that by choosing for a proportional
tax rate of 30% no possibilities are available for tariff arbitration between the different tax
bases in box 3. According to the legislator, the capital yield tax has lead to tax neutrality as
the system does not make difference anymore between income received from dividend
payments or capital mutations; thus it results in neutrality between profit distributions and
capital increases.197 By this higher level of tax neutrality, the capital market is in a better
way able to perform its function. The legislator also mentions that the capital yield tax
contributes to an increase of the international tax neutrality as investors will less choose for
foreign investment forms.198 Besides, the capital yield tax may probably stimulate investors
to invest in high efficient investments.199 However, it seems that the capital yield tax is not
neutral in this way as it affects investors with risk-aversion relatively heavy. It results into
the situation that investors are stimulated to taking risk which may probably not suit to the
investment profile. And it also seems that, despite of the capital yield tax, the lower
inefficient investments are more used.200
As I argued before, I can support the case that some income groups can be treated more
favorable than other types of income, but that this should take place as much as possible on
196
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 19.
197
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 20.
198
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 35.
199
See Kamerstukken II, 1998/99, 26 727, no. 7, p. 233-234.
200
S.M.H. Dusarduijn & J.L.M. Gribnau, ‘Vermogensrendementsheffing’, in: A.C. Rijkers & H. Vordering,
Vijf jaar Wet IB 2001, Deventer: Kluwer 2006, p. 527.
Fairness and taxation of different types of income
64
the level of the tax rates and that the difference in tax rate should not be excessive in the
light of the equality principle that requires that unequal cases should be treated differently
in a proportional way. The desire of the tax legislator to improve the requirement of tax
neutrality therefore should not only take place for income in box 3, but on all types of
income in the income tax system.201 The realization of neutrality in box 3 led to the result
that there is no neutrality between box 3 and the other boxes. An example is the introduced
anti-avoidance rules in box 1 on the providing regulations as result of the very differing tax
regime of capital income. The income tax system is not neutral towards the tax bases in the
three boxes. Where in box 1 and box 2 real income is taxed, box 3 has a fixed income basis
of 4%. In box 1 and box 2 loss compensation is possible for certain years, in box 3, it is not
even possible to have a negative tax base, let alone that loss compensation is allowed. The
same situation for the tax rates in the income tax: box 1 has a progressive tax rate, box 2 a
proportional rate and box 3 a degressive one. So, it can be said that there is no neutrality
between the boxes as there unreasonable high differentiations in the tax base and tax rates.
There is an excessive difference in tax rate between box 1 (maximum 52%) and box 2
(25%) on the one hand, and the effective tax rate of 1,2% in box 3. If the 30% would have
been applied on the real capital income received by taxpayers, the difference in tax rates
would not have been that high. In my opinion, the reasons to treat capital income more
favorable would then also have more chance to succeed and the social support of box 3
would then be more from a high level.
3.5.4 Conclusion
The evaluation of the current Dutch income tax system shows that the income tax system
regarding the tax treatment of different types of income includes infringements with the
principles of ability to pay and neutrality with respect to a fair tax burden distribution
between taxpayers, especially with the favorable taxation of capital. The box tax system can
be divided into box 1 and box 2 which taxable bases include real income according to ability
to pay and box 3 in which on capital income a 30%-rate applies on a deemed fixed 4%-yield,
meaning an effective tax rate of 1.2%. The favorable tax treatment of capital income in
respect to the income in the other boxes is examined and balanced against the three factors
of ability to pay, formulated under my normative framework. It can be concluded that the
capital yield tax is conceptually not in line with the ability to pay as instead of real income is
taxed, fictitious income of 4%-yield is deemed and thereby the excessive difference in tax
rates with the other boxes cannot be justified in my opinion, taking into account the
201
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.1.
Fairness and taxation of different types of income
65
principles of equality and neutrality. In my opinion, the taxation of capital income can be
better regulated and improved in order to achieve a more fair tax burden distribution
amongst taxpayers.
3.6
Conclusion
The purpose of this chapter was to assess whether the current personal income tax system
contributes to fair tax burden distribution between taxpayers with respect to the taxation of
different types of income. The evaluation of the current income tax system took place on
the basis of the benchmarks of ability to pay and tax neutrality as being underlying
principles of fairness, which have been formulated in the normative framework in chapter 2.
With the introduction of the box system and the capital yield tax at the tax reform in 2001,
the tax legislator aimed to put an end to the tax base erosion of capital income under the
PITA 1964. This is because, under the PITA 1964, income from capital was taxed at a
progressive tax rate and capital (value) increases were not taxed, which has led to many
tax avoidance constructions. The PITA 2001 consists of three boxes whereby every box has
its own tax rate and determination rules of the taxable income base. Box 1 includes income
from work and home with a progressive tax rate maximized at 52%. Box 2 taxes income
from substantial interest (dividends and capital gains) at a proportional tax rate of 25% and
the capital yield tax in box 3 sets income from capital on a fixed yield of 4% on which a
fixed tax rate of 30% applies. This constitutes, an effective tax rate of 1,2%. The result of
this introduction of the analytic box system and the capital yield tax has been that the
taxation of capital income in box 3 differs significantly from the tax treatments of income in
the other boxes.
By evaluating the taxation of different types of income and the taxation of capital income, it
can be concluded that the tax treatment of capital income on essential elements infringes
the underlying fairness principles of ability to pay and neutrality, which both link to the
equality principle. Income from capital in box 3 is set on a 4% yield on which a 30% fixed
tax rate applies. However, capital yield tax is both applicable on income deriving from
capital and on capital gains (contrary to the tax regime under the PITA 1964), private
capital gains as such are not taxed. The main argument of the tax legislator that the capital
yield tax does contribute to a fairer income tax system based on ability to pay, because the
tax evaders now pay more taxes than they did under the PITA 1964 is not sustainable,
because the situation has not substantially changed. And a fiction such as a deemed 4%
Fairness and taxation of different types of income
66
return on capital infringes the ability to pay of the taxpayers, as it should reflect real income.
Indeed, investors with a lower yield than 4%, taking into account that in the last years the
saving interest is below the 4%, are deemed to pay for 4%. No contra-evidence is allowed
and besides this the tax base cannot be negative. On the other hand, high capital gains
(actual gains higher than 4%) also pay from their view for just 4%. This does also infringe
the equality principle. The legislator also argues that the capital yield tax is suitable in
preventing capital flight taking into account the high mobility of capital. However I think
that differences can be made between income groups, this should only take place, as much
as possible, at the to be applied tax rate and the difference in tax rates should be
proportionate. Such a taxation of fictitious capital income next to on real income based
boxes and besides the degressive tax rate of 1,2% next to tax rates of box 1 and box 2
cannot be justified in my opinion. The capital yield tax can therefore be considered as a
“hidden” wealth tax instead of a part of the income tax. With the capital yield tax, the
legislator also aimed at (international) tax neutrality in the tax treatment of investment
forms in order to stimulate the efficient allocation of capital. But also tax neutrality between
box 3 and the other boxes should be taking into account regarding the essential differences
in tax rates and determination rules of the tax bases, which means in juridical way that
favorable tax treatments must be proportional and be based on reasonable justifications.
It can be said that the Dutch personal income tax with respect to the taxation of different
types of income in the box system and the capital yield tax does not contribute to a fair
income tax burden distribution between taxpayers assessed according the underlying
principles of ability to pay and neutrality. It seems that the tax legislator, by introduction of
such taxation on a fictitious tax base, preferred the simplicity and effectiveness rather than
the principles of fairness which may have influence on the legitimacy and the acceptance of
a fair income tax system.
Fairness and taxation of different types of income
67
Chapter 4 Tax treatment of business income in the Dutch income tax system
4.1
Introduction
The determination of the taxable business profits does not, in principle, depend on the size
of the enterprise,202 but it depends on which legal form is chosen and therefore which tax
regime applies; the personal income tax or the corporate income tax (combined with the
personal income tax). Fiscal considerations seem decisive for the choice of legal form of a
business with the consequence that not always the most economic efficient decision is made
by taxpayers. The purpose of this chapter is to evaluate to what extend the current Dutch
income tax system with respect to the tax treatment of business income is in accordance
with the underlying principles of fairness. Firstly, the different tax treatment of income from
business profits in the Dutch personal and corporate income tax system will be explained.
To make the overview more complete, special tax regimes that apply to the business profits
under the PITA 2001 and the CITA 1969 will be in shortly covered. Afterwards, the focus will
be on the tax position of the director main shareholder (DMS). After given this overview, the
tax treatment of business income in the current income tax system will be evaluated on the
basis of the benchmarks formulated under the normative framework. The evaluation will
mainly take place on the basis of the benchmarks of tax neutrality, especially the static
legal form neutrality regarding the choice of legal form of a business.
4.2
Different tax treatment of business income.
There are differences in tax treatment of an entrepreneur under the PITA and shareholders
with shares (also including the director main shareholder) in a corporation under the CITA.
The determination of the taxable business income thus depends on which legal form is
chosen and therefore which tax regime applies; the PITA or the CITA. The determination of
business income depends on whether it is derived by:
1. a sole proprietor and fiscally transparent partnerships, or by
2. corporations and fiscally opaque partnerships.203
The first category falls within the scope of the PITA 2001; business income is only taxed at
the level of the entrepreneur and the partners at a maximized progressive 52%-tax rate.
202
However, the small or medium enterprises (SME’s) have been, both in the PITA and the CITA,
taken into account by the SME-exemption in the PITA 2001 and the 20%-CIT rate up to an amount of
€ 200.000.
203
Partnerships are not taken into consideration in this thesis. Therefore an analysis of the taxation of
partnerships falls outside the scope of this thesis.
Fairness and taxation of different types of income
68
The second category falls under the provisions of the CITA 1969; companies and opaque
partnerships are subject to corporate income tax (with a 20% or 25% CIT-rate) and their
profit distributions will be additionally taxed on the level of the shareholders and partners at
a 25%-rate in box 2 of the PITA. Even though the linking provision of article 8 CITA 1969
ensures that the same rules from the PITA applies on the determination of the income base
of the business profits in the CITA, there are differences between the tax treatments of
these types of business income. This different tax treatment of business income results in
different tax burdens each with its own tax rules.
Main differences between the tax treatment of business income in the PIT and CIT are as
followed:
1. the most essential difference seems to be the difference in rate; a progressive tax rate in
the PIT with a maximum of 52% and a progressive tax rate in the CIT of 20% and 25%.
However, the SME-exemption applies on entrepreneurs in box 1, which brings the effective
tax rate to a maximum of 44,72%. Taking into account that profits will be distributed to the
shareholder, an additional levy in box 2 of 25% takes place on the level of the substantial
shareholder. So, although different tax rates apply in the PITA and the CITA, in the last
years the different tax rates and tax burdens are brought to a more or less same level.
204
But, also other relevant fiscal considerations may be taken into account;
2. as mentioned, only entrepreneurs and partners of transparent partnerships in box 1 in
the PITA are entitled to the SME-exemption and the entrepreneurs-deduction, which forms
an essential advantage;205
3. there is a difference in the determination of the taxable base of the business profits in the
PIT and the CIT. The personal entrepreneur under the PITA is not allowed to deduct
interests on capital from its taxable profits in contrast to companies under the CITA which
can deduct interest on loans. Also employment payments to the “director main shareholder”
(DMS) of the company and pension provisions, form deductible costs for companies under
the CITA. On the level of DMS, these payments are taxed in box 1 as income from
204
Such as the decrease of the progressive tax rate in box 1, the change of the substantial interest
regime in 1997, introduction of the capital yield tax and the decrease of the CIT over the years for the
investment position of the Netherlands in international context.
205
The SME-exemption is an exemption of 14% of the taxable profit of the entrepreneur in box 1, see
article 3.79a PITA 2001. The entrepreneurs-deduction applies on entrepreneurs in box 1, which
comply with the hour criterion and the deduction is € 7.280, see article 3.76 PITA 2001.
Fairness and taxation of different types of income
69
employment.206 In contrary to entrepreneurs in box 1; their employment payments cannot
be deducted from the profits of the sole proprietorships in box 1, due to the lack of an
employment relationship. So, their income from employments is taxed in box 1 as income
from business profits, and they do not form deductible costs;207
4. a DMS or shareholder with a substantial interest can decide to postpone profit
distributions and also, alienation profits on substantial interest shares are taxed at a 25%
PIT-rate. These alienation profits are not taxed with CIT, as exchange of shareholders is not
a taxable “transaction” for CIT purposes; in this way, taxation on hidden reserves in the
CITA can be postponed. Contrary to entrepreneurs in box 1; they are progressive taxed on
their whole (suspension) profits. Taxation on their reserves can be only postponed to the
extent that so-called pass regulations can be used.208
Another type of discussion that in the last years arose is the discussion that SME’s are not
treated the same as multinational enterprises (MNE’s). It became clear that multinationals
by using (aggressive) tax planning constructions do not pay CIT or much less than they
should (25%).209 As multinationals are able to set up tax planning constructions whereby
they swift their profits to low taxable jurisdictions (tax heavens) and transfer their interest
deductions to high taxable jurisdictions, they are able to pay 0% or a bit more on (CIT)
taxes. And SME’s are being disadvantaged, as they are not able to use the regulations and
facilities, of which MNE’s do profit from.210 The result is that other taxpayers (and
companies) pay more taxes due to the fact that MNE’s do not pay their fair share. 211
4.3
Special tax regimes under the CITA 1969
Special tax regimes and exemptions apply on companies under the CITA 1969. This
paragraph only describes the main tax regimes and exemptions in the CITA. Also two tax
exemptions in the PITA are taken into account; these two exemptions also apply on
companies in the CITA through the linking provision of article 8 CITA 1969.
206
See paragraph 4.4 for the tax position of the DMS.
207
However, a relevant advantage is that the SME-exemption does apply on this income.
208
J. Doornebal, Cursus Belastingrecht. Inkomstenbelasting, Deventer: Kluwer 2013, p. 768.
209
J. Dohmen, ‘Multinationals betalen vrijwel geen belasting’, NRC Handelsblad, 21 februari 2008.
210
J.L.M. Gribnau, ‘Fair share en tax planning: een moeilijk maar noodzakelijk debat’, in: P. Kavelaars
(red.), ‘Ongewenste belastingontwijking?’ De jacht naar een fair share (congresbundel), Rotterdam:
Fiscaal Economisch Instituut 2013, p. 43.
211
See for more information about the action plans of the OECD on this issue: The OECD, Action Plan
on Base Erosion and Profit Shifting, OECD 2013, p. 15.
Fairness and taxation of different types of income
70
4.3.1 Participation exemption
An important main tax (object) exemption in the Dutch corporate tax system is the
participation exemption which only applies on the companies in the CITA 1969. The
participation exemption regime is one of the main pillars of the Dutch corporate tax system.
It is applicable to both resident and non-resident companies. This exemption is provided in
order to prevent economic double taxation and is based on two justifications: the “conduit
approach” and the ne bis in idem principle.
212
When a subsidiary distributes its profits to its
parent company, the parent company is exempted for these profits, because the subsidiary
has already been taxed on these profits at the level of the subsidiary. All dividends and
capital gains from participations are exempted at the level of the parent company.
213
The
“conduit approach” means that distributed profits from subsidiaries should be exempt at the
level of the parent company if the activities of the subsidiary are in line with the activities of
the parent company. If the parent company holds at least 5% in the subsidiary it is
considered as “in line with” the activities. That means that the participation exemption is not
applicable on portfolio shareholders.
The participation exemption applies if the taxpayer holds at least 5% of the shares in the
subsidiary and (1) the subsidiary is not held as a portfolio investment, or (2) the subsidiary
must be subject to a reasonable effective tax rate based on Dutch standards, or (3) the
assets of the subsidiary must consist less than 50% of “passive” assets based on the fair
value.
If the participation exemption is not applicable, credits for the levied tax may be applicable.
The participation exemption also means, vice versa, that relating (purchasing- and selling)
costs are not deductible and liquidation losses are only be taken into account under certain
conditions. Under the CITA until 2004, the provision of the participation exemption did not
allow deduction of costs related to foreign participations/subsidiaries.
That means that interest costs relating to foreign subsidiaries to which the participation
exemption applied were not deductible under the participation exemption rules of article 13
CITA 1969. In 2003 the ECJ decided in the landmark Bosal case that this distinction
between (deductible) costs relating to Dutch subsidiaries and (non-deductible) costs relating
212
J.A.G. van der Geld, Hoofdzaken vennootschapsbelasting, Deventer: Kluwer 2013, p. 156.
213
Article 13 CITA 1969.
Fairness and taxation of different types of income
71
to foreign subsidiaries conflicted with EU-law based on the freedom of establishment.214
After this decision, the Dutch legislator abolished this limitation rule on the deduction on 1
January 2004. From that moment also costs relating to foreign subsidiaries are allowed to
be deductible. In order to prevent the budgetary effects of the so-called Bosal gap, which
means that interest costs relating to foreign subsidiaries can be deducted in the Netherlands
without taxing profit income from the foreign subsidiaries because of the participation
exemption, the legislator also implemented thin capitalization rules. 215
4.3.2 Conduit entities
Based on article 8c CITA 1969, received and paid royalties and interests by conduit entities
(concern financing companies) will be not, under certain circumstances, included in the
taxable income base. The aim is to avoid that relating withholding taxes would be deductible
in the Netherlands; when royalties and interest are not included in the taxable base, related
withholding taxes cannot be deducted.
4.3.3 Object exemption for foreign business profits
In 2012, object exemptions for foreign business profits, including from foreign permanent
establishments, are implemented in the articles 15e-15j CITA 1969. Until 2012, losses of
permanent establishments were directly deductible from the profits of the resident Dutch
companies. Since 2012, profits and losses of permanent establishments (also other business
profits such as real estate) are excluded from the Dutch tax base. However, when the
permanent establishment terminates its activities, its final losses which cannot be deducted
in the foreign country, are still deductible in the Netherlands.
214
European Court of Justice 18 September 2003, no. C-168/01, BNB 2003/344 (Bosal case) and see
for an analysis of the Case: D.M. Weber, ‘Het Bosal Holding-arrest:analyse, kritiek en gevolgen’, WFR
2003/1844.
215
The thin capitalization rule was implemented in article 10d CITA 1969, but this rule has already
been abolished and since 2013, a new rule has been implemented: the deduction limitation on
participation interest in article 13l CITA 1969, see J.A.G. van der Geld, Hoofdzaken
vennootschapsbelasting, Deventer: Kluwer 2013, p. 104 and 144.
Fairness and taxation of different types of income
72
4.3.4 Fiscal unity
The Dutch group taxation regime, fiscal unity, in the CITA 1969 provides parent companies
the option to form a tax group with its domestic subsidiaries, based on article 15 CITA 1969.
The requirements are:216
1. the parent company holds at least 95% of the legal and economic ownership of the
shares in the subsidiary;
2. the financial years for both (the parent company and the subsidiary) coincide;
3. the determination rules of the taxable profit are the same for the parent company and
the subsidiary;
4. both the parent company and the subsidiary are established in the Netherlands;
5. both the parent company and the subsidiary qualify for the legal form;
6. the parent company is not allowed to hold the subsidiary as inventory.
The subsidiary is deemed to be “absorbed” in the parent company. For levy CIT, the
subsidiary is deemed to non-existent. However, for corporate tax purposes the parent
company and the subsidiary are considered as single entities. The reason is to let the
subsidiary be entitled to tax treaty benefits.
217
One of the main advantages of the fiscal
unity is that within the tax group losses of one company can be set off against profits of
another company. Furthermore, transfer of assets within the fiscal unity can take place
without fiscal consequences. Also transactions between the companies in the group are not
recognized as the group is treated as one taxpayer. The group as whole files one
consolidated tax return.
A fiscal unity with foreign subsidiaries is not allowed. In the X-Holding case, the ECJ decided
that the fiscal unity regime of the Netherlands on this point does not conflict with EU-law.218
The ECJ held that the fact that only domestic subsidiaries can take part in a fiscal unity, in
principle, forms a restriction on the freedom of establishment, but that refusing a cross-
216
Articles 15(1) and 15(3) CITA 1969.
217
Until 2003, for corporate tax purposes, the subsidiary was deemed to non-existent as it was
“absorbed” in the parent company. The subsidiary was therefore not entitled to tax treaty benefits,
because it ‘did not exist’. That is why the system has changed now, to ensure that the subsidiary still
owns the treaty benefits; but the idea of ‘absorbing’ in the parent company still exist, see J.A.G. van
der Geld, Hoofdzaken vennootschapsbelasting, Deventer: Kluwer 2013, p. 292.
218
European Court of Justice 25 February 2010, no. C-337/08, BNB 2010/166 (X-Holding case).
Fairness and taxation of different types of income
73
border fiscal unity is justified to preserve the allocation of powers to impose taxes between
the Member States.
4.3.5 Innovation box
From a patent box to an innovation box
The innovation box is a tax incentive to stimulate innovation, research & development
activities and to maintain and attract high-quality employment.
219
The patent box had not
been very successful as taxpayers did not use it that much. In order to make it more
attractive the legislator changed the rules in 2008 and in 2010 by the introduction of the
innovation box. The changes were a lower CIT-rate, decreased from 10% to 5%.
Furthermore, permitting R&D activities without a patent mainly provided for the SME’s. Also
abolishing of the limits resulted in the fact that there is no maximum amount to which the
innovation box can be applied. So, when a high capital gain is realized by the sale of
intangible assets, the 5% rate applies on it. Another advantage is that the 5% rate does not
apply on losses within the innovation box. These losses are deductible to the normal rate of
25%.
220
Within the innovation box, nowadays, all profits related to the self-developed
intangible assets are taxed at an effective CIT-rate of 5%. The innovation box also applies
to more intangible assets rather than as the patent box did. The qualifying intangible assets
include self-developed intangible assets or qualifying Research & Development-activities
(R&D-activities) for which a R&D-declaration has been obtained from the “Agentschap
NL”.221 That means that the 5% rate can be applied even without a patent (it is easier to
obtain a R&D-declaration than a patent).222 To benefit from the innovation box, it is
required that the intangible assets have been self-developed and not acquired and that
these profits must exceed the total amount of the production costs of the intangible assets.
Innovation box and the companies in the PITA
The innovation box regime only applies to companies who are subject to CIT as the
innovation box is laid down in the CITA 1969. That means that PIT-companies cannot
benefit from this privileged tax regime. The question arises whether this is line with the
principle of equality; the PITA applies on PIT-companies and the innovation box is only
219
See Kamerstukken II, 2005/06, 30 572, no. 3, p. 6.
220
IJ. de Nies, ‘Stimulering van innovatie: van octrooibox naar innovatiebox’, WFR 2010/146.
221
The Agentschap NL forms a part of the Dutch Ministry of Economic Affairs.
222
With a R&D-declaration the taxpayer can also profit from payroll tax reductions: it reduces the
employment costs of employees relating to the R&D-activities.
Fairness and taxation of different types of income
74
incorporated in the CITA. The first examination of the principle of equal treatment, within
the scope of article 14 of the European Convention on Human Rights (ECHR), is whether
they can be qualified as equal cases. Veraa argues that they are equal, because both
taxpayers are acting with the same purpose and they differ too less from each other to be
223
qualified as unequally.
The following question is whether it is allowed to treat equal cases
unequally. The European Court requires that there has to be an objective and reasonable
justification. That is the case if there is a legitimated policy purpose aimed at and if there is
a reasonable proportionality between the used mean and the aimed purpose. Only if these
requirements are fulfilled, the infringement of the equality principle can be justified. Taken
this into account, according to Veraa, there is no objective and reasonable justification and
the equality principle is infringed. She argues that the political aim to stimulate innovation is
legitimated, but that the use of the innovation box mean is not proportional, as it makes a
distinction between the possible users of this facility.
224
The Dutch Council of State also
states that PIT-entrepreneurs are conducting innovation activities and that there is no
objective and reasonable justification to not allow this facility to PIT-entrepreneurs. It
infringes the equal treatment of (innovating) entrepreneurs.
225
4.3.6 Special tax regimes under the PITA 2001
Special tax regimes apply on business income under the PITA 2001. The PITA 2001 contains
two object exemptions on the taxable business income base. These two exemptions also
apply on companies under the CITA 1969 because of the linking provision of article 8 CITA
1969. The first exemption is the forestry exemption laid down in article 3.11 PITA 2001,
which has the result that no income tax is levied on profits from forest enterprises. This
exemption aims at maintaining and extension the forest areas in the Netherlands. Profits
from forest income are not included in the taxable income, but it also means that losses
from the forest enterprises are not been taken into account. Forest entrepreneurs have the
option to not use the forestry exemption for a certain period; in that case losses can be
taken into account.
226
The second exemption is the agriculture exemption (article 3.12 PITA
2001). Realized and unrealized value changes of agricultural land, including grounds of its
buildings, which are not attributable to the conduct of the business, are exempted from the
223
J.J.D. Veraa, Fiscale Geschriften no. 25: De octrooibox, Den Haag: Sdu Uitgevers 2009, par. 2.6.1.
224
J.J.D. Veraa, Fiscale Geschriften no. 25: De octrooibox, Den Haag: Sdu Uitgevers 2009, par. 2.6.1.
225
See Kamerstukken II, 2005/06, 30 572, no. 4, p. 21-22.
226
Article 3.11(2) PITA 1969.
Fairness and taxation of different types of income
75
taxable income base. The exemption includes both positive and negative value changes.
Unlike the forestry exemptions, there is no option regulation.
4.4
Tax position of the director main shareholder
A director main shareholder (DMS) has substantial interest in a company and he also
performs activities in the same company as employee. However he does not have to be the
director of the company, in most of the cases he is.227 The entrepreneur in box 1 who
derives business income from his sole proprietor is taxed differently than the DMS who has
substantial interest in the company (and is an employee of that company). Nowadays, the
substantial interest regime is more focusing on equal taxation of entrepreneurship,
irrespective of whether by an independent undertaking or by using a company with share
capital in which the entrepreneur is employed (=DMS). Since the regime has changed in
1997, the Dutch legislator aims in both situations at an almost equally tax burden. The tax
burden for the DMS is the accumulated burden of the levied CIT and PIT, for the
entrepreneur is the (progressive) rate of box 1 with a maximum of 52% after application of
the entrepreneur facilities. In 2001 the CIT-rate was 35% which made an accumulated rate
of CIT and PIT of 51,25%. In that time there was an equal tax burden on the DMS,
entrepreneur and the employee (as the employee is also taxed in box 1 at a maximum rate
of 52%). In later years, the CIT-rate decreased to 25% and 20% for business profits up to
€ 200.000.228 In order to maintain the balance, in 2007 the SME-exemption has been
introduced, which brings for entrepreneurs in box 1 the effective rate on their business
profits to the same level as the burden of the substantial interest-shareholder. The balance
with the employee has been lost.
229
The DMS is both a substantial interest-shareholder as an employee, which means that the
DMS is subject to two tax systems:
1. The shareholder position: income from substantial interest is taxed in box 2 and includes
regular income, mainly dividend payments, and alienation profits of his shares, both taxed
at a 25%-rate. The business profit is levied with a CIT-rate of 20% up to the first € 200.000
and for the more at 25%. Dividend payments are not deductible for CIT-purposes. So, the
227
Final Report Committee Income tax and allowances, Naar een activerender belastingstelsel, Den
Haag 2013, p. 23.
228
For reasons of international tax competition.
229
Final Report Committee Income tax and allowances, Naar een activerender belastingstelsel, Den
Haag 2013, p. 24.
Fairness and taxation of different types of income
76
tax burden on income from substantial interest is combined CIT- and box 2-levy with a 40%
rate to a profit of € 200.000 and 43,75% for profits above. Not every alienation of shares
leads to payable taxes. In some cases, it is possible to pass the box 2-tax claim of profits
from alienation of shares, to the new owner, which creates ways to postpone the
taxation.
230
Also in the case that the shareholder emigrates, the Dutch legislator is only able
to claim taxes if income will be realized in the following ten years. After ten years the
Netherlands cannot claim its taxation rights anymore.
2. The employee position: the salary of the DMS is taxed in box 1 at a progressive rate of
52%. Contrary to dividend payments, paid salaries to the DMS are deductible from the CIT
levied on the company. So, the effective tax burden is a maximum of 52%.
It seems that it is more favorable for the shareholder to distribute dividends than receiving
salaries. In order to prevent that the shareholder pays himself too less salary for tax
purposes, a fictitious ‘customary wage’ regulation has been introduced.
231
This regulation
states that an employee who has substantial interest must earn a salary that is usual for the
same (work) activities without a substantial interest-relation; this salary must have a
minimum of € 44.000. This regulation was introduced in 1997 whereby constructions were
set up for applying the 68%-regulation.
232
The 68%-rule meant that not more than 68% of
the taxable income would be levied with income and wealth tax.
233
DMS’s, who are able to
decide on their own whether to receive salaries or not, did not pay themselves salaries to
keep the taxable income base low at a zero level: in this way, no income and wealth tax
were levied.
Taxation of employment income of the DMS does not differ from taxation of a normal
employee in box 1; both are taxed at the progressive 52%-rate. However, taxation of the
DMS and employee in box 1 differs from the taxation of employment income from the
personal entrepreneur in box 1. The law does not distinguish between labour and capital
income of the entrepreneur; the labour component is a part of the profits of the
entrepreneur. So, labour income of the personal entrepreneur in box 1 is taxed at a rate of
31,82%-44,72%.234
230
The so-called ‘doorschuiffaciliteiten’.
231
Article 12a Dutch Wages Tax Act 1964.
232
G.W.B. van Westen, Cursus Belastingrecht. Loonbelasting, Deventer: Kluwer 2013, p. 110.
233
The net wealth tax has been abolished in 2001.
234
Assuming as followed: 52% maximum PIT-rate x (taxable income minus SME-exemption of 14%)
= 52% x (100%-14%) = 52% x 86% = effective rate of 44,72%.
Fairness and taxation of different types of income
4.5
77
Different tax treatments of dividends and capital gains in the box system
This paragraph illustrates the different tax treatments of dividends and capital gains in the
box system in order to make the distinctions more clear.
4.5.1
Different tax treatment of dividends in the box system
As mentioned above, dividends derived by substantial interest-shareholders in box 2 are
taxed at a fixed rate of 25%. The profits of the company are also taxed with a CIT-rate of
20% or 25%. The total accumulated tax burden on dividends in box 2 is therefore 40%43,75%. The classical system still applies on shares attributable to enterprises in box 1 and
on non substantial interest-shareholders in box 3. From 2001, by introduction of the capital
yield tax, it does not matter for the total tax burden in box 3 whether the company has
distributed profits or not. These shareholders are yearly subject to a flat rate, even if the
company does not distribute profits or does distribute higher dividends. This box 3-system
stimulates to distribute profits; dividend payments in box 3 are therefore preferable if large
amounts of dividend payments will be distributed. That is not the case for shareholders in
box 1 and box 2. In both boxes real income is taxed at a progressive rate of 52% in box 1
and a fixed rate of 25% in box 2.
The following examples illustrate the tax regimes for dividends:
235
Box 1 – dividends
Business profit of the company
100
CIT 25%
25
Profit after CIT
75
Gross dividend payment
75
PIT 44,72%
236
33,54
Net income of dividend
41,46
Total tax burden 25% + 33,54%
58,54
235
These examples are based on: S.A.W.J. Strik, Cursus Belastingrecht. Vennootschapsbelasting,
Deventer: Kluwer 2013, p. 14-15.
236
Assuming as followed: 52% maximum PIT-rate x (taxable income minus SME-exemption of 14%)
= 52% x (100%-14%) = 52% x 86% = effective rate of 44,72%.
Fairness and taxation of different types of income
78
Box 2 – dividends
Business profit of the company
100
CIT 25%
25
Profit after CIT
75
Gross dividend payment
75
PIT 25%
18,75
Net income of dividend
56,25
Total tax burden 25% + 18,75%
43,75
Box 3 – dividends
Assuming that the dividend payment is higher than the capital yield of 4% in box 3:
Business profit of the company
100
CIT 25%
25
Profit after CIT
75
Gross dividend payment
75
PIT 30% x 4%
237
12
Net income of dividend
63
Total tax burden 25% + 12%
37
So, when dividend payments are higher than the capital yield, the box 3 system is more
favorable for dividends.
4.5.2 Different tax treatment of capital gains in the box system
There is also a difference in tax treatment of (private) capital gains between the three boxes.
Personal entrepreneurs in box 1, who operates business at their own risk and for their own
account are subject at the progressive rate of 52%, and after application of the SMEexemption, for a maximum of 44,72%. The profits are yearly taxed, because of the
entrepreneur is directly entitled to them. In contrary to the substantial interest-shareholder,
the entrepreneur is not able to defer his profits. At the moment he alienates his business
including hidden reserves and goodwill, he is directly subject to PIT in box 1.
237
Assuming as followed: value of the shares is 1000. The real gross return is 7,5% ((75/1000) x
100%).
Fairness and taxation of different types of income
79
The capital gains of the box 2-shareholder are taxed with 25%. Unlike box 1-entrepeneurs,
shareholders in box 2 are able to defer dividend payments and alienation of shares. Another
difference is that when the shareholder alienates his shares, the added values/capital gains
(as hidden reserves and goodwill) are not taxed with CIT, so the capital gains are only taxed
with 25%. However, the shareholder can derive capital gains from capital elements which
he provides to his company, the so-called ‘providing regulation’.238 Normally, for example, if
the shareholder rents out property to his company, the received rent would be taxed in box
3, just at a 1,2% rate. The legislator introduced the providing regulation to prevent this.
The providing regulation means that all capital gains from provided capital elements to the
own company (where insubstantial interest is hold) are taxed in box 1 as income from
miscellaneous activities. That means that capital gains in this regime are taxed at a
progressive rate. For the company the paid payments to the shareholder are deductible of
the levied CIT. This regime is comparable with the customary wage regime for the DMS.
This system causes a different tax treatment between the substantial interest-shareholder
in box 2 and the non-substantial interest-shareholder in box 3 under equal circumstances. A
shareholder in box 3 is subject to 1,2% on his capital gains (both profits and capital gains).
The following schedule summarizes the different treatment of private capital gains:
Tax rates on capital gains
31,82% - 44,72%
239
in box 2
32,56% - 45,76%
240
Box 2
Substantial interest-shareholder
25%
Box 3
Investor
30% x 4% on capital yield
Box 1
Personal entrepreneur
Providing regulation for shareholder
241
238
Article 3.92 PITA 2001.
239
Assuming as followed: 52% maximum PIT-rate x (taxable income minus SME-exemption of 14%)
= 52% x (100%-14%) = 52% x 86% = effective rate of 44,72%.
240
Assumed at the progressive rate of 52% after application of the providing-exemption of 12%, see
article 3.99b PITA 2001.
241
Realized capital gains are not separately taxed; no separated private capital gain tax is levied in
the Netherlands.
Fairness and taxation of different types of income
4.6
80
Evaluation of the current income tax system with respect to the tax
treatment of business income
4.6.1 Introduction
The principle of tax neutrality is another principle of fairness (linking to the equality
principle), and forms a requirement in order to achieve a fair tax burden distribution.
The principle of tax neutrality can be considered as a differentiation of the equality principle.
It may not be possible to achieve a completely neutral tax system, but aiming at economic
efficiency, a tax system should distort economic decisions of the taxpayers as little as
possible.242 The (juridical dimension of) neutrality requires that whether or not taxation is
used for instrumental purposes, deviations and more favorable tax treatments should be
based on reasonable justifications. Legal form neutrality is one of the aspects of this
(economic) principle of tax neutrality. In the context of a fair tax burden distribution
between taxpayers, this paragraph will evaluate the current income tax system with respect
to the tax treatment of business income against the benchmarks of tax neutrality and
especially static legal form neutrality, as described in the normative framework in chapter 2.
In addition, a distinction can be made between static and dynamic legal form neutrality. The
focus of this thesis is on the static legal form neutrality, the dynamic dimension will be
addressed where relevant. As it has shown in this chapter, there is a difference in tax
treatment of business profits derived from sole proprietorships and from corporations.
However the (juridical) ability to pay principle would not serve as benchmark for evaluation
of the tax treatment of business income, I think it is worth to first take into account, in
short, the ability to pay as business profits from incorporated companies are subject to a
separated tax with the idea that they have “ability to pay”.
4.6.2 Ability to pay
Where personal entrepreneurs of sole proprietorships are subject to progressive taxation in
the PIT for their business profits, corporations (with legal entity) are independently taxed
for their profits under the CIT. The latter case does not alter the fact that the shareholders
in the PIT are taxed for the distributed profits from these corporations. 243 The consideration
that corporations are taxed separately for their profits can be, according to Strik, derived
from the purpose of corporate income tax: taxing business profits which cannot be taxed
242
H. Vording, ‘Rechtsvormneutraliteit: wat was het probleem ook al weer?’, NTFR 2010/2052.
243
However, box 2 takes into account the already levied CIT, the classical system applied on these
shareholders until 1997, see for more paragraph 3.4.3.1.
Fairness and taxation of different types of income
81
within the personal income tax shall be taxed with corporate income tax. Otherwise – when
legal entities would not be subjected to corporate income tax-, it would lead to fiscal
discrimination regarding to personal entrepreneurs and partners of a (fiscally transparent)
partnership, and to constructions with escaping PIT by personal companies switching in
legal entities.
244
The connection between the PIT and the CIT depends on which principle
forms the legal ground of the CIT: a separated tax for corporations. On this point, there has
never been agreed one consistent legal justification for the CIT. 245 But it has always been
required for the reason, as noted above, otherwise a gap would exist with the personal
income tax whereby PIT could be escaped.246
The Dutch legislator mentioned in the parliamentary documents of the preceding model of
the current CITA that these corporations, concerned taxation, are in the same position as
individuals; thus what the meaning of the PIT is for individuals, the CIT is for corporations.
According to the legislator, this idea was developed in accordance with the capacity to
pay.247 So, it can be said that the ability to pay of these corporations was considered as
their capacity to contribute by taxation. It seems that the legislator has follow this line
under the current CITA 1969, in which he considers that the corporations have an
independent character and that it must not be forgotten that the social presence form of
these companies can be clearly distinguished from the sole proprietorships due to the “own
life” that the corporation leads, next to the shareholder.248 In Van Kempen’s view, it is not
so much the legal form or the possession of legal personality that is decisive whether and to
what extend corporations are independent, but the material reality.249
I agree with the view that a corporation can be considered as taxpayer as it carries on an
enterprise making profits by a combination of labour and capital. As Mol-Verver argues in
this case that labour and capital are taxed separately, and as business profits form a result
of the combination of capital and labour, there is no reason to not tax business profits in the
244
S.A.W.J. Strik, Cursus Belastingrecht. Vennootschapsbelasting, Deventer: Kluwer 2013, p. 3.
245
See for a short overview of several theories on the fundamentals of a CIT: J.A.G. van der Geld,
Hoofdzaken vennootschapsbelasting, Deventer: Kluwer 2013, p. 24-30.
246
J. Verburg, Vennootschapsbelasting, Deventer: Kluwer 2000, p. 2.
247
See Leidraad Besluit op de Vennootschapsbelasting 1942, p. 2.
248
See Kamerstukken II, 1962/63, 6000, no. 9, p. 2-3.
249
M.L.M. van Kempen, Rechtspersoonlijkheid en belastingplicht van vennootschappen, Tilburg:
Schoordijk Instituut 1999, p. 86.
Fairness and taxation of different types of income
82
light of the equality principle.250 However Van Kempen focused on the differences in tax
treatment of partnerships and not that much on sole proprietorships, I agree that not the
legal form should be decisive, but the material reality. And in this reality, there is in
economic way no relevant difference between the business profits of a sole proprietor and
corporations. Both business profits have the same particular character compared with other
income groups. Mol-Verver states in this way, that when business profits are generated,
these business profits are not directly at the free disposal of the entrepreneur, DMS or
shareholder.251 Therefore are profit distribution for the shareholders and withdrawals for the
entrepreneurs required. Besides, these profits have a special function when the profits are
not distributed, but stayed in the company: they then have investment- and reservation
functions.252 In this case, I therefore agree with the fact that it is justified that business
profits of enterprises can be subject to a separated tax as they can be seen as separated
taxpayers from natural persons with an own capacity to pay taxes, but in my view, not only
corporations with legal entity, but also sole proprietorships as their business profits do have
the same character. In the context of the evaluation of the current Dutch tax system, sole
proprietorships and corporations are not subject to a same separated tax. Only corporations
are subject to a separated tax, CIT, due to their legal form. Sole proprietorships are subject
to the progressive PIT. However for the determination of their taxable income the same
rules apply because of article 8 of the CITA 1969, there are still differences in the
determination of the taxable base and in the applied tax rate (progressive tax rate with a
maximum of 52% versus a proportional 25%-tax rate) which cannot be justified in my
opinion, because of the abovementioned arguments.
4.6.3 Static legal form neutrality
As neutrality is a broad concept, legal form neutrality is one of the dimensions of this
principle, which serves as benchmarks with respect to the choice of legal form of a business.
Legal form neutrality thus implies that the income tax system should be neutral towards the
choice of legal form of a business; the chosen legal form of a business should not be
relevant for the tax consequences. Business profits should be taxed in the same way,
regardless whether the enterprise is carried by a sole proprietor or a corporation. Legal form
neutrality has two dimensions: static neutrality in the sense of the tax burden of the
available legal forms for a type of business may not differ as such with the result that the
250
S.J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, par. 2.3.2.
251
S.J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, par. 2.3.3.
252
S.J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, par. 2.3.3.
Fairness and taxation of different types of income
83
choice of the legal form is purely based on this tax burden difference. Dynamic neutrality
requires that taxation should not form an obstacle to change the legal form into another one.
As the Dutch tax legislator has aimed to remove these obstacles of the latter as much as
possible and as it seems that therefore the dynamic neutrality is tried to reach as much as
possible in Dutch tax law, the focus will be on the evaluation based on the static legal form
neutrality.253
The legislator must also have considered a certain level of legal form neutrality since the
general tax reform of 1960 the issue of the neutrality regarding the legal form has arisen.
The legislator attempted to reach a certain level of static neutrality by achieving a “global
balance”: a certain balance between the tax regimes for on the one hand the sector of
personal entrepreneurs (meant the entrepreneurs under the PITA) and on the other the
sector of legal entities (meant the corporations subject to CIT).254 Even if there was an
uneven tax treatment of different legal forms, Grapperhaus named this neutrality aim at a
global equal tax burden on the different legal forms the “theory of the global balance”.255
This theory of the global balance means that, based on a neutral view of the legislator
regarding the legal form of a business, the taxation of profits received by personal
entrepreneurs (under the PITA) and profits realized by legal entities (under the CITA)
should be in a global balance. In this case, the Dutch tax legislator confined himself with the
aim to achieve a global balance between the tax regimes for the personal entrepreneurs and
their sole proprietorships, and on the other hand the shareholders and their corporations in
the CITA, by achieving a similar tax rate and by eliminating the fiscal implications of legal
form changes. The almost equal tax burden between the sole proprietors on the one hand,
and the combined tax burden of CIT and PIT for the shareholders in the current tax system
can be seen as a main result of this aim of the legislator. However these developments
contributed to the aimed greater balance and even though the different tax rates for
business profits under the Dutch PITA and the CITA are brought to a similar level, there are
253
See H. Vording, ‘Rechtsvormneutraliteit: wat was het probleem ook al weer?’, NTFR 2010/2052, J.
Doornebal, De terugkeer uit een BV, Deventer: Kluwer 1991, p. 241-242 and P.H.J. Essers,
‘Rechtsvormneutraliteit’, TFO 2011/3, par. 2.2.
254
See Kamerstukken II, 1958/59, 5380, no. 3, p. 16, J. Verburg, Vennootschapsbelasting, Deventer:
Kluwe 2000, p. 11 and F.H.M. Grapperhaus, De besloten NV fiscaal vergeleken met de persoonlijke
ondernemer en met de open NV (diss. Tilburg), Amsterdam: N.V. Uitgeverij Fed 1966, p. 49-50 in
which the author quotes the passages of the legislator about the global balance.
255
F.H.M. Grapperhaus, De besloten NV fiscaal vergeleken met de persoonlijke ondernemer en met de
open NV (diss. Tilburg), Amsterdam: N.V. Uitgeverij Fed 1966, p. 47.
Fairness and taxation of different types of income
84
other differences in tax treatment of business income, described in paragraph 4.2, which
may form decisive fiscal considerations for the choice of legal form of a business.
According to Essers, it seems that there is at most a break-even point: the PIT-regime is
attractive for entrepreneurs with profits before this break-even point and the CIT-regime
after this point.256 So, the CIT-regime is attractive from a certain amount of higher profits;
as long as no dividends will be distributed to the shareholder, the CIT-rate is lower than the
progressive PIT-rate and the employment payments of the shareholder form deductible
costs.257 As consequences of the many legislation changes, mainly at the front introduced
entrepreneur facilities in the PITA, this break-even point to switch from a sole proprietorship
into a corporation (from the PITA to the CITA), has increased. 258 Essers states that the crux
of the problem of lack of the fiscal legal form neutrality is that the progressive taxation in
the PIT does not reflect the different functions of the profit income.
259
Profit income has not
only a consumption function, but also an investment-, reservation- and an old age
function.260 And that is way in my view the business profits of sole proprietorships in box 1
of the PIT and corporations should be subject to a same tax regime as they do not differ in
this context. Progressive taxation has also negative effects on the self-employed and sole
proprietorships as it is shown in research.261 Besides, the introduction of the several
exemptions (such as the abovementioned SME-exemption) for entrepreneurs in the PITA is
attractive as no distinction is made between the capital and the labour component of the
business income, which means that the SME-exemption is also applicable on the labour
component. Contrary to the DMS; his employment income is taxed to the progressive tax
rate with a maximum of 52%. In his view, it is better regulated in the CIT, since the profits
are taxed to a relative low CIT-rate and only when profits are distributed to the shareholder,
an additional tax is levied at the level of the shareholder. The other functions than the
consumption function of profits income justify that also in the PIT the profits should be
256
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 2.2 and P.H.J. Essers, Knelpunten bij de
hervorming van de belastingheffing van ondernemingen, Deventer: Kluwer 1992, p. 3.
257
H. Koster, Cursus Belastingrecht. Vennootschapsbelasting, Deventer: Kluwer 2013, p. 415-416.
258
J.A.G. van Es, Afweging bv of eenmanszaak; tendens in tijd, TFO 2007/94, par. 7.
259
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 3.1.
260
And not to forget that no distinction is made between employment and capital income of the
personal entrepreneur in box 1 (contrary to the DMS).
261
R.A. de Mooij & G. Nicodème, Corporate tax policy, entrepreneurship and incorporation in the EU,
CPB Discussion Paper no. 97, January 2008, p. 36-37.
Fairness and taxation of different types of income
85
taxed to a lower rate. And only when profits will be distributed to the entrepreneur for
private purposes, an additional levy should take place.
262
As I mentioned before, even though the economic dimension of tax neutrality had to serve
as benchmark for taxation of business income, the juridical dimension of tax neutrality and
ability to pay have also shown their relevance and in this context it is useful to note the
following. The introduction of the entrepreneur exemptions (such as the SME-exemption)
has also led to a fiscal distortion on the labour market. As described before, no distinction is
made between the capital and the labour component of the personal entrepreneur, which
means that the SME-exemption is applicable on both components. It can be said that the
balance with the employees has been lost, as employees are taxed to a highly progressive
tax rate, and the effective tax rate on business income in the PITA decreases by these
applicable exemptions. This led to the development of the increase of self-employed without
employees (ZZP’ers). For them, it is attractive to work as self-employed, because the
entrepreneur exemptions are applicable on the labour income, instead of the progressive
tax rate of 52%.263 Vording mentions the risks of the increase of self-employed without
employees; not only business activities are economically marginalized, but also the
activities that before were performed as employee, are now shown as business activities.264
The real negative effect of this development is the income uncertainty of these selfemployed persons, caused by these tax regulations. 265 Essers states that this development
is a consequence of the fact that these entrepreneur exemptions cannot be justified. An
example is not only the SME-exemption, but also the old age facility for entrepreneurs in
the PITA. They can deduct 10.9% from their profits to reserve it for their old age, without a
real use of it for their old age. This can clash with the principle of equality. So, entrepreneur
facilities and exemptions that cannot be justified regarding the special position of business
income with respect to other income, increase this tension. If there are no appropriate
reasons to treat non-entrepreneurs worse than entrepreneurs and shareholders, the
equality principle may be infringed from the idea of ability to pay. 266 Also the business
262
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 3.1.
263
H. Vording, ‘Rechtsvormneutraliteit: wat was het probleem ook al weer?’, NTFR 2010/2052.
264
The Dutch tax authorities is aware of this “false self-employment”and deals with this problem, see
N. Troost, ‘Belastingdienst pakt schijnzelfstandige aan’, de Volkskrant 9 April 2014.
265
H. Vording, ‘Rechtsvormneutraliteit: wat was het probleem ook al weer?’, NTFR 2010/2052.
266
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 2.3.
Fairness and taxation of different types of income
86
succession facilities may infringe this equality principle with respect to nonentrepreneurs.267
It is worth to mention in this framework, that the previous government announced a
discussion paper about the introduction of a separated profit box for entrepreneurs in box
1.268 With the introduction of the profit box the tax rate on business profits from sole
proprietorships will be decreased to a lower rate and many of the entrepreneur facilities will
be abolished. The current government has adopted the idea of a profit box, also with the
reason to decrease the increased difference in tax burden between employees and selfemployed.269 This action is, in my view, a sign that the legislator is gradually becoming
more aware of the required neutral taxation of business income regardless the legal form of
a sole proprietor or a corporation and thereby he also takes into account the juridical
dimension as there has to be reasonable justifications to treat a group taxpayers (the selfemployed) more favorable than the other groups (the employees).
4.6.4 Conclusion
To conclude, by assessing the current Dutch taxation of business income against my
normative framework that is on the first place based on the economic principle of legal form
neutrality, the Dutch tax system fails on this point as it does not apply the same tax regime
on all business profits, regardless the legal form. This is because, while business profits of
sole proprietorships are subject to progressive taxation, corporations are subject to a
separated lower CIT-rate. By taking into account that the shareholders of the latter case are
also taxed with PIT, not only different tax rates apply but also differences in the
determination of the tax base exist, which may be decisive at the choice of legal form and
therefore may not lead to the economic most efficient decisions. In my opinion, the
267
The business succession facilities include a large exemption in the inheritance tax for only business
property, it is not applicable on private assets. Based on article 35 of the Succession Act 1956, this
exemption applies on donated or inherited business property. This facility provides an exemption for
shares in a company conducting a business or assets which form a business. The exemption is 100%
of the first € 1.045.611 and 83% for the excess. The primary aim of the exemption is to prevent
liquidity problems for the business, as a result of a gift or inheritance tax burden for the acquirer,
which can be only paid by withdrawing money from the business. However, this exemption has lead to
a great discussion in the literature and even to a court case as it might be against the principle of
equality, see Supreme Court 22 November 2013, ECLI:NL:HR:2013:1212, BNB 2014/31.
268
See Letter of the State Secretary of Finance, 14 April 2011, no. AFP/2011/248 U, p. 31 and further.
269
See the Coalition agreement ‘Building Bridges’ of the Netherlands, 29 October 2012, p. 77.
Fairness and taxation of different types of income
87
progressive taxation on sole proprietorships is the problematic issue on this point as the
progression does not reflect the several functions of business income, but also the fact that
this taxation may infringe the juridical dimension of tax neutrality. Therefore in my opinion,
the current taxation of business income can be improved in order to achieve a more neutral
tax regime on business income.
4.7
Conclusion
The aim of this chapter was to examine whether the current Dutch income tax system
contributes to a fair tax burden distribution between taxpayers, with respect to the taxation
of business income. The assessment is based on the economic principle of tax neutrality and
especially the static legal form neutrality, which has been formulated under the normative
framework in chapter 2. However, it can be stated that the juridical dimension of tax
neutrality and ability to pay have had also their relevance.
The taxation of Dutch business income depends on which legal form is chosen, and
therefore which tax regime applies: the PIT-regime or the CIT-regime. Business income
under the legal forms of sole proprietorships and transparent partnerships in the PITA are
subject to progressive taxation with a maximum rate of 52%. Because of the wide
entrepreneurs exemption, the maximum effective tax rate is decreased to 44,72%. The tax
regime on business profits under this regime does not differ between the capital and the
labour component, because of the lack of an employment relationship. This results in the
fact that on the labour income of the entrepreneur the favorable SME-exemption also
applies. On the other side, corporations under the CITA are taxed for 20% or 25%. When
profits are distributed to the shareholder, an additionally PIT is levied for 25% in box 2 for
substantial interest. Besides this, the DMS is subject to the progressive tax rate of box 1 for
his employment income. The PIT-tax burden and the combined CIT/PIT-tax burden is quite
similar. However, there are still differences, such as in the determination of the taxable
basis. Corporations are allowed to deduct the employment costs of its director and pension
provisions from the taxable income. Personal entrepreneurs under the PITA are not allowed
to do this.
It can be concluded that the Dutch income tax system is not neutral against the choice of
legal form of a business. However, the tax legislator aimed to achieve a certain balance
between the tax burden on business profits in the PITA and the CITA. The different tax
treatment of the determination of the taxable income base may still be decisive for this
Fairness and taxation of different types of income
88
choice instead of being based on economic considerations. It may lead to cases where
taxpayers choose a legal form that is not suitable for that type of business from on
economic point of view. The nature of the business profits is the same regardless the legal
form around it. The fact that the legal form is a sole proprietor or a corporation does not
change the fact that all of these business profits have in an economic view the same
business-related functions: the investment and the reservation function. These functions of
all of these business profits justify one applicable tax regime with a relative low rate. Only
when profits are withdrawn by the entrepreneur of distributed to the shareholders, a
different or supplemented personal tax is required. At that moment, they can be compared
with the other individuals in the personal income tax. In my opinion therefore, the
problematic fact of this issue lays down in the applied progression on business profits in box
1 of the PITA. The legislator has become aware of this fact, and plans to introduce a
separated profit box with a lower rate for the business profits from box 1.
Fairness and taxation of different types of income
89
Chapter 5 Comparative law analysis
5.1
Introduction
In the previous two chapters it has been analyzed to what extend the current Dutch income
tax system contributes to a fair tax burden distribution amongst taxpayers. It also
investigated the tax treatment of different types of income in the personal income tax
system, with a special focus on the capital income and the taxation of business income.
These two tax regimes are evaluated on the basis of the benchmarks of ability to pay and
neutrality as underlying principles of fairness. The aim of this chapter is to compare the
Dutch income tax system with the tax systems of the other EUCOTAX countries. These
participating countries Austria, Belgium, France, Germany, Hungary, Italy, Poland, Spain,
Sweden, Switzerland and the United States. The legal comparison will only include the two
analyzed subject of this thesis: taxation of different types of income in the personal income
tax with a special focus on the treatment of capital income and the tax treatment of
business income.270 Therefore, the first part of this chapter includes a legal comparison and
an analysis of the income tax systems of the other EUCOTAX countries with respect to the
different tax treatments of income in the personal income tax system and the second part
the tax treatment of business income. Reference is made to appendix A and B for short
overviews of the differences in the income tax systems and the business income treatments.
The last paragraph provides the conclusion with regard to the comparative analysis.
5.2
Tax treatment of different types of income in the personal income tax
5.2.1 Introduction
In chapter 3, the analytic box system in the Dutch personal income tax was discussed. This
system distinguishes between three boxes, each with its own tax rate and determination
rules of the taxable income base. Within this box system, a main difference is made in the
tax treatment of private capital income on the one hand, and income from labour, sole
proprietor and substantial interest on the other. Thus the Dutch box system for individuals
is an analytic tax system with the effect that different types of income are taxed at different
rates whereby capital income is treated more favorable than the other income groups. Some
of the EUCOTAX countries apply a tax system that taxes the overall income, meaning that
all types of income are combined and taxed to the same rate. In this context, the other tax
270
The legal comparisons are based on the EUCOTAX papers of the participating countries and the
final matrix of the EUCOTAX Wintercourse week in Paris.
Fairness and taxation of different types of income
90
systems of the EUCOTAX countries will be analyzed concerning the personal income tax
including the focus on taxation of capital income.
5.2.2 Legal comparison
The comparison of the income tax systems of the EUCOTAX countries that is made in the
Wintercourse week in Paris shows that some of the countries employ a dual income tax and
others an overall income tax system, but each providing deviating favorable treatments for
capital income. In a dual income tax regime, total income is divided into labour and capital
income with different tax bases. While labour income is subject to a progressive tax rate,
capital income is taxed at a flat rate.271 The overview below illustrates the various income
tax systems.
5.2.2.1
Countries with a dual income tax system
Austria
Although comprehensive taxation continued in the Austrian system, analytic elements
switched the system into a more dual income tax. In this case, Austria recently introduced a
final withholding tax pursuant to which income derived from capital (including dividends and
interest) and profits realized from capital gains from shares and similar investments is taxed
at a flat rate of 25%.272 Labour income (and the other types of income such as business
income) is taxed at a progressive tax rate with a maximum of 50%. It is to emphasize that
taxpayers can opt out of this final capital gains tax and choose to include capital income in
their regular comprehensive tax base, but this option is only advantageous for taxpayers
with low income as it is applicable if this income tax rate is below the final capital gains tax.
This favorable taxation of capital income has mainly been introduced for simplicity,
efficiency and non-compliance risks.
Germany
Also Germany applies a dual income tax system in which personal income (labour income) is
taxed progressively and capital income proportionally.273 The highest progressive tax rate
for the personal income is 45%. Income from capital assets that exceeds the tax free
271
B. Genser, ‘The Dual Income Tax: Implementation and Experience in European Countries’,
Ekonomski pregled, Vol. 57, no. 3-4 (2006), p. 276.
272
Section 93 of the Austrian Personal Income Tax Act.
273
J. Hey, § 7, Einführung in das besondere Steuerschuldrecht, published by K. Tipke & J. Lang, 21.
Edition, Köln 2012, marginal sign 76.
Fairness and taxation of different types of income
91
amount of € 801, is subject to a flat final withholding tax of 25% plus a 5,5% solidarity
surcharge.274 Income from capital assets includes dividends, interest et cetera. The German
legislator justified the lower flat tax rate on capital to stop the transfer of capital assets
abroad. Besides, due to that tax evasion would be reduced, enforcement obstacles would be
eliminated and more fairness could be achieved. Furthermore, this final withholding flat tax
would lead to simplification of the tax regime from which everyone would profit.275
Spain
The Spanish income tax system also applies a dual structure which divides the total income
of the individuals into two main categories; general income and savings income. General
income is taxed at a progressive tax rate with a maximum of 56%. 276 It includes salaries
and other benefits from employment, income from economic activities, real estate, rental
income and capital gains realized within the same year of the acquisition. Income from
savings, including interest, dividends, capital gains on the sale of assets in a later year than
the acquisition year, is subject to a progressive rate with a maximum of 27%. 277 Certain
exemptions apply regarding the taxable income bases. The main objectives of the Spanish
tax authorities to adopt such a dual income tax model were amongst others to attract and
promote savings and investments, simplicity reasons and to improve the Spanish position in
competition by the free movement of capital.
Sweden
Sweden applies a dual income tax system since the reform in 1990. The taxable base in the
Swedish personal income tax consists of three types of income: income from employment,
business income and capital income.278 Both employment income and business income are
added up and taxed as earned income at a progressive tax rate (an average municipal rate
of 31% and an additional state income tax rate up to 25% if the income is above a certain
level).279 Capital income on the other hand is taxed at a proportional tax rate of 30%. 280 It
274
Section 20, par. 9 and section 32d, par. 1 of the German Personal Income Tax Act.
275
FG Nürnberg v. 03.07.2013 – 3 K 448/13.
276
The maximum rate can vary based on the region of residence as Spanish legislation differentiates
three levels of tax authority which apply different types of taxes. Only 44% of taxation is managed by
the State; the other part is in the hands of autonomous regions and the local levels (towns).
277
Title III, Chapter III, Articles 45-49 of the Spanish Personal Income Tax Act.
278
Chapter 41, section 1 of the Swedish Personal Income Tax Act (PITA).
279
Chapter 65, section 5 of the Swedish PITA.
280
Chapter 65, section 7 of the Swedish PITA.
Fairness and taxation of different types of income
92
includes all profits and expenses from private assets and liabilities such as bank accounts,
dividends, capital gains on shares, real estate et cetera. Specific reduced rates and rules
however apply on certain types of capital income. The main reasons of this reformation
were to make the provisions easier, fairer and more neutral. In the previous tax system
there were six different types of income and no uniform calculations which resulted in the
fact that different types of income were treated very differently. All these types of income
were put together and taxed at a progressive tax rate, including income from capital.281
With the introduction of the dual income it is aimed at stimulating savings and investments.
Taking into account inflation, but in case of fairer distribution, the tax rate for capital
income would not be too low; the wealthy would be otherwise treated too preferable. 282
5.2.2.2
Countries with an overall income tax system
Belgium
The Belgian PIT system taxes individuals on their overall net income. The comprehensive
tax base includes the sum of four categories: the net property income, the net income from
movable assets, net professional income and miscellaneous income.
283
This income is
subject to a progressive tax rate from 25% up to 50% after certain deductions are
applied.
284
Each category includes a definition of taxable income. The main exception to this
general principle is the withholding tax of 25% on income from movable assets, which is
then not added to the taxable base which is taxed progressively.285 Within this category,
many exemptions and special rates apply for certain dividends, interest payments et cetera.
Capital gains are treated uniquely in Belgium; in the category of property income and
income from movable assets, the basic principle exempts capital gains, under the condition
that they are realized because of normal management of one’s private wealth.286 Capital
gains realized after speculative behavior are thus taxable. If they are taxable, they are
categorized under the last category of miscellaneous income, for which specific tax rates
apply. The taxation of this category is the second exception on the basic principle of
progressive taxation of one comprehensive tax base. So even if the capital gains are taxable,
281
C.G. Fernlund, Skattereformen det nya skattesystemet, Allmänna förlaget, Stockholm 1990, p. 156.
282
Official Reports of the Swedish Government 1989:33, p. 69.
283
Article 5 of the Belgium Income Tax Code 1992 (BITC 1992)
284
Articles 104 and 130 BITC 1992.
285
Article 269 BITC 1992.
286
Article 90 BITC 1992.
Fairness and taxation of different types of income
93
special favorable rates apply.287 Capital gains on assets used for an individual’s professional
activities are on the other hand always taxable as part of the miscellaneous income
category with special favorable rates, depending on certain conditions, with a possibility of
spreading the taxation or using a continuation regime. The many specific rates, provisions
and exemptions make the tax system complex, but the legislator sees these as instruments
to stimulate the taxpayers to make investments.
France
In general, the French income tax system taxes individuals on their overall income. Income
is divided into eight different types and then those categories are also classified into three
categories: income from employment, professional income and capital income. 288 After
taking into account the applicable deductions, the net income is taxed at a progressive rate
with the highest of 45% for income above € 151.200. Special rules and exemptions apply
on several types of capital income, including dividends, capital gains on certain movable
properties, and capital gains on immovable properties. 289 First regarding dividends, there is
a reduction up to 40% on the amount received from dividends prior to the imposition of tax
at the progressive income tax rate if certain holding requirements are met. 290 The deviation
is legitimated by the fact that dividends are already taxed with corporate income tax.
Recently, a compulsory fixed levy of 21% has been introduced on dividend income which is
applied as a withholding tax on gross dividend income and is designed to ensure that taxes
due on dividends are received as soon as possible.291 Regarding private capital gains, capital
gains derived from shares of companies that are not mostly real estate now generally taxed
at the progressive income tax rate (so the high progressive rates up to 45% apply).
However, entrepreneurs can instead opt for a fixed levy tax at a 19%-rate if certain
requirements are met. 292 If this fixed levy does not apply, limited exemptions between the
50-80% of the capital gains can be applied under certain requirements. 293 For capital gains
287
Article 171 BITC 1992.
288
F. Douet, Précis de droit fiscal de la famille, 12th edition, Lexis Nexis, 2013, p. 196.
289
There has recently also been introduced a marginal rate of 75% on taxable income over 1,000,000
EUR for individuals. This is designed to be a solidarity surtax on high income, but it only affects very
few French taxpayers.
290
F. Douet, Précis de droit fiscal de la famille, 12th edition, Lexis Nexis, 2013, p. 152.
291
Article 117 of the French General Tax Code.
292
F. Douet, Précis de droit fiscal de la famille, 12th edition, Lexis Nexis, 2013, p. 190.
293
F. Douet, Précis de droit fiscal de la famille, 12th edition, Lexis Nexis, 2013, p. 187 and 190. See
also: <http://vosdroits.service-public.fr/particuliers/F21618.xhtml>.
Fairness and taxation of different types of income
94
from immovable properties and shares of companies that are mostly real estate, there is a
total exemption tax if the property is held for 22 years. Lesser exemptions apply if the
immovable property is held less than 22 years but at least 15 years. Also other special
exemptions apply on certain types of capital income. The several applicable exemptions aim
at promoting economic development.
Hungary
The personal income tax system of Hungary applies a flat rate of 16% on all types of
income. Hungarian law contains several clauses to define what is seen as income, but the
main principle states that any and all income of an individual is subject to taxation. 294 Thus
also capital income is part of this taxable base on which the 16%-flat rate applies. There is
one special provision for capital gains on securities that are held on a special “long-term”
account: a 10%-rate applies after a 3-year holding period of these securities, and a 0%-rate
after the account’s maximum of 5 years is expired. The application of this special provision
is however rare. Hungary provides thus a flat tax rate of 16%, regardless the type of
income. The reasons to introduce such a flat tax rate are simplicity and the government’s
will to encourage its citizens to engage in work, pay income taxes and to not hide revenues.
Italy
The current Italian income tax derives from a tax reform from 1970-1973. The aim was to
provide a personal overall income tax for individuals based on the principles of progressivity
and ability to pay, and a corporate income tax for corporations and legal entities.295 Thus
Italy has a personal income tax system based on overall income with six categories and all
categories have their own rules for determination of the tax base. These categories include
income from land and buildings, capital income, employment income, professional income,
business income and other income.296 The overall income is taxed at a progressive rate from
23% up to 43%. Certain income types are taxed separately to a favorable lower tax rate. 297
The aim is to avoid that income that is formed during many years, but received in one fiscal
period is caught by progression. A special exemption regime applies in the category of
capital income for dividends and capital gains. Under certain conditions, they are favorable
294
The Hungarian Act CXVII of 1995 on Personal Income Tax.
295
G. Falsitta, Manuale di diritto tributario parte speciale, Padova 2013, p. 2 and Presidential decree
598/1973(IRPEG); now IRES.
296
Article 44 of the Italian Income Taxation (TUIR).
297
Article 17 of the TUIR.
Fairness and taxation of different types of income
95
taxed through withholding of 20%. This withholding tax is just by article 47 of the Italian
Constitution, in which savings in all forms are encouraged by the government.
Poland
The Polish income tax system for individuals taxes individuals for their total income to a
progressive rate between 18% and 32%.298 There are however five categories on which a
proportional tax rate applies instead of the progressive one. These categories consist of
income from capital (including dividends and interest), revenues from the sale of shares in
companies and securities, revenues from the sale of real estate, income from nonagricultural activity and income from undisclosed sources of income. 299 Private capital gains
are thus taxed at a flat rate of 19%. Private capital gains on the sale of movable and
immovable property in non business activities are also taxed to this 19%-flat rate.300 Entire
gains are tax exempted if the taxpayer holds non business related immovable property for a
certain period of time.301 Reasons for the favorable tax treatment of capital are moreover
the same; stimulating and attracting savings and investments.
Switzerland
In Switzerland, not only the state, but also the 26 cantons and even the communes can levy
taxes, which have the result of a large number of tax laws. However different canton tax
laws can significantly differ from others, their framework is similar due to the federal tax
harmonization law (FTHL). In general, the income tax system of Switzerland taxes income
from all sources as a whole and are subject to the same conditions. On certain types of
income however special provisions apply.302 Capital income of individuals is generally taxed
under the normal rules, but there is an essential differentiation between capital gains and
investment income. Investment income, which derives from surrendering the use of goods,
is taxed as part of the income of the individual and capital gains on movable assets for
private purposes are tax exempt. Capital gains on immovable property are subject to a
separate real estate gains tax. Also other special rules apply on capital income. The tax
exemption of income from capital gains from private assets is justified by the legislator
298
Article 9-10 of the Polish Personal Income Tax Act (PITA).
299
Article 10, par. 1 of the Polish PITA.
300
Article 10, 1 (8d) and 30(e) of the Polish PITA.
301
Article 10, 30(e) of the Polish PITA.
302
Articles 16(3) of the Swiss Direct Tax Law (DTL) and 7(4) of the Swiss FTHL.
Fairness and taxation of different types of income
96
mainly based on practical reasons.303 The tax rates on federal level are progressive, up to
11,5%, and the cantons and communes also apply income taxes that vary from each other.
United States
The United States impose in generally the income tax on individuals’ total taxable income at
progressive rates. There are seven rate brackets ranging from 10% to 39,6%. 304 Also the
United States Code provides several exclusions of capital gains. The most important rule is
in this way the special rates for long-term capital gains. Capital gains - which are the profits
from the sale or exchange of a capital asset, which are generally non-inventory assets such
as shares of corporate stock, a business, land or artwork – are included in taxable income
but taxed at a lower progressive rate up to 20%305 for non-corporate taxpayers if held for
the requisite one-year time period and other requirements are met. 306 Arguments for such a
favorable tax treatment are encouraging entrepreneurship, offset the effects of inflation and
prevents the incentive to hold assets too long for tax purposes (“lock-in effect”). This
distinction between capital and ordinary income is a frequently criticized example of the
differing treatment of various types of income. The United States did not provide this
favorable treatment to dividends traditionally, but these favorable rates for capital gains
have also been extended to qualifying dividends from domestic and qualified foreign
corporations received by individuals.307
5.2.3 Analysis
5.2.3.1
Ability to pay
Firstly it is worth to briefly mention the principles of ability to pay and equality. Compared
to the income tax systems of the participating countries, it can be said that, as in the
Netherlands, the personal income tax systems in these countries are based on the principles
of equal treatment and the subjective notion of ability to pay. This is reflected by net
303
A. Filli, Die Besteuerung der Kapitalgewinne im Spannungsfeld der realfiskalischen Gegebenheiten,
in: ASA 66 (1997/1998), p. 438.
304
26 United States Code (U.S.C.) § §1(a)-(d), 61-63.
305
26 U.S.C. §11(h).
306
See 26 U.S.C. § 1221 (defining capital asset). Notably, § 1221 denies “capital asset” status to
inventory property and property used in the taxpayer’s trade or business if it is either (1) depreciable
or (2) real property. With respect to real or depreciable property used in trade or business, known as
“quasi-capital assets”, even more favorable treatment obtains, see also 26 U.S.C. §1(h).
307
26 U.S.C. §1(h).
Fairness and taxation of different types of income
97
realized income in the personal income tax systems. The fundamental principle of equality is
just as in the Netherlands, codified in every legal system of the participating countries. 308
With regards to the ability to pay, it is worth mentioning that unlike in the Netherlands,
Austria, Belgium, Germany, Poland, Sweden, and the United States, in some of the
EUCOTAX countries the ability to pay principle is embedded in their national law. In this
context, article 13 of the French Declaration of Human and Civil Rights states the principle
of taxation with regards to the capacity of the taxpayer to contribute: “For the maintenance
of the public force, and for administrative expenses, a general tax is indispensable; it must
be equally distributed among all citizens, in proportion to their ability to pay.” In Italy not
only the ability to pay principle is embedded in the Constitution, but also the progressivity
of taxation. Article 53 of the Italian Constitution provides namely that “every person shall
contribute to public expenditure in accordance with his taxpayer capacity.” The taxation
system shall be based on criteria of progression.” Spain has a similar provision that
establishes that “everyone shall contribute to sustain public expenditure according to their
economic capacity, through a fair tax system based on the principles of equality and
progressive taxation, which in no case shall be of a confiscatory scope.” 309 But it should be
noted that ability to pay does not have necessarily to be linked with progression. 310 Also in
Switzerland ability to pay has a legal basis as article 127 of the Swiss Federal Constitution
states that “provided the nature of the tax permits it, the principles of universality and
uniformity of taxation as well as the principle of taxation according to ability to pay are
applied.” In the last case, the Hungarian Constitution provides a rule in this case that “every
citizen of the Republic of Hungary bears the obligation to contribute to rates and taxes in
accordance to income and wealth.”311 To conclude with regard to the ability to pay principle,
the taxation on net income in the personal income tax systems of the EUCOTAX countries is
308
Article 7, par. 1 of the Austrian Constitution and article 2 of the Austrian Basic Law of the State;
article 170 of the Belgian Constitution; article 13 of the French Declaration of Human and Civil Rights
of 26 August 1789; article 3 of the German Basic Law for the Federal Republic of Germany
(Grundgesetz); article 15 of the Hungarian Fundamental Law; article 3 of the Italian Constitution;
article 1 of the Dutch Constitution; article 32 of the Constitution of the Republic of Poland; article 14 of
the Spanish Constitution; article 2 and 9 of the Swedish Constitution; article 8 of the Federal
Constitution of Switzerland, and the United States Declaration of Independence, the fourteenth
amendment to the Constitution.
309
Article 31(1) of the Spanish Constitution.
310
See paragraph 2.3.4.
311
Article 70(1) of the Hungarian Constitution.
Fairness and taxation of different types of income
98
based on the concept of ability to pay, which can be seen as a derivation of the principle of
equality. Some of the countries have even a legal basis of ability to pay in their constitution
whether or not combined with a legal basis of progressive taxation.
5.2.3.2
Structure of the tax systems
Bearing in mind the ability to pay as a fundamental principle of taxation of income of
individuals, it can be concluded that, with the exception of Hungary, every analyzed income
tax system taxes different types of income differently. In general, all of these systems take
into account realized income as taxable income base. But all systems provide favorable tax
treatments on several types of capital income: both on the tax base and on the applicable
tax rate. A dual income tax is a form of scheduler income tax which divides individual’s
income into labour income taxed at progressive tax rates, and capital income to a lower
proportional tax rate. As an example, Sweden has a real dual income tax as labour income
is progressively taxed up to 57% and capital income to a fixed rate of 30%. Spain applies a
dual regime as well, but with the difference that both types of income are progressively
taxed, with providing lower progressive rates for capital income. Austria and Germany have
introduced a final capital gains/withholding tax on capital income, that therefore has been
distinguished from the comprehensive tax base of the other (ordinary) income taxed at
progressive tax rates. The other EUCOTAX countries, including Belgium, France, Italy,
Hungary, Poland, Switzerland and the United States have an overall income tax system that
add income types together and taxes it to one progressive rate. In doing so, preferential
treatment to capital income is maintained. Hungary is the only country that applies a flat
tax rate of 16% on all types of income, so for both ordinary and capital income.
Common to all the EUCOTAX countries (again with the notable exception of Hungary) is that
they all apply progressive taxation on ordinary income and all include types of capital gains
taxes but with at least one special and favorable treatment of capital income. Belgium is
unique in this context as private capital gains not engaged in business are tax exempt,
unless they are the result of speculative wealth management. Also Switzerland does not tax
private capital gains on movable assets. But even if they are taxed, lower favorable tax
rates apply. The extent of this favorable treatment varies between the countries. They
provide several justifications to treat capital income more favorable than other types of
income. These justifications are simplicity, ease and efficiency of administration,
encouraging economic participation and preventing taxpayers from holding assets longer
than they otherwise would mainly to avoid taxation (the lock-in effect), encouraging
Fairness and taxation of different types of income
99
investments and thereby boosting the national growth, compensating inflation, preventing
capital flight, and international tax competition. Hungary is the only country that opted for
“real” simplicity in its income tax system, by adding all income together and taxing it at a
flat rate of 16%. Simplicity can be an element of a fair system as it leads to an easier
system for the taxpayer to understand, as not every taxpayer has the knowledge to legally
avoid high tax burdens. But opponents can argue that this choice ignores the progressivity
principle and is not taking into account ability to pay of its taxpayers, which does not seem
fair at first sight as favorable treatment of capital is viewed by many to disproportionately
benefit wealthy taxpayers. They do not need this support and are able to bear a higher tax
burden.
It can be said that each country has struck a different balance between achieving fair
income taxation according ability to pay of the individuals and promoting other economic
and social policy goals. And as stated in the normative framework that ability to pay does
not necessarily requires progressive taxation in theory, it can be concluded that based on
the aim of social income redistribution and other objectives, all of the EUCOTAX countries
(Hungary excepted) consider a progressive income tax whereby they assume that wealthy
taxpayers can bear a higher tax burden, as a fair system. Capital gains are in general
subject to much more favorable taxation. The extent of the deviations varies from country.
These justifications of the EUCOTAX countries are mainly based on economic and practical
considerations.
5.3
Tax treatment of business income
5.3.1 Introduction
As shown in the fourth chapter, the tax treatment of business income in the Netherlands
depends on which legal form is chosen: sole proprietorship, partnership or a corporation. 312
This is because of the fact that two tax systems exist for the taxation of business profits;
sole proprietorships are subject to the personal income tax and corporations to the
corporate income tax in combination with the personal income tax. In this paragraph, the
tax treatment of business income in the income tax systems of the other EUCOTAX
312
The description and analysis of the tax treatment of partnerships fall outside the scope of this
thesis and thus partnerships will not discussed further, but only mentioned where relevant. So, the
analysis will be mainly based on the different tax treatment of income derived from sole
proprietorships and corporations.
Fairness and taxation of different types of income
100
countries will be analyzed with the focus on taxation of business profits from sole
proprietorships and corporations.
5.3.2 Legal comparison
The legal comparison shows that the tax regimes of the EUCOTAX countries distinguishes
between business income derived from sole proprietorships and business income derived
from corporations. The details below provide a short overview of the relevant main
differences in the tax treatment in the tax systems.
Austria
In Austrian tax law, the applicable tax regime depends on the legal form of the company,
that choice entails the application of different provisions and principles. Income from sole
proprietorships is subject to the personal income tax with progressive tax rates up to 50%.
On the other hand, dividend income is subject to corporate income tax before distribution to
the shareholders. Prior to that, certain business expenses may be deducted from the
taxable base of the company (such as wages and salaries). Austria levies a flat tax rate of
25% on the profits of the corporations, whether or not they are distributed. The tax burden
on corporate level accrues by supplementing of the final withholding tax on dividends of 25%
on the personal level, by which the combined tax burden therefore correspondents with the
highest personal income tax rate.313
Belgium
In Belgium, business income is taxed differently depending on whether the business is
carried on in the legal form of a sole proprietorship, partnership or corporation. The
discrepancies in fiscal tax treatment may cause a certain business type to be more favorable,
but there is no consensus about the level of income and the type of business activity
required for a certain type to be the most favorable. The main difference in tax treatment is
the applicable tariff of the personal income tax and the corporate income tax. But also other
elements, such as the calculation of the taxable income base and other rules have to be
taken into account. Both tax rates increase progressively, but the corporate tax rates are
on a lower level than the personal tax rates. There are also other fiscally optimal techniques
to secure a pension income and provide other benefits to employees. These expenses are
deductible for the company and will not be taxed fully on the level of the individual. The
313
B. Genser, ‘The Dual Income Tax: Implementation and Experience in European Countries’,
Ekonomski pregled, Vol. 57, no. 3-4 (2006), p. 282.
Fairness and taxation of different types of income
101
personal income tax rates go up to 50% and the corporate tax rates up to 33% (excluding
the crisis surtax).314 In this case, a withholding tax of 25% applies on the level of the
shareholders if profits are distributed to them. The Belgian government introduced special,
favorable tax regimes for SME’s. One of them is the possibility to qualify for lower
progressive tax rates: SME’s are subject to the lower progressive rates of 24,25%-34,50%,
if certain conditions are fulfilled and the taxable base is below € 332.500.315
France
The calculation of the taxable business income in France depends on whether the profits
have been derived from a sole proprietorship or a corporation. Income from sole proprietor
is subject to the progressive income tax rate up to 45%, and corporations are subject to the
corporate income tax of 33,33% for all of their profits. SME’s may benefit from a lower rate
of 15% (for the tax bracket under or equal to € 38.120.316 This regime reintroduces a hint
of some progressivity in the CIT system and it has been introduced with the aim to favor
the development of SME’s which have problems to enter the capital markets and bank
loans.317 Distributed dividends to the shareholders are taxed at 60% on the basis of the
progressive income tax rate; the 40%-reduction applies for the attenuation of double
economic taxation as they are already taxed with corporate income tax. 318 In case of
distributions of benefits, there may be large and neutral choice of legal structure for the
corporation.319 The progressive income tax aims at redistributing the tax revenues; the
corporate income tax is proportional and does not have the same purpose at all. A certain
level of neutrality is maintained between these entities due to the differences in their
taxation.
Germany
The income of sole proprietorship belongs to the personal income of the individual in
Germany, which is taxed at progressive tax rates up to 45%. Business profits of
corporations are subject to corporate income tax and trade tax. 320 The corporate income tax
314
Articles 130 and 215 BITC 1992.
315
Article 215 BITC 1992.
316
Article 219(1) of the French General Tax Code.
317
F. Douet, Précis de droit fiscal de la famille, 12th edition, Lexis Nexis, 2013, p. 166.
318
Article 158 of the French General Tax Code.
319
P. Serlooten, Droit fiscal des Affaires, 12th edition, Précis Dalloz, 2013-2014, p. 313.
320
Article 23, par. 1 of the German Corporate Income Tax Act.
Fairness and taxation of different types of income
102
rate is 15% and the solidarity surcharge is only applicable on the corporate income tax,
which results in an effective tax rate of 15,825%. The municipal trade tax ranges between 7%
and 17%, which means a total corporate income tax with the highest rate of 33%. Due to
the different taxation of sole proprietorships (and partnerships) compared to corporations
the literature is talking about the dualism of business income tax. 321 At the level of the
shareholders, only 60% of the dividends are included in the shareholder’s personal income
tax base. This is known as the partial income system.
Hungary
The personal income tax system of Hungary applies a flat rate of 16%, which means that
individuals with business income from a sole proprietor are taxed at 16%. Business income
from corporations is subject to the corporation income tax with two rates: 10% for profits
up to approximate € 700.000 and 19% for profits exceeding € 700.000. There is no special
tax regime for dividends, which means that distributed dividends to shareholders are also
subject to the flat rate of 16% in the Hungarian personal income tax.
Italy
Net income from self-employment in Italy is subject to the personal income tax with
progressive tax rates up to 43%. On the other hand, all income derived by companies are
considered as business income and subject to the corporate income tax. The Italian
corporate income tax rate is 27,5%. The taxation of the distributed dividends to the
shareholders on the level of the shareholders in the personal income tax depends whether
they consist of qualified or nonqualified dividends. Non qualifying dividends (dividends
outside the aim of business activities) are subject to the 20% withholding tax (which also
applies on certain capital gains). Qualifying holdings consists of shares (other than saving
shares) and other investments in the capital of a corporation are subject to the ordinary tax
base subject to progressive income tax rates for 49,72% of their amount.322 The result is
that there is a different treatment and still double economic taxation for Italian individuals
and as the reasons are not clear why the double economic taxation has been only decreased
and not completely reduced for individuals.323 The Italian tax system provides special tax
regimes for enterprises that can be considered as SME’s, the so-called “minor enterprises”.
321
J. Hennrichs, Steuerrechtliche Gewinnermittlung (Bilanzsteuerrecht), published by K. Tipke & J.
Lang, 21. Edition 21, Köln 2012, § 10 marginal sign 2.
322
Article 47(2) of the TUIR.
323
G. Falsitta, Manuale di diritto tributario parte speciale, Padova 2013, p. 195.
Fairness and taxation of different types of income
103
They are those exercised by individuals or partnerships that stay at a certain thresholds
fixed by the law: € 309.847,14 for those enterprises with providing services as main activity
and € 516.456,90 for the others.324 If they fulfill certain conditions, preferable regimes
apply as a tax rate of 5%, exclusion from VAT and the regional production tax, and a
simplification of the individual tax return is provided.
Poland
Income from sole proprietorship in Poland is taxed with progressive personal income tax
rates up to 32%. Business profits of corporations are subject to the flat corporate income
tax rate of 19%. Dividends from business activities received by individuals are classified as
income from capital in the personal income tax.325 There exists no deductible costs and no
allowances are allowed from the received dividends and these dividends are taxed with the
flat personal income tax rate of 19%.326 Income from dividends may not be combined with
the other incomes in the personal income tax. Favorable exemptions and reliefs are
applicable to SME’s in Poland. However tax neutrality should be preserved, the exemptions
targeted at the SME’s are justified by the benefits for the whole Polish economy. The SME
sector of Poland generates the largest part of the Gross Domestic Product.327The aim is not
to favor a specific group, but to make their competitiveness between them and large
companies more equal.328
Spain
Sole proprietorships in Spain are taxed with progressive personal income tax rates up to
56%.329 The Spanish government introduced several measures to encourage selfemployment and entrepreneurship. One of the measures is that self-employed individuals
may apply for a reduction of 20% to net earnings obtained in the first year of economic
activities with positive results. Taxable income of corporations on the other hand includes
worldwide profits less deductible expenses (not all expenses are deductible). The corporate
tax is a flat rate of 30%, but a reduced rate applies for SME’s. Small companies are taxed at
324
Presidential Decree, no. 602, dated 29 September 1973, article 18.
325
Article 17, par. 1(4) of the Polish PITA.
326
Article 30A, par. 1(4) of the Polish PITA.
327
M. Starczewska-Krzysztoszek, Raport: Szanse i zagrożenia dla rozwoju mikro, małych i średnich
przedsiębiorstw, Warszawa 2012.
328
R. Wolánski, Opodatkowanie malych i średnich przedsiebiorstw, Warszawa 2002.
329
Self-employed regime Law 2/2007.
Fairness and taxation of different types of income
104
corporate tax rate of 20% for profits up to € 300.000 and 25% for profits above this.
Medium-sized companies are taxed at 25% for profits up to € 300.000 and 30% for
exceeding profits. On the level of the shareholders, the dividends are taxed at the lower
progressive rates up to 27%.
Sweden
In Sweden, the rules defining the taxable income from economic activities may mainly the
same regardless of the type of activities or in which form the activity is performed (sole
proprietorships or limited liability companies). 330 Profits from sole proprietorships are taxed
at the level of the shareholders and taxable profits of corporations in the corporate income
tax. As noted before, Sweden has a dual personal income tax, which means that income
from employment and business are added up and taxed at progressive tax rates up to 57%,
while capital income is subject to a proportional tax rate of 30%. Sole proprietors are
normally taxed as income from business for income attributable to the economic activities.
Dividends and capital gains from different forms of financial assets are however considered
not to be assets of economic activities as a main rule, but they are taxed as capital income
from individuals to the 30% tax rate instead of the progressive tax rates. 331 The business
profits of corporations are subject to the flat corporate tax rate of 22%. Shareholders who
receive dividend from such corporations are subject to the tax rate of 30% on which
dividends are taxed as capital income. The Swedish tax system is built to be neutral and
there are no differentiations regarding the calculation of the taxable income depending on
the size of the company (except for the smallest once). But however, there is a difference in
taxation of dividends and capital gains on the level of the individuals. If the company is
unlisted, the capital income from the shares are taxed at 25% instead of the ordinary 30%rate for capital income.332 However, this differentiation does not depend on the size of the
company.
Switzerland
Self-employed in Switzerland are subject to the personal income tax: it is the in- and
decrease of the business assets’ net value that determines the taxable profits. The capital
gains are included. The progressive tax rates on federal level are up to 11,5% plus the
330
S. Lodin et al., Inkomstskatt- en lär- och handbok i skatterätt, Studentlitteratur, Lund 2013, p. 285.
331
However, dividends and capital gains can be taxed as business income if they fall under the
definition of inventory, see chapter 13, section 7 of the Swedish PITA.
332
Chapter 42, section 15a of the Swedish PITA.
Fairness and taxation of different types of income
105
income tax rates on the level of the cantons and the communes apply. Profits of
corporations are taxed at the level of the corporations at rates between 13-28%. Distributed
dividends to the shareholders are taxed at their personal level. The calculation of the
taxable profits of the corporations and the self-employed are the same.333 On the level of
the shareholder, the taxation of income from substantial participations (in these
corporations), held as private or business assets, is reduced by fixed percentages in order to
lessen the impact of double taxation However, there are other differences in tax treatment
between them. One of the other differences in taxation than the applicable tax rates, is that
corporations can deduct federal, cantonal and communal taxes from their taxable profits,
while these expenses explicitly are not deductible for self-employed.334 Another difference is
the tax deferral mechanism for profits of corporations. While self-employer’s profits are
immediately added to his income and therefore taxed, corporation’s profits are taxed to
lower rates. The sum that the corporation therefore can save, can be gainfully reinvested.
The bigger the difference between the tax rates of self-employed and corporations, and the
longer the capital is kept within the corporation before distributing it, the smaller the
disadvantage from plural taxation becomes. In preparation of the Business Tax Reform Act
II, a commission was formed which had to compare the tax burden of legal entities and selfemployed in order to determine to what extent the impact of plural taxation led to a
disadvantage for corporations and their shareholders. 335 The commission noticed that the
overall taxation of profits from corporations was not always higher than self-employed,
instead, it was determined that there are numerous situations where it is advantageous to
generate profits in a corporation.336
United States
Business income derived from sole proprietorships is attributed to the individual owners and
taxed at the progressive income tax rates up to 39,6%. In contrast to business income
earned by a corporation is subject to corporate income tax at the entity level despite the
fact that the income will again be taxed at the shareholders level when dividends are
distributed. The lowest applicable corporate income tax rate is 15% for taxable income less
333
M. Reich, Steuerrecht, 2nd edition, Zurich 2012, § 18 N 3.
334
See articles 59(1)(a) and 34(e) of the Swiss DTL and article 25(1)(a) FTHL.
335
ERU Report: Bericht der Expertenkommision rechtsformneutrale Unternehmensbesteuerung (ERU),
Erstattet dem Eidgenössischen Finanzdepartment, Bern 2001, p. 13.
336
ERU Report: Bericht der Expertenkommision rechtsformneutrale Unternehmensbesteuerung (ERU),
Erstattet dem Eidgenössischen Finanzdepartment, Bern 2001, p. 20-21.
Fairness and taxation of different types of income
106
than $ 50.000 and 35% for profits exceeding $ 18,33 million. The US does not have
separate tax regimes for individuals and corporations. Although some provisions of the tax
code only apply to individuals and others only to corporations, the overall system for
calculating the income tax applies to both equally. The gross income is the same for both,
but the calculation of the taxable income is on certain places different.337 At the level of the
shareholders, distributed dividends are taxed to a reduced rate of 20%. Besides, certain
special rules apply for small businesses for the reason that they are “job creators”, 338 which
has resulted in numerous favorable provisions in the tax code for small businesses and their
owners. Such favorable treatments include certain tax credits, exemptions and generous
carryback rules. Some of these favorable regimes for small businesses apply without
limitation. Those who are in favor of small business tax preferences argue that these small
firms create opportunities for social and economic advancement and that the incentives
have substantial effect on small business growth, while opponents state that such
preferences lessen the progressivity and distort allocation of resources. 339
5.3.3 Analysis
5.3.3.1
Partnerships
Even though an analysis of the taxation of partnership would not be taken into account, it is
noteworthy to mention the tax liability of partnerships in the EUCOTAX countries. It has to
be assumed that in most countries the model of fiscal transparency applies. This means that
firstly, the profit of the partnership is calculated. Secondly, this profit is divided and
distributed according to certain provisions to the individual partners. Lastly, personal
income tax is levied on them, depending on the domestic rules of PIT. So in this case,
partnerships are not being considered as taxpayers, but the partners are subject to PIT.
This model is applied in Austria, Belgium, France, German, Italy, Spain, Sweden,
Switzerland and the United States. Partnerships in Hungary are fiscally opaque, which
means that partnerships are recognized as taxpayers and are subject to the Hungarian
337
26 U.S.C. § 11(a).
338
H. Gleckman, Small Business and Taxes: Not what You Think (Sept. 27, 2011),
<http://taxvox.taxpolicycenter.org/2011/09/27/small-business-and-taxes-not-what-youthink/#sthash.0Hga24P2.dpuf>.
339
G. Guenther, Small Business Tax Benefits: Overview and Economic Rationale, Congressional
Research Service (March 26, 2009), p. 20-28,
<http://royce.house.gov/uploadedfiles/small_business_tax_benefits.pdf>.
Fairness and taxation of different types of income
107
corporate income tax.340 In Poland and in the Netherlands both systems apply. Most
partnerships in Poland are transparent but one specific type is opaque.341 Compared to the
Dutch tax system, there are transparent partnerships subject to the PITA 2001, unless it
has an open legal form with share capital. Partnerships take a particular place in the Dutch
tax regime in this way; certain criteria determine whether an entity is transparent or not. 342
5.3.3.2
Structure of the tax systems
In every analyzed tax system of the EUCOTAX countries, the taxation of business profits
depends on the legal form of sole proprietor or corporation (as legal entity). In most
EUCOTAX countries, progressive income tax is levied on business profits of sole
proprietorships. Hungary is the only EUCOTAX country that taxes at a flat tax rate of 16%.
Even though the progressive PIT-rates can be high, in most of the countries several
exemptions and deductions apply on the taxable income base. Besides, in most of the
countries the same determination rules apply on the taxable profits of the sole
proprietorships and corporations. But still, they provide some different exemptions and
deductions in the corporate tax system and the income tax system. The corporations in all
of the EUCOTAX countries are subject to a separated corporate income tax, except of the
United States. The United States does not have separate tax regimes for individuals and
corporations. Although some provisions of the United States Tax Code only apply to
individuals or to corporations, the calculation of the taxable income for both is equally. But
again, also in this tax system there are deviations in the determination of the taxable profits
(and of course a different tax rate).343 Austria, Germany, Italy, Poland, Switzerland and
Sweden provide proportional corporate income tax rates. France does have a standard
corporate income tax as well, but SME can benefit from lower rates in this case.
Considerable is that Germany and Switzerland apply different effective corporate rates
within the country because different tax rates are applied on community levels. Instead of
340
The Hungarian Act LXXXI of 1996 of the Corporate Tax and Dividend Tax.
341
H. Litwińczuk, Prawo podatkowe przedsiębiorców, Warszawa 2013.
342
Dutch tax law distinguishes between ‘open’ limited partnerships (open CV’s) and ‘closed’ limited
partnerships (closed CV’s). The relevancy of the distinction is that open CV’s are subject to Dutch
corporate income tax, closed CV’s are not (article 2(1)(a) CITA 1969). A closed CV is fiscally
transparent which means that the partners are only taxed in the PITA. Certain criteria apply to decide
whether foreign companies can be qualified as transparent or non-transparent, see Resolution State
Secretary of Finance, 11 December 2009, no. CCP2009/519M, Staatscourant 2009, 19 49, BNB
2010/58.
343
26 U.S.C. § 11(a).
Fairness and taxation of different types of income
108
proportional tax rates, the other countries Belgium, Hungary, Spain and the United States
provide two or three different corporation tax rates with profit-brackets. An important
reason for using progressive tax rates for corporations is to support SME’s. Apart from the
preferential tax rates, some of the countries know more extensive favorable provisions for
the promotion of SME’s. To give a few examples in this context, Belgium aimed with the
introduction of the notional interest deduction to attract more foreign capital investment and
to convince foreign SME’s to establish their centers in Belgium.344 Italy, Poland and the
United States provide several special tax regimes for SME’s. Under the Spanish tax system,
SME’s are subject to a special tax regime which includes incentives applicable to the income
tax for three years starting from the tax period that in which the requirements are met.345
This special regime includes depreciations, recovery of investments, accelerated
depreciations et cetera. A company may be subject to this favorable tax regime if the net
revenue of the tax period is below 10 million euro.
In all of the EUCOTAX countries, distributed profits from the corporations to the
shareholders are also taxed with personal income tax on the level of the shareholders. This
situation leads to economic double taxation: the profits are first taxed at corporate level and
when dividends are distributed to the shareholder, again with personal income tax. To
eliminate this double taxation, most of the countries reduced the personal income tax rates
for these qualifying dividends to a lower level. Other countries reduce the taxable income
base of the dividends: France and Germany apply a 40%-reduction on dividends, the
remaining 60% of the dividends is included in income tax base of the shareholder. In the
same case, in Italy only 49,72% of the dividends are taxed with personal income tax on the
level of the shareholders.
The resulting overview shows us that every EUCOTAX country applies a different tax regime
on business profits, depending on the legal form of business. Business income from sole
proprietors is subject to the progressive personal income tax rates (with the exception of
Hungary that applies a proportional tax rate). Business profits of corporations are taxed
with corporation tax and when dividends are distributed to the shareholders, again with
personal income tax on the shareholder’s level. So even that there is conceptually no legal
form neutrality as business profits are subject to the same tax regime regardless the legal
form, some of the countries are aware of the case. Not only because of the fact that the
344
Belgian Law of 22 June 2005.
345
Title VII, Chapter XII, articles 108-114 of the Spanish Corporate Income Tax Act.
Fairness and taxation of different types of income
109
EUCOTAX countries reduced the income tax rates on dividends to eliminate the impact of
double taxation, but some countries also aware of the need of more legal form neutrality.
Switzerland formed a commission in preparation of the business tax reform whereby the
commission compared the tax burden of the corporations and the self-employed in order to
determine the extent of the impact of the double taxation. 346 Just to mention another
example, Italy is now planning to introduce a rule for self-employed; under certain
conditions they can decide to be taxed at a separate tax rate equal to the corporate income
tax.347
5.4
Conclusion
In this chapter a comparative law analysis has been made with respect to the income tax
systems of the other EUCOTAX countries. The legal comparison included the two main
subjects of this thesis: taxation of different types of income in the personal income tax,
focusing on the tax treatment of capital income and the taxation of business income.
After this analysis, the following conclusion can be drawn with respect to the taxation of
different types of income in the personal income tax. It can be argued that the ability to pay
principle forms the starting point of the fair distribution of the tax burden based on net
income in the analyzed income tax systems. The principle of equality, which takes into
account that all taxpayers should be treated equally and differently in degree of their
differences and from which ability to pay is emerged, is a fundamental principle that has a
constitutional basis in all of the EUCOTAX countries. Indeed, in France, Italy, Spain, and
Switzerland the ability to pay principle is even embedded in their constitutions. Their
provisions state that the tax burden amongst all citizens must be distributed equally, in
proportion to their ability to pay. The Italian and Spanish Constitutions add, moreover, that
a fair tax system should be based on progressive taxation, which means that the ability to
pay of individuals of these countries is legally linked to progressive taxation. Even the fact
that in the other countries the progressivity is not legally embedded, most of the personal
income tax systems of the EUCOTAX countries apply progressive income tax rates. And all
of these regimes provide a type of capital gains tax (with the exception of Belgium and
346
ERU Report: Bericht der Expertenkommision rechtsformneutrale Unternehmensbesteuerung (ERU),
Erstattet dem Eidgenössischen Finanzdepartment, Bern 2001, p. 13.
347
The Italian corporate income tax rate of 27,5% would apply then instead of the progressive Italian
personal income tax rates up to 43%. This potential legislation is called Imposta sul reddito d’impresa
(IRI).
Fairness and taxation of different types of income
110
Switzerland on private capital gains from movable assets) with favorable tax treatments on
several types of capital income; both via the taxable income base and the applicable tax
rate. By taking into account the main difference in taxation of labour and capital income, it
can be said that Austria, Germany, Spain and Sweden employ a dual income tax whereby
labour income is taxed at progressive rates and capital income to lower flat rates. Even if
the other countries (Belgium, France, Italy, Hungary, Poland, Switzerland and the United
States) apply an overall income tax, they also provide favorable treatments for capital
income. Hungary is the only EUCOTAX country that applies a flat tax rate of 16% on all
types of income. The flat rate is justified by the consideration of the government to
encourage its citizens to engage in work, as well as simplicity reasons. So, private capital
income in every EUCOTAX country receives preferential treatment. The extent of the
differentiation in taxation of capital income varies in the EUCOTAX countries, but the
justifications are mainly the same. The EUCOTAX governments justify the much more
favorable private capital treatment by encouraging savings, investments and economic
participation, preventing the lock-in effect and capital flight, international tax competition
and reasons of simplicity and efficiency.
With respect to the tax treatment of business income, it can be concluded that none of the
participating EUCOTAX countries takes into account legal form neutrality. In every country
the taxation of business income depends on the chosen legal form of business. Business
income from sole proprietors and fiscally transparent partnerships are subject at the level of
the entrepreneur. This business income is taxed at progressive personal income tax rates in
every EUCOTAX country with the exception of Hungary. On the other hand, business profits
of corporations (with legal personality) are taxed to a separated corporate income tax to
mainly lower proportional tax rates. Belgium, Hungary, Spain and the United States provide
two or three different corporate tax rates with the main reason to support SME’s. In addition
to lower tax rates for SME’s, also several preferential tax rules are applicable to SME’s in
most of the EUCOTAX countries such as favorable exemptions and deductions on the
taxable income base. As noted, corporate tax is levied on business profits of corporations.
But besides, when dividends are distributed to the shareholders, also personal income tax is
levied on the level of the shareholder. The result is economic double taxation: business
income from corporations is taxed both on the level of the corporation and the shareholder.
To avoid this double taxation, the EUCOTAX countries reduced the tax rates on dividends at
the level of the shareholder. In this context, France and Germany only includes 60% and
Italy 49,72% of the dividends in the taxable income base of the shareholders. However, the
Fairness and taxation of different types of income
111
reduced tax rates on the dividends brings the total tax burden of the combined corporate
and income tax to a closer level with the income tax rate on the sole proprietorships and
that in generally in every country the same rules apply for calculation of the taxable
business profits of sole proprietorships and corporations, there are still differences in this
determination of the taxable income base such as certain exemptions and deductions,
depending on the national tax regimes. Some of the countries, such as Italy and
Switzerland, bear in mind a sense of legal form neutrality, as they consider the introduction
of rules concerning these different tax treatments of business income.
Fairness and taxation of different types of income
112
Chapter 6 Proposals for tax reform
6.1
Introduction
It has been argued in the previous chapters that the Dutch income tax system consists of
unfair issues with respect to the taxation of private capital and business income. The Dutch
personal income tax treats income of individuals differently. There is a main difference in
taxation between labour income which is taxed to high progressive tax rates and capital that
is taxed much more favorable and on a deemed yield basis. All of the other EUCOTAX
countries also provide a favorable tax treatment of private capital, but they are not based
on such a fiction as in the Netherlands. But even so, taxation of private capital gains has
become a real topic of debate on both national and international level.348 On the other hand,
the taxation of business income depends on the legal form of business. Business profits of
sole proprietors are subject to personal income tax on the level of the entrepreneur and
corporations are taxed to corporate tax and again with personal tax on the level of the
shareholder. Even though the effective tax rates of both business taxations are brought to a
similar level, there a still differences in the determination of the taxable income base with
the result that they may form decisive considerations at the choice of legal form, which will
not be always economic efficient.
Many times, these issues have been topic to debate in the literature. Several authors have
proposed solutions to the current tax system with respect to both tax treatments. In this
chapter, two of these solutions will be addressed that in my view corresponds with a more
fair tax treatment of private capital and business income: a capital gains tax (CGT) in box 3
and a business profits tax (BPT). The advantages and disadvantages of these tax regimes
will be discussed and these proposals will be evaluated on the basis of the benchmarks
formulated in chapter 2. In this chapter, any references will be made to the other
participating EUCOTAX tax systems related to the capital gains tax or the business profits
tax. Similarly to the previous outlines of the thesis, the first part of this chapter includes the
proposal of the capital gains tax related to taxation of different types of income of
individuals (paragraph 6.2) and the second part the business profits tax (paragraph 6.3)
with respect to the taxation of business income. Paragraph 6.4 ends with the conclusion
that can be drawn from this chapter.
348
See paragraph 1.1.
Fairness and taxation of different types of income
6.2
113
Proposal for taxation of different types of income in the personal income tax
6.2.1 Introduction
As noted before, on national and international level the intention increases to tax capital
much less favorable compared to labour income because of the growing economic inequality
in the communities.349 Based on a recent report of Statistics Netherlands, the income
disparities in the Netherlands remained more or less stable but the capital ratios are much
imbalanced and growing.350 Based on the statistics, the richest 1% of the Netherlands
(74.000 households) had in 2012 € 273,1 billion in hands. That is 23,4% of the total capital
of the country in 2012: 1.116,3 billion in shares, savings, real estate (pensions
excluded).351 The rate was in 2008 (before the crisis) 21,5%. The explanation of the
growing inequality is in the nature of the capital. Wealthy households have (international)
capital assets that increases in value and the other main reason is the impairment of the
own home.352 Because of the impairment of the own home, the median capital in the
Netherlands decreased to € 27.000 in 2012, while this was € 51.000 at the beginning of
2008.353 Also Oxfam Novib calls for action to reduce the growing inequality with respect to
the taxation of capital in a recent report.354 Since (and even before) the introduction of the
current box system and the capital yield tax has been introduced in 2001, it has received a
lot of criticism in the literature and in recent times also on political level.355 The Minister of
Finance at the time dismissed the criticism on the capital yield tax with the statement that
349
See for a select overview of criticism paragraph 1.1 and 2.3.1.
350
See the report of Statistics Netherlands, Welvaart in Nederland 2014. Inkomen, bestedingen en
vermogen van huishoudens en personen, Den Haag/Heerlen June 2014.
351
See the chart ‘Top-1% vermogen van huishoudens 2006-2012’ of Statistics Netherlands published
on 11 April 2014, <http://www.cbs.nl/nl-NL/menu/themas/inkomenbestedingen/cijfers/incidenteel/maatwerk/2014-vermogensverdeling-huishoudens-2006-2012mw.htm>.
352
W. Dekker, ‘Rijkste 1 procent bezit bijna een kwart van alle vermogen’, de Volkskrant 12 April
2014.
353
Report Statistics Netherlands, Welvaart in Nederland 2014. Inkomen, bestedingen en vermogen
van huishoudens en personen, Den Haag/Heerlen June 2014, p. 9-10. Besides, 2% of the households
in 2012 held a capital of 1 million euro which corresponds with 154.000 households, less households
than the years before, see p. 68 of the report.
354
Report Oxfam Novib, Eerlijke Belasting, Gelijke Kansen. Een internationaal perspectief op
ongelijkheid en belastingen in Nederland, 3 June 2014, p. 3-4.
355
See paragraph 1.1 and 3.4.4.4.
Fairness and taxation of different types of income
114
everyone could get more return than the 4%.356 But the opposite has unfortunately been
the case: the interest on savings decreased over the years, with the result that the capital
yield turned into a tax of 100% for many savers. Instead of underlying the fact that the
fictitious yield in box 3 is conceptually wrong, the Committee van Dijkhuizen proposed to
maintain the capital yield tax with the arguments that the levy is easy to receive, and the
level of the levy is stable and predictable for both parties. 357 The advice is to match the
fictitious yield rate automatically to the nominal interest on saving accounts of the preceding
five years with the motivation that it takes into account the relation with the actual yields of
the taxpayers and aligns more closely with the people’s perceptions. 358 In effect, the
Committee advises the government to keep the fiction in box 3 whereby infringements of
the ability to pay principle are still present. However, while this solution will be more in line
with real income on savings account of taxpayers, it will also apply on income from other
capital assets such as shares. So the actual income of capital may still be not in line with
the proposed yield. As many authors suggest, abolishing the capital yield tax and
introducing a capital gains tax would be much more in line with the principles of ability to
pay and equality. In this paragraph, the general outlines of a capital gains tax will be
discussed.
6.2.2 Capital gains tax in box 3
6.2.2.1
Scope
First of all, the abolishment of the capital yield tax has the effect that taxation of income
from capital will be based on actual income. A capital gains tax (CGT) levies taxes on
realized economic benefits derived from capital gains.359 Private capital gains as such are
now not taxed in box 3, but they do definitely improve the economic position of the
taxpayer. The abolishment of the capital yield tax and the implementation of a CGT in box 3
will have the result that regular income (such as dividends) are taxed for their actual yield
and that realized private capital gains from now on will be taxed as well. So, taxpayers in
356
Y. Hofs, ‘Fiscus gedaagd voor hoge belasting’, de Volkskrant 31 March 2014, p. 19.
357
Final report of the Van Dijkhuizen Committee: Final Report Committee Income tax and allowances,
Naar een activerender belastingstelsel, Den Haag 2013, p. 14.
358
Final report of the Van Dijkhuizen Committee: Final Report Committee Income tax and allowances,
Naar een activerender belastingstelsel, Den Haag 2013, p. 70. With the introduction of the deemed
4%-yield in 2001, the yield on government bonds has been used as guideline.
359
R.A. van Eijck, Het vermogen te dragen, Deventer: Kluwer 2005, p. 87.
Fairness and taxation of different types of income
115
box 3 will be taxed for both net realized income from capital and capital gains. Besides this,
it follows from the comparative law analysis in paragraph 5.2.2 and 5.2.3 that all of the
other EUCOTAX countries apply a certain type of a capital gains tax.360 A CGT also means
that from now on capital losses can be taken into account, in contrast to the current box 3
in which a negative tax base is not allowed. Realized capital gains can be set on the
difference between the disposal price and the acquisition price of the capital assets. The
gains can be corrected with related costs, depreciations and inflation. 361 The Commission of
the Dutch Association of Tax Science proposed in their research ‘Income tax on capital
mutations’ to introduce a CGT on realized capital gains for individuals under the PITA 1964,
taxed to the ordinary progressive tax rates with any limitations and exemptions on shares
and modest gains.362 On the other hand, capital gains have in general the feature that they
arise over a long period of time and they are realized incidentally. Application of the
progressive tax rates on these capital gains could have undesirable consequences.363 A
lower separated tax can therefore be justified, especially when taking into account that
most of the other EUCOTAX countries provide lower rates. The 30% tax rate of the current
box 3 may correspond in this approach.
6.2.2.2
Advantages
The main argument in the literature that supports a capital gains tax is that it is in line with
the principles of ability to pay and equality and that such a tax would not have to pose
technically difficult problems.364 Even before the introduction of the capital yield tax in 2001,
there was a strong motivation for a CGT.365 Van Dijck argues in this way that the fact that
private capital gains are not taxable, forms a serious failure of the income tax system.366 If
360
With the exception of Belgium and Switzerland on private capital gains on movable assets.
361
R.A. van Eijck, Het vermogen te dragen, Deventer: Kluwer 2005, p. 87.
362
Geschriften van de Vereniging voor Belastingwetenschap no. 208, Inkomstenbelasting over
vermogensmutaties. Tekst en bespreking van het rapport van de Commissie ter bestudering van de
mogelijkheid van belastingheffing over vermogensmutaties, Deventer: Kluwer 1998, p. 19.
363
Kavelaars makes an exception for capital gains arising within one year, such as speculative profits,
see P. Kavelaars, Vermogenswinstheffing: verlies of (aan-)winst?, Deventer: Kluwer 1997, p. 46.
364
See for an overview: R.A. van Eijck, Het vermogen te dragen, Deventer: Kluwer 2005, par. 3.6 and
further.
365
Under the PITA 2001 private capital gains were not taxed at all, only income that was derived from
capital.
366
J.E.A.M. Van Dijck, ‘Vermogenswinstbelasting (Openbaar afscheidscollege gegeven op 16 december
1988 aan de Katholieke Universiteit Brabant.)’, WFR 1988/1661, par. 3.
Fairness and taxation of different types of income
116
the ability to pay of the taxpayers is taken into account, it cannot be the case that private
capital gains are in totally tax exempt. Aardema states in this context that a CGT would
eliminate the unreasonable distribution of the tax burden.367 Essers conclusion concerning
the PITA 2001 is that the box system is not neutral both between the boxes and within the
boxes themselves. In this context, he refers to the possibility to extend the capital mutation
tax.368 He goes on to mention that this tax already exists for entrepreneurs in box 1,
miscellaneous activities and substantial interest-shareholders. In his view it seems a “small
step” to extend this approach to individuals with real estate and effects. 369 Thus a CGT in
box 3 seems appropriate to repair the deficiencies of our personal income tax that relies on
the ability to pay of the taxpayers to levy income tax. As Van der Geld notes, if the option
for a CGT in box 3 is chosen, it will lead to conformity with the ability to pay principle and
the taxation of the other income types in the PIT-system.370
6.2.2.3
Disadvantages
The prevailing view in the literature is that a CGT on private capitals had been a better
alternative than the capital yield tax in 2001 to solve the underlying problems of the PITA
1964.371 The legislator has rejected the CGT during the tax reform in 2001. He recognizes
that the CGT would be in line with the levy based on ability to pay, but he adds that the
ability to pay principle is not decisive even the fact that it is a valuable guideline for seeking
fairness and equality.372 Taking into consideration a balance of fairness, effectiveness and
budgetary goals, the legislator rejected a CGT based on mainly implementation
complications in combination with low and unstable revenues.373 The main disadvantages of
a CGT and that also have formed the reasons of the legislator to reject it will be discussed
now in general.374
A main counterargument against the CGT is the so-called lock-in effect. Taxpayers would be
inclined to postpone the realization of the gains as long as possible and to realize losses as
367
E. Aardema, ‘Een vermogenswinstbelasting als reparatiewetgeving’, in: Van Dijck-bundel, Deventer:
FED 1988, p. 14.
368
P.H.J. Essers, ‘De boxenstructuur van de Wet inkomstenbelasting 2001’, WFR 1999/1463, par. 2.
369
P.H.J. Essers, ‘De boxenstructuur van de Wet inkomstenbelasting 2001’, WFR 1999/1463, par. 2.
370
J.A.G. van der Geld, ‘De evaluatie van de Wet IB 2001: box 3’, WFR 2006/302, par. 3.1.
371
See paragraph 3.4.4.1.
372
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 292-293.
373
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 296.
374
See for the overview: Kamerstukken II, 1998/99, 26 727, no. 3, p. 292-297.
Fairness and taxation of different types of income
117
soon as possible. An economic disadvantage of the lock-in effect is that the capital
allocation will not be economic efficient, because of the capital assets now may not flow to
the most profitable investments. According to the legislator, the result would be that private
investments in risk capital (such as shares) therefore would be discouraged with negative
effects on the capital market.375 In the literature this problem is also recognized, but
Cnossen states that the lock-in effect on the capital market is limited, because most of the
related capital assets are held by investors (such as pension funds and non-residents) who
are not subject to PIT/CIT.376 He also argues in this case that the CGT would have barely
effects on risk behavior if capital losses will be deductible. These negative effects can be
compensated for by proposed reductions on the effective tax burden or lower tax rates. For
example, the Commission of the Association of Tax Science proposed in this case an
allowance for equity which yearly decreases the taxable income base and a loss
compensation rule which discourages the postpone of capital gains because private capital
losses should be only deductible from private capital gains.377 Van Dijck states that a lower
applicable rate will reduce the threshold to realize capital gains.378
A difficult question concerning the CGT is how to deal with its inflation aspect. Inflation
adjustment reduces the risk of the investments and it will also reduce the risk of the lock-in
effect because less tax should be levied.379 However, inflation adjustment is really complex
as the holding period of the capital assets, and the development of the inflation must be
taken into account which increases the administrative burden, costs and implementation
rules. It is this complexity of inflation adjustment that was one of the considerations of the
legislator, but inflation is also an issue of the capital yield tax.380 Kavelaars mentions the
cases of deflation, capital losses and the situation that the inflation is higher than the capital
gains. He argues not to apply inflation corrections in such cases on pragmatic grounds, and
on theoretical grounds if also on the other regular income no inflation adjustments take
375
See Kamerstukken II, 1998/99, 26 727, no. 3, p. 294.
376
S. Cnossen, ‘Analyse van een belastingherziening’, WFR 1999/1583, par. 5.
377
Geschriften van de Vereniging voor Belastingwetenschap no. 208, Inkomstenbelasting over
vermogensmutaties. Tekst en bespreking van het rapport van de Commissie ter bestudering van de
mogelijkheid van belastingheffing over vermogensmutaties, Deventer: Kluwer 1998, p. 86.
378
J.E.A.M. Van Dijck, ‘Vermogenswinstbelasting (Openbaar afscheidscollege gegeven op 16 december
1988 aan de Katholieke Universiteit Brabant.)’, WFR 1988/1661, par. 14.
379
S. Cnossen, ‘Analyse van een belastingherziening’, WFR 1999/1583, par. 5.
380
Final Report Committee Income tax and allowances, Naar een activerender belastingstelsel, Den
Haag 2013, p. 63.
Fairness and taxation of different types of income
118
place.381 Because of the complexity of inflation adjustment, also other EUCOTAX countries
apply lower rates to compensate inflation.382
6.2.2.4
Evaluation
The following can be noted by evaluating the box system without a capital yield tax and a
capital gains tax in box 3 on the basis of the three elements of ability to pay and neutrality
formulated in chapter 2. Taking into account the notion of taxable income base, abolishing
the current fiction of the capital yield tax affects the ability to pay principle in a positive way.
The taxable income base in box 3 will from now on be based on actual realized income,
which forms the starting point of the personal income tax. This is indeed the case in box 1
and box 2 in which general realized net income is taxed. There is no justified reason to
deviate from a real basis in box 3. The introduction of the CGT in box 3 ensures that also
realized capital gains are included in the tax base. There is already a partial CGT in box 1
and box 2: capital gains of business profits, miscellaneous activities and substantial
interest.383 As private capital gains definitely improve the ability to pay of the taxpayers, it
is essential that these gains are also included in the tax base in box 3.
But as it is said, capital gains include an inflation element, which actually means that capital
gains corrected with inflation form the actual income of the taxpayers. This is not only
applicable on private capital gains, but on all capital gains in the income tax system. Even
that some proposals are done to eliminate the inflation factor, it seems really complex to
determine real capital gains without the inflation factor. Therefore it seems justified to not
adjust inflation in private capital gains; also taken into account that it is usual in the PITsystem for other capital gain types.384 The other side of the coin of the CGT is that capital
losses in box 3 will be included as well. Ability to pay and income tax based on net income
requires that all profits and losses should be taken into account. In box 1 and box 2 loss
compensation is already allowed (however limited to certain years). To keep a certain
balance between the boxes, a limitation could also apply for losses in box 3 or providing a
381
P. Kavelaars, Vermogenswinstheffing: verlies of (aan-)winst?, Deventer: Kluwer 1997, p. 58.
382
See paragraph 5.2.
383
P. Kavelaars, ‘Het rammelt en rommelt’, NTFR 2008/1303, p. 2.
384
See Final Report Committee Income tax and allowances, Naar een activerender belastingstelsel,
Den Haag 2013, p. 63. In this report the example is given of the capital gains on the sale of a
business-related building, as it is not easy to split out the inflation gain and the real gain. However,
some rules apply to moderate the taxes.
Fairness and taxation of different types of income
119
stricter regime to ensure that private gains losses can be only compensated with private
capital gains.
As now with a CGT in box 3, the different types of income in the box system are in general
all based on actual realized income of the taxpayers, which is in line with the ability to pay
and equality principles. In my view, certain deviations can be made in the tax treatment of
different types of income under the conditions that the differences can be justified and stay
reasonable in the extent. A small exemption in the taxable income base can be justified to
not tax lower capital gains in order to stimulate investments as it forms an important
product of the national economies. Arguments based on inflation, stimulating investments
for national economic purposes, and the fact that capital gains in general arises over a
longer period may also justify applicable lower tax rates on private capital gains, what we
also see in other EUCOTAX countries. Some of the countries in this case relate favorable
treatments of capital to the holding period (for example France, Poland, United States). The
difference between the current effective tax rate of 1,2% in box 3 (30% x 4%) and the
other boxes cannot be justified as the tax burden in box 3 is degressive compared with the
other boxes. But the 30%-rate applicable on the actual yields seems more in line with the
rates in the other boxes. And even within box 3 one or two lower rates or limited
exemptions could be used for taxpayers with lower returns (which we can consider as low
progressive rates in box 3). The other participating EUCOTAX countries follows the same
approach as most of these countries apply lower proportional tax rates between 20%-30%
and some of them provide a lower progressive tax regime, such as Spain and the United
States.
Different types of income can be treated differently based on their specific characteristics.
Tax neutrality economically means that taxation should not distort the decisions of the
taxpayers as it may not always be economic efficient and juridical that favorable treatments
of certain types of income must be reasonable justified. As mentioned in this evaluation, the
lock-in effect of the CGT might have the result that taxpayers do not realize capital gains
because of the tax levy. But also taking into account capital losses in the tax base, this
distortion could be decreased. But more in legal way, the CGT in box 3 on the contrary
brings much more neutrality in this way compared with the other boxes which also takes
into account capital gains. Not only realized income will be taxed, but also to a proportional
rate that more coincides with the box 1 and box 2- rates. Applicable lower tax rates and
limited exemptions can be justified by reasons as the lock-in effect, inflation compensation
Fairness and taxation of different types of income
120
and investment promotions. In my opinion, therefore the argument of the complexity of the
CGT that the legislator points out is definitely not a reason to let private capital gains
untaxed at all. Based on the principles of ability to pay and equality it is necessary to tax
private capital gains as well. The practical complexity of the CGT can be eliminated and is
indeed justified in my opinion by not correcting the inflation, applying certain exemptions
and lower tax rates, which is also in line with the other tax systems of the EUCOTAX
countries.
6.3
Proposal for taxation of business income
6.3.1 Introduction
As it can be concluded from chapter 4 and 5, the tax treatment of business income depends
on the legal form of the business whether the PIT-system (in box 1) or the CIT/PIT
combination (in box 2) applies, such as in the other EUCOTAX tax systems. The main cause
of the lack of legal form neutrality is thus the coexistence of two tax regimes for business
profits, each with its own determination rules of the taxable income base and tax rates.
Today and in the past, the literature has called for a legal form neutral business profits tax
(BPT).385 The legislator also considered this lack of neutrality when he tried to find a global
balance between the two tax regimes.386 The Dutch government created a Tax System
Study Committee in 2009 to conduct a preliminary study on recommendations for a possible
revision of the Dutch tax system. In the opinion of the Study Committee, a legal form
neutral BPT deviates from legal reality and that therefore a complex system is required that
which will lead to undesired effects on international level.387 The Committee proposed a
profit taxation that keeps the current system and the legal reality intact, while at the same
time realizing for a major part the intended tax neutrality with the BPT. The Committee’s
suggestion is in this approach to design the effective tax rates as such that the components
of capital, labour and the surplus profit of the business profits of the entrepreneur in box 1
385
See for example E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De
ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005 and S.J. Mol-Verver, De
ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, and in the past: Report Tax Study Group
of the “Katholiek verbond van werkgeversvakverenigingen”, Hervorming van de belastingheffing van
ondernemingen, Den Haag, April 1960 and J.E.A.M. van Dijck, Belastingheffing van ondernemingen
ongeacht de rechtsvorm, Deventer: FED 1984.
386
See paragraph 4.6.3.
387
Report Study Committee Tax System, Continuïteit en vernieuwing. Een visie op het belastingstelsel,
Den Haag 2010, p. 9.
Fairness and taxation of different types of income
121
and the DMS/box 2-shareholders will be taxed similarly through the introduction of an
allowance for equity and by abolishing the entrepreneurs-deduction in box 1.388 The point is
that with this proposal, the box 1-business profits are still taxed at progressive tax rates,
the customary wage of the DMS is taxed at a maximum rate of 52%, while on the labour
component of the box 1-entrepreneur the SME-exemption still applies.389 With the new
proposed separated box in the box system by the government, the profits of enterprises in
box 1 will move to a new fourth box. In this new profit box, the business profits will be
taxed to a lower (proportional) rate in return for the abolition of entrepreneur deductions.390
However, the idea is not yet completely developed. But the separated box for these
business profits seems to have a positive influence in the direction towards a legal form
neutral BPT. Taking these views into account, the proposed legal form neutral BPT will be
analyzed in this paragraph and evaluated to the fairness benchmarks of tax neutrality
described in chapter 2.391
6.3.2 Business profits tax
6.3.2.1
Scope
A legal form neutral business profit tax could be designed in a few ways, depending on the
chosen perspective: from the subject of the entrepreneur (1), the object of the enterprise (2)
or an optional regime. These variants will be described in general. 392
1. Transparency of the corporations
In the first option, the primacy lies with the PIT with the BPT as deductible withholding tax.
The BPT-tax rate will be in this case proportional and it can be deducted with the levied PIT
on distributed profits. Van Dijck was one of the proponents of such a system. The starting
388
Report Study Committee Tax System, Continuïteit en vernieuwing. Een visie op het belastingstelsel,
Den Haag 2010, p. 97.
389
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 3.3.
390
Letter of the State Secretary of Finance, 14 April 2011, no. AFP/2011/248 U, p. 34.
391
Again, the focus is laid down on the comparison between the box 1-etrepreneur and the
DMS/shareholder in box 2.
392
There may be other variations as well, but the described possible variants here are based on E.J.W.
Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De ondernemingswinstbelasting
van de 21ste eeuw, Deventer: Kluwer 2005, p. 14-22. As already noted before, the focus of this thesis
is on the different tax treatment of sole proprietors and corporations. Bu the proposed BPT takes also
partnerships into account.
Fairness and taxation of different types of income
122
point of distributed profits in this system is that just once tax is levied on the same
profits.393 It means that the received dividends by the shareholder are grossed up and taxed
at the progressive PIT-rates with an offset of the already levied BPT. 394 So, this system
addresses the problem from the side of the shareholder and is based on the idea of fiscal
transparency of the corporations under the CIT. This system has some disadvantages. In
the case of major listed companies, there is a clear separation between the organizations
and the capital providers. Heithuis therefore states that it is not that realistic to give the
offset credit of the BPT. This will also form a complex problem if we take into account
holding structures and other concern structures and foreign investors. Besides, it will lead to
a complex legislation because of the needed gross up regulations. However, it can be said
that the current box 2-regime takes into account the already levied CIT on the applied tax
rate of 25%, there is still no legal form neutrality as shareholders in box 2 and box 1entrepreneurs are different taxed.
2. Separated tax liability of the PIT-enterprises
The perspective of the second option is from the object of the enterprise itself. The primacy
lies with the CIT as a “liberating final tax”. This system addresses the problem from the side
of the box 1-entrepreneur. In this system, all enterprises will be taxed with BPT without any
offset of this BPT with the levied PIT on the distributed profits. In this variant, all of the
enterprises in the PITA are transferred into the CIT that will function as the BPT.395 This
leads to the fact that all business profits are taxed in the same way regardless the legal
form. An additionally PIT takes place as in the current box 2, to which the entrepreneurs in
box 1 can be added. So, in this regime enterprises in box 1 are not seen as transparent
anymore but are taxed in the same way as the current corporations under the CIT. In this
way, entrepreneurs keep the freedom to carry out their business in the legal form of a sole
proprietor or a corporation. Besides, the maintenance of the current CIT-regime is still
applicable to the major listed companies, holding structures and concerns.
393
J.E.A.M. van Dijck, Belastingheffing van ondernemingen ongeacht de rechtsvorm, Deventer: FED
1984, p. 23.
394
See for an example: E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De
ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005, p. 16.
395
E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De
ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005, p. 18.
Fairness and taxation of different types of income
123
3. Optional regime
The third variant is an optional regime in which enterprises can choose between the
progressive PIT-regime and the CIT-regime in combination with the box 2-levy. The
European Commission made a recommendation in this context for such an option regime to
reach more tax neutrality between the legal forms of the enterprises.396 The legal form
neutrality is ensured in this case because entrepreneurs can choose now for the legal form
that fits to its business and to the most preferential tax regime. But for practical reasons it
seems not sustainable as both systems should be applied and the first option is already
considered as complex. Besides, as the two regimes will exist next to each other, special
regulations must be implemented for atmosphere transitions, which will lead to more
complexity of regulations.397
6.3.2.2
Evaluation
By evaluating these three variants of the BPT on the basis of the benchmark of legal form
neutrality, it can be said that all of these regimes ensure that the taxation of business
profits of box 1-entrepreneurs and shareholders in box 2 is the same regardless the legal
form. However, from my point of view, business profits regardless the legal form of a sole
proprietor or legal entity does have the same character.398 There is no relevant economic
difference in the business profits. And in my view, it is the economic reality that should
prevail here instead of the juridical perspective of legal forms. Business profits moreover
have a particular investment and reservation function compared with other types of income.
Based on these special functions, it can be justified that business profits can be treated
differently than the other types of income in a separated tax regime. Therefore in my
opinion, the second variant corresponds the most with this approach, as the transparency
and progressivity of the PIT-system does not take into account the special position of the
business profits. Heithuis, Essers and Mol-Verver also prefer the separated tax liability of
enterprises, regardless of the legal form, and give their specific interpretation of it.399
396
See Recommendation European Commission of 25 May 1994 concerning the taxation of small and
medium-sized enterprises (94/390/EC). The European Commission particularly notes that sole
proprietors and partnerships are subject to progressive taxation, which hampers the development of
the self-financing capacity of these enterprises if we compare it with enterprises subject to CIT.
397
In Dutch: sfeerovergang, see E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB
2007: De ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005, p. 20.
398
See paragraph 2.4.2.2 and 4.6.2.
399
E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De
ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005, par. 4.6 and chapter 5, P.H.J.
Fairness and taxation of different types of income
124
Besides this, the introduction of such a BPT-regime needs the fewest adjustments in the
current tax system compared with the other options, as Heithuis states.
In general, the introduction of this BPT variant in general means for the current tax system
that the enterprises in the PIT will move to the CIT that functions as the BPT with a lower
proportional tax rate. This applicable tax rate takes into account the specific functions of
business profits, more than high progressive tax rates that may inhibit the growth of the
businesses.400 In this way, the determination rules of business profits in box 1 that also are
applicable for the current profit rules of the CIT can be transferred to the BPT as well.401 The
current entrepreneur deductions can be abolished. As in my view, favorable treatments of
income should be express as much as possible in the applicable tax rate, smaller business
profits may be taxed to a lower rate in the BPT. It is the same case in the current CITsystem as the current CIT-rates are 20% for lower profits and 25% for the excess. So as all
business profits regardless the legal form are equal, the BPT ensures that they are treated
equally. When profits are distributed and withdrawn from the capital of the company to and
by the shareholders and the entrepreneurs, an additionally tax should be levied. Essers
states in this way that for this position a different tax treatment is not justified anymore.
Indeed, when the entrepreneurs and shareholders get the profits in their hands, there is no
difference anymore with for example employees.402 The special function of the business
profits does not count here anymore; they can use the distributed profits now for private
purposes and in that way the equality principle requires a similar tax treatment with the
other types of income. On this level, the current box 2-regime can still be applicable on
shareholders and the entrepreneurs from box 1 could be included in box 2. The tax burden
of the combined BPT and box 2 regime in this way could be brought to a more or less
similar level with the maximum rate of 52% for employment income if the current box 2
rate will be increased a bit.403
Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 3.4 and J. Mol-Verver, De
ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, chapter 6.
400
See Recommendation European Commission of 25 May 1994 concerning the taxation of small and
medium-sized enterprises (94/390/EC).
401
See the linking provision article 8 CITA 1969 and E.J.W. Heithuis, Zonder aanziens des
(rechts)persoons. De Wet VPB 2007: De ondernemingswinstbelasting van de 21ste eeuw, Deventer:
Kluwer 2005, p. 41.
402
P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO 2011/3, par. 3.4.
403
The current combined total tax burden in box 2 is now 43,75%, see paragraph 4.5.1.
Fairness and taxation of different types of income
125
Other important questions with respect to the BPT are how to treat the employment
component, the old day provisions, the providing regulation, the participation exemption et
cetera. In this thesis is mainly discussed, the employment income and costs of the
substantial shareholders, as one of the main considerations on the differences in taxation of
business income that may be decisive at the choice for a legal form. Therefore, this
evaluation will be limited to the taxation of the employment component of business
income.404
The question is how to treat the wages of the entrepreneur and shareholder. In the current
tax system, substantial shareholders are deemed to receive a customary wage of € 44.000.
This wage forms deductible costs for the taxable income of the business profits under the
CIT-system. The shareholder is taxed with PIT in box 1 to the progressive tax rates for this
wage. For the current box 1-entrepreneurs there is no distinction between the capital and
the labour component of its business profits, with the result that no deduction of
employment costs on the business profits in box 1 is allowed (because of the lack of an
employment relationship). The employment element of the box 1-entrepreneur is also taxed
at the progressive tax rate with a maximum of 52% but because of the applied
entrepreneurs deduction, the effective tax rate is decreased to 44,72%. As in the BPT the
business profits are all applicable to the same tax regime, the question arises whether to
extend the customary wage rule to the entrepreneurs as well or the other way around, to
abolish the customary wage regulation completely. Heithuis is in favor of maintaining the
customary wage rule and to extend it to the entrepreneurs as well, in order to keep the
aimed equality between the entrepreneurs and the substantial shareholders.405 His
arguments are that business profits does consist of an employment component and because
of the neutrality with respect to the employees who are also taxed at the progressive box 1rates. For the question whether it is actually possible for the personal enterprises in the BPT
to deduct the employment costs from the business profits, Mol-Verver comes with the
following solution.406 She proposes to introduce a (new) fiscal fiction based on the objective
404
See for the several recommendations of the proponents of the BPT on these elements: E.J.W.
Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De ondernemingswinstbelasting
van de 21ste eeuw, Deventer: Kluwer 2005, p. 41-62, P.H.J. Essers, ‘Rechtsvormneutraliteit’, TFO
2011/3, par. 3.4 and J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007,
chapter 8.
405
E.J.W. Heithuis, Zonder aanziens des (rechts)persoons. De Wet VPB 2007: De
ondernemingswinstbelasting van de 21ste eeuw, Deventer: Kluwer 2005, p. 54.
406
and J. Mol-Verver, De ondernemingswinstbelasting, Den Haag: Sdu Uitgevers 2007, chapter
8.2.4.2.
Fairness and taxation of different types of income
126
approach of the BPT. The personal entrepreneurs have now namely an independent tax
liability which makes it possible to provide employment contracts between the
entrepreneurs and their enterprises. So based on this fiction, it would be possible for all
enterprises under the BPT, regardless the legal form, to have an employment contract. The
consequence is thus that the employment costs of the personal entrepreneurs can now also
be deducted from the taxable profits income.
The other option is to equalize the position of the shareholders with the entrepreneurs by
abolishing the customary wage under the BPT. In my opinion, realized income received by
taxpayers should stay the basis as only such a real basis can show the actual ability to pay
of the taxpayers. Therefore fictions in tax law that are used for reasons as simplicity and
effectiveness must be used as little as possible as they do not reflect the real ability to pay;
the latter forms the starting point of our tax system. From this point of view, the customary
wage rules should be abolished and the actual realized employment income should be the
basis, just like the “normal” employees. The total tax burden of the employees and the
entrepreneurs/shareholders can be indeed brought to a similar level by increasing the
additional PIT-rate on the latter group.
Besides this, the customary wage rule has been introduced for anti avoidance purposes with
respect to the wealth tax.407 The wealth tax has been abolished in 2001, so this argument
may not be valid anymore. Another argument on which the customary wage regulation has
been based on, is the possible abuse of income-depended schemes.408 Van Dijck states that
the cause of this issue is not based on the tax legislation, but on the interaction between
the tax legislation and non-tax legislation. He proposes to connect the income-depended
regulations to the total income from all of the boxes with a limited application of such a rule
for only real wage manipulation tax behavior.409 The reasonable fear of a system without a
customary wage is indeed that shareholders will retain profits in order to avoid the
additional levy at PIT-level. But there may be other solutions to discourage this behavior.
For example, Stevens proposed to change the customary wage rule into an option rule,
whereby this rule will not be applied if as least a certain part of the profits are distributed as
407
G.W.B. van Westen, Cursus Belastingrecht. Loonbelasting, Deventer: Kluwer 2013, p. 110.
408
See Kamerstukken II, 1996/97, 24 761, no. 7, p. 51 and more recently, Notition Tax Position of
the director main shareholder attached to the letter of the State Secretary of Finance, 29 April 2009,
no. DB2009/210U, V-N 2009, 24., par. 3.2.1.
409
J.E.A.M. van Dijck, ‘Gebruikelijk loon’, WFR 2001/1033.
Fairness and taxation of different types of income
127
dividends within a year.410 Such similar rules could be applied under the BPT for anti
avoidance purposes, while the actual employment income should stay the basis in my
opinion. Besides, if taxpayers enjoy lower wages than the deemed customary wage, they
have the burden of proof to make plausible that for similar performed functions lower wages
are applicable. Also for other situations taxpayers may have the burden of proof to show
that lower wages are taken into account. Van Westen therefore argues that these situations
and the burden of proof on the taxpayers lead in practice to difficult and complex
discussions between taxpayers and the tax authorities which may be in detriment of the
taxpayers.411 So there can also be doubts regarding the effectiveness and simplicity of this
fiction. Based on these arguments, in my view, the customary wage regulation should not
be included in the BPT. If work is carried out by the entrepreneurs and shareholders, in both
cases the employment costs should form deductible costs, such as the other employment
costs. For the PIT-levy, the actual employment income should stay the starting point and
thus the customary wage fiction can be abolished as in general the main justifications for its
introduction seems not sustainable anymore and other more proportionate regulations
seems applicable.
6.4
Conclusion
Two solutions have been discussed in this chapter to achieve a more fair tax burden
distribution between taxpayers. A more fair tax treatment of private capital can be achieved
by the introduction of a capital gains tax (CGT) in box 3. A more equal tax treatment of
business income can be accomplished by implementing a legal form neutral business profits
tax (BPT). These proposals have been evaluated on the basis of the benchmarks of ability to
pay and tax and legal form neutrality. It can be concluded that both proposals in general
fulfil the criteria of the benchmarks with some justifiable deviations.
A CGT includes realized income from private capital gains. By abolishing the current capital
yield tax and implementing a CGT in box 3 would have the result that taxpayers in box 3
are taxed for their real actual regular income and private capital gains. In the current
situation, private capital gains are not taxed as such. This solution then, will definitely leads
to a more fair tax burden distribution between the taxpayers, because the CGT in box 3
ensures that also realized private capital gains are included in the tax base which also
improves the ability to pay of the taxpayers. This may also be required in the context of the
410
L.G.M. Stevens, ‘Vereenvoudiging en herstructurering Wet IB 2001’, WFR 2010/744, par. 5.2.
411
G.W.B. van Westen, ‘De fictiefloonregeling moet worden afgeschaft’, NTFR 2006/693.
Fairness and taxation of different types of income
128
discussion of the growing economic inequality in societies with the call to tax private capital
to bring it more in line with the taxation of labour income. Moreover, many other EUCOTAX
countries levy such a CGT. So, by taking into account the ability to pay, the CGT does also
improve the conformity with the equality principle. Indeed, taxpayers with an equal income
should pay the same amount of taxes. This equal income does now include income from
private capital gains as the really increase and decrease the ability to pay of the taxpayers.
In the context of neutrality, the tax base of the different types of income in the current box
system would be the same now: realized actual income from the different sources including
private capital gains. However, these different types of income can be treated in a certain
different way based on their specific characteristics. These deviations should be reasonably
justified, and be limited as much as possible based on the equality principle. The complexity
of the inflation adjustment of private capital, the lock-in effect and the aim to encourage
savings and investments for economic purposes do therefore justify in my opinion to
provide certain exemptions in the tax base and lower (progressive) tax rates, just like in the
other EUCOTAX tax regimes. The CGT will bring the current box system conceptually more
in line with a fair tax burden distribution as it will show the real ability to pay of the
taxpayers, which is also reflected in private capital income.
As in my opinion business profits do not differ in economic way as they have the same
nature and characteristics, business profits have to be treated the same regardless the legal
form. Therefore the legal form neutral BPT, whereby all enterprises (both sole
proprietorships and corporations) are subject to a separated BPT with a (low) proportional
tax rate, is the appropriate option. The lower proportional rate is justified because of the
several functions of business profits, such as the reservation and investment function. An
additional PIT is levied when profits are distributed or withdrawn by the
shareholders/entrepreneurs. At this level, they do not differ from the other taxpayers with
received income, such as the employees. The transparency of the current enterprises under
the PITA shall be declined. Within the BPT, the entrepreneurs keep the freedom for carrying
out their business in the legal form that is the most efficient one. The employment costs of
the entrepreneurs and shareholders form deductible costs of the taxable business profits,
but the current customary wage regulations should be abolished. They will be taxed based
on their actual received wages, which reflects their real ability to pay, just like the normal
employees. Within the BPT, all business profits will be taxed at the same way regardless the
legal form. By equalization of the entrepreneurs in box 1 and the shareholders in box 2, the
current unjustified different taxation of the capital and labour elements of the business
Fairness and taxation of different types of income
129
profits will be eliminated and the influence of taxation on the most economic efficient legal
form decision will be decreased. However, it should be note that such a BPT is not used on
an international level; all of the other EUCOTAX countries do distinguish between business
profits under the PIT-system and the combination of the CIT/PIT-system for shareholders
and corporations. Further study is being and should be conducted to the international
context of the BPT.
Generally, the following may be concluded regarding the total overview of the taxation of
different types of income in the box system, with the implementation of the CGT in box 3
and the legal form neutral BPT. The enterprises in box 1 will be switched to the separated
BPT (similar to the current CIT-system). The current business profit rules in box 1 can be
therefore eliminated and transferred to the BPT. Box 1 will still be used for the taxation of
the other types of income, such as the income from work for employees with a maximum 52%
progressive tax rate. Box 2 will be considered as an additional levy of the BPT. As the
proportional tax rate of the BPT may be established similarly to the current CIT-rates, the
additional levy in box 2 should be increased a bit for the total tax burden of the PIT/BPT to
stay in balance with the box 1-rate of 52%. This because the current combined tax burden
in box 2 is now 43,75%. Box 3 will include a CGT instead of the capital yield tax. So, the
proposals of the CGT and the BPT ensure a more neutral personal income tax system, as
the starting point for taxation remains the ability to pay of the taxpayers based on all
realized income. But the different characteristics of the different types of income can justify
deviation and favorable treatments, both of which should stay within reasonable levels. The
box 1 and box 2 rates can be brought to a more or less equal level, with the deviated 30%rate of box 3 being due to the nature of private capital gains, such as the inflation element
and the lock-in effect.
Fairness and taxation of different types of income
130
Chapter 7 Conclusion
Tax systems distinguish between different types of income including different tax rates and
taxable income bases for individuals. Whereas favorable and lower taxation is provided for
private capital gains, employment income is in most cases subject to higher progressive tax
rates. Taking into account the worldwide discussion on the growing economic inequality in
societies and the related role of taxes on capital and labour, the importance of fairness in
taxation becomes increasingly apparent. There is a global aim to reform the capitalist
system. This is reflected in the Dutch national and political level, here too there is a
discussion going on whether to decrease the tax burden on employment income and to
increase taxes on capital. In the same approach, the Dutch government created a
Committee (Committee van Dijkhuizen) to investigate possibilities to improve the current
system in order to create a simple and solid tax system.
Another differentiation made in the Dutch tax system is in tax treatment of business income,
as the chosen legal form is decisive which tax regime applies. Whereas enterprises under
the PIT-system are subject to progressive tax rates, legal entities are subject to a lower
proportional CIT-rate, and are only subject to the PIT-regime if profits are distributed to
their shareholders. The Dutch legislator has already been made aware of the essence of a
certain neutrality in the taxation of business income, judging from the efforts to achieve a
“global balance” between the two tax regimes. However, there are still fiscal differences
which may play a decisive role for the choice of legal form. The result may be that this
choice will not be the most economically efficient one. This case again comes back to the
question about fairness of taxation.
These issues and actual discussions in politics and society illustrate the importance of this
subject with respect to an equal and fair tax system. This thesis therefore examined to what
extend the Dutch tax system is fair with respect to these tax treatments of different types
of income (with a focus on capital income) and business income and how the Dutch tax
system can be reformed in order to achieve a fairer tax system. The research question of
this thesis is as followed:
To what extend is the Dutch tax burden distribution amongst taxpayers with
respect to the taxation of different types of income in the personal income tax
system and with respect to the different tax treatment of business income based
on the underlying principles of fairness, and how can the Dutch tax system be
improved in order to achieve a fairer tax burden distribution?
Fairness and taxation of different types of income
131
In order to answer the research question, the research question has been subdivided into
several sub-questions. The conclusions that can be drawn from the sub-questions are as
follows, and in this regard, I would like to note that the conclusions from the analysis of the
other EUCOTAX countries’ will be mentioned in the sub-question about the current Dutch
tax system.
What should be the underlying principles of fairness of taxation of different types
of income in an income tax system?
Fairness in taxation includes several concepts, such as juridical and economic concepts.
The fundamental principle of equality is essential in order to achieve fair tax system. The
equality principle means that equal cases should be treated equally and unequal cases
unequally in proportion of their inequality. For the purpose of this thesis, two fairness
principles of ability to pay and tax legal form neutrality have been chosen to serve as
benchmarks. Both principles can be considered as derivations of the equality principle and
will be used for the evaluation of the current Dutch income tax system and for achieving a
fairer tax burden distribution between the taxpayers.
Ability to pay
I have chosen for the ability to pay principle with respect to the taxation of different types
of income in the personal income tax, as ability to pay is the most appropriate indicator to
compare the (economic) positions of the taxpayers in the context of equal tax treatments
and (justified) unequal treatments, in order to achieve a fairer tax burden distribution
between the taxpayers. It means that taxes must be levied in accordance with the ability to
pay of the taxpayers. I analyzed three elements which are in my opinion relevant for
making the ability to pay principle more concrete. The three elements are: the notion of
taxable income, fictions in tax law and the applicable tax rate. The starting point of taxation
of different types of income is the notion of “taxable income”, therefore it should be
determined what this notion should include. This is essential in order to distribute the tax
burden equally and in accordance with ability to pay. In my opinion, realized net income
from all forms of income groups must be taken into account in the taxable income base,
such as wages, dividends and capital gains. Therefore, fictions in tax law that leads to
fictitious income may not be used. These fictions should not prevail over the ability to pay.
Only real received income reflects the ability to pay of the taxpayers, and even if fictions
may be used for simplicity reasons, such fictions do infringe the principles of ability to pay
and equality: as taxpayers in unequal circumstances are deemed to have the same
Fairness and taxation of different types of income
132
economic position and therefore paying the same amount of taxes. So in my view, the
starting point of the taxation of different types of income should stay the same. All realized
income, as it reflects the ability to pay of the taxpayers and only then can be compared with
the economic positions of the other taxpayers in the light of an (un)equal tax treatment.
However, differentiations in tax treatments can be justified taking into account the specific
nature and characteristics of income groups. But in my opinion, these deviations in tax
treatment should be expressed as much as possible in the applicable tax rate under the
condition that the differences stay reasonable and are not from a to high extent. So, as I do
not only argue for a progressive rate or proportional rate, it is in my view important that the
differences in tax rates between the income groups should not be too high.
Legal form neutrality
In the context of taxation of business income, the economic principle of legal form neutrality
has served as benchmark in this thesis. In the concept of economic efficiency, tax neutrality
is relevant as taxation should distort the economic decisions of taxpayers as little as
possible. As we know, taxation is also used as instrument to control certain behavior of
taxpayers. The result is that some behavior is treated more favorable than the others. In a
more juridical dimension, tax neutrality requires in this case that using taxation for
achieving certain policy goals should not lead to disproportionate consequences. Such more
favorable tax treatments must stay in a reasonable balance with the other tax treatments of
income. Legal form neutrality as a dimension from tax neutrality requires that business
income must be treated equally regardless of the chosen legal form of the business. In my
view, the nature of the business profits is in economic way the same and should be treated
the same, regardless the chosen legal form of a sole proprietor, partnership or corporation.
Next to the private consumption function, business profits also include the investment and
reservation function. The legal form does not alter this fact. Therefore all business profits
should be subject to the same tax regime. Taxation should not be decisive at the choice for
the legal form, as it may not be the most economic efficient choice.
Static legal form neutrality implies therefore that the tax burden of the different available
legal forms for a certain type of business does not differ as such, with the aim that the
choice of legal form is not purely based on fiscal considerations.
To what extend is the current Dutch income tax system based on the underlying
principles of fairness with respect to the taxation of different types of income in
the personal income tax and with respect to the tax treatment of business income?
Fairness and taxation of different types of income
133
Taxation of different types of income in the personal income tax
The current Dutch personal income tax system with respect to the taxation of different
types of income has been assessed to the benchmarks of ability to pay and tax neutrality
formulated under the normative framework. Following from this evaluation, it can be
concluded that the current Dutch personal income tax does include unfair elements of
taxation with respect to the principles of ability to pay and tax neutrality. The current box
system taxes income from work and home in box 1 with progressive tax rates with a
maximum of 52%. Box 2 includes regular income and capital gains from substantial interest
taxed at a proportional rate of 25% by taking into account the levied corporate tax rates of
20% and 25%. It is box 3 that forms the main cause of the infringements of the system
with the principles of fairness. Box 3 includes income from savings and investments. The
yield on savings and investments is set on 4%. So, taxpayers are deemed to have yearly 4%
gain on their private capital. On this 4% yield, a proportional tax rate of 30% applies, which
means an effective tax rate of 1,2%. So, this capital yield tax does not take into account
private capital gains as such and the yield is fixed set on 4%, which are both not in line with
the principle of ability to pay. Such a fiction of a fixed 4%-yield does definitely infringe the
ability to pay principle. Taxpayers with a lower actual income are deemed to pay for 4%
which can lead to a tax of 100%. Besides this, they are not allowed to prove contraevidence and the tax base cannot be negative; loss compensation is not possible. On the
other hand, they with higher capital income just pay for 4%. The result is that it is also not
in line with the equality principle: taxpayers in actual different positions are treated the
same. What is conceptually wrong in box 3 is that private capital gains are not taxed as
such. As private capital gains do definitely improve the ability to pay of the taxpayers, they
must be included in the taxable income base. It may be justified to provide a more
favorable tax treatment of capital income with regard to other types of income. All of the
other EUCOTAX countries provide a more favorable tax treatment (via rates or tax base) of
capital as well (with the exception of Hungary which applies one proportional tax rate of
16%, but none of them apply such a fiction of the capital yield tax. Most of these EUCOTAX
countries include private capital gains in the tax base in one way or another.
With respect to tax neutrality of the taxation of different types of income in the box system,
the following can be concluded. The aim of the legislator to create more neutrality within
box 3 led to the case that there is no neutrality between box 3 and the other boxes. The
box system may not be neutral towards the tax bases in the boxes. Whereas in box 1 and
box 2 real income is included in the tax base, box 3 set a fixed income of 4%. While in box
Fairness and taxation of different types of income
134
1 and box 2 loss compensation is allowed, in box 3 it is not even possible to have a negative
tax base. The same case applies on the applicable tax rates. Box 1 has a progressive tax
rate, box 2 a proportional rate and box 3 a degressive one. So, it can be said that there is
no neutrality between the boxes as there are in my view unreasonable excessive
differentiations in the tax base and tax rates. There is a high differentiation in the tax rate
between box 1 (maximum 52%) and box 2 (25%) on the one hand, and the effective tax
rate of 1,2% in box 3.
It can be said that the main unfair element in the Dutch personal income tax is caused by
the capital yield tax in box 3. This favorable tax treatment of capital income compared with
the other boxes is assessed on the basis of the three elements of ability to pay. It can be
concluded that the capital yield tax is conceptually not in line with the ability to pay as
instead of real income is taxed, fictitious income of 4%-yield is deemed and because of the
lack of taxation of private capital gains as such. Furthermore, the excessive difference in tax
rates with the other boxes cannot be justified in my opinion, taking into account the
principles of equality and neutrality. The unfair capital yield tax may be also expressed by a
recently made announcement. The Dutch Association for Taxpayers and a Dutch tax firm
will bring a test case before the Dutch court as the capital yield tax would be unreasonably
high and as it infringes the principles of fairness.
Tax treatment of business income
By assessing the current Dutch tax treatment of business income on the basis of the
benchmark of legal form neutrality, it may be concluded that there is no legal form
neutrality in the Dutch tax system. The tax treatment of income from business profits
depends on the legal form because two tax regimes exist next to each other. Business
profits of sole proprietorships and transparent partnerships are taxed at the level of the
entrepreneurs in box 1 of the PIT to progressive tax rates of 52%. Business profits of
corporations (legal entities) are first taxed in the CIT (tax rates of 20% and 25%) and
additionally on the level of the shareholders in box 2 with PIT (tax rate of 25%) if the profits
are distributed. As the legislator has also been aware of the aim of legal form neutrality, he
attempted to reach a certain level of legal form neutrality in the sense of a “global balance”:
a certain balance between the tax regimes for one the one hand the enterprises in box 1
and on the other hand the corporations under the CIT. The result has been the current
system, in which the effective tax rates between the box 1-entrpreneurs on the one hand,
and on the other hand the shareholders/director main shareholders are brought to a more
Fairness and taxation of different types of income
135
or less similar level by decreasing the box 2-rate, and the introduction of the entrepreneur
deductions for the box 1- entrepreneurs. The maximum effective tax rate of business
income in box 1 is 44,72% and the combined CIT/box 2-PIT rate is maximum 43,75%.
However, there are still differences in tax treatment, such as in the determination of the
taxable income base. One of the main differences is that the employment costs of the
substantial shareholders and the DMS form deductible costs from the tax base of the
corporations, but on the other hand these wages are taxed in box 1 to the progressive rates
instead of the lower box 2-rate. Besides, a fictive customary wage regulation applies, which
means that the substantial shareholder as employee must earn an usual salary.
Entrepreneurs in box 1 cannot deduct employment costs because of the lack of an
employment relationship. So for the entrepreneurs in box 1, there is no distinction made
between the capital and labour element of the business profits. But on the other hand, the
SME-exemption applies on their business profits (so including the labour element), which
effectively decreases the tax burden in box 1. This difference and also other differentiations
in tax treatment may still affect the choice of legal form of business, with the consequence
that this choice may not be the most economic efficient choice. It should be noted that all of
the other EUCOTAX countries provide a similar tax treatment of business income. All of the
EUCOTAX system distinguishes between a PIT-regime for sole proprietors and a combined
CIT/PIT-regime for business profits of legal entities as well and therefore none of them
provide a legal form neutral tax treatment of business income. So even if the legislator
aimed to a greater balance of the different tax treatments of business income, it can be said
that there still are differences which may form decisive fiscal considerations for the choice of
the legal form of business.
How could the Dutch income tax system be improved in order to achieve a more
fair tax burden distribution between taxpayers in the personal income tax system
with respect to the taxation of different types of income and the tax treatment of
business income?
Taxation of different types of income in the personal income tax
As it has already been concluded, the box system in the PIT-system for individuals includes
unfair tax treatment, which is mainly caused by the capital yield tax in box 3 that infringes
the principles of ability to pay, equality and neutrality. In my opinion, it is therefore not
necessary to reform the whole box system in order to achieve a more fair tax burden
Fairness and taxation of different types of income
136
distribution. Differences in tax rates for different types of income can be justified on
grounds related to the nature of the income groups. Taking into account the actual
discussion about the growing inequality in societies, certain lower tax rates for employment
income could be further discussed. But even so, there should be a certain balance of the
rates of the three boxes without too many deviations. Therefore the tax regime of box 2 can
be justified because it takes into account the double taxation of the income and brings a
similar tax burden with business profits in box 1 and box 2. As the current capital yield tax
in box 3 is the main unfair element of the personal income tax, the proposal of abolishing
the capital yield tax and introducing a capital gains tax has been evaluated based on the
formulated benchmarks. In this context, the Committee van Dijkhuizen proposed to
maintain the capital yield tax but to bring the fictitious yield rate more in line with the
nominal interest on savings accounts of the preceding five years. In my view, this proposal
should not be accepted as the maintained fiction will still include the unfair elements as
mentioned above.
A capital gains tax in box 3 will solve the issue that private capital gains as such now are
not taxed, but they do improve (or worsen) the economic position of the taxpayer. So,
introducing a CGT in box 3 and abolishing the capital yield tax will have the result that
taxpayers are taxed for their real actual regular income and private capital gains. This
solution will result in a fairer tax burden distribution between taxpayers as box 3 ensures
that realized income from private capital gains are included in the tax base as they also
reflect the ability to pay of the taxpayers. This is also required in the context of an equal tax
treatment. Besides, in the light of neutrality, the tax base of the different types of income in
the three boxes will now be the same; actual income from the different sources including
private capital gains. When it comes to the applicable tax rates, it is already said that the
tax rates of box 1 and box 2 (considering the already levied CIT) are quite similar. In my
view, deviations in tax treatment can be made based on the different nature and
characteristics of the income type. Preferably on the applicable tax rate, but the
characteristics of capital income and promoting savings and investments can also justify
certain exemptions in the tax base. As many countries levy such a capital gain tax, they all
provide a favorable tax treatment on it caused by reasons as complex inflation adjustments,
the lock-in effect, encouraging saving and investments. The favorable tax treatment in most
of the countries is expressed by providing a lower tax rate or lower progressive rates, in
general between around 20%-30%. In my opinion therefore, the current proportional tax
rate of 30% can be maintained. So the CGT will bring the current box system conceptually
Fairness and taxation of different types of income
137
in line with a fairer tax burden distribution as it includes realized private capital gains that
should be reflected in the income tax base of the taxpayers as well.
Tax treatment of business income
As it has been already said, in my opinion business profits do not differ in economic way as
they have the same aim and nature. Therefore they should be treated the same regardless
the legal form. By assessing the current Dutch tax system, it can be concluded that the
Dutch tax system does not apply the same tax regime on all business profits. This is
because business profits of sole proprietorships are subject to progressive taxation,
corporations are subject to a separated lower CIT-rate. By taking into account that the
shareholders of the latter case are also taxed with PIT, not only different tax rates apply but
also differences in the determination of the tax base exist, which may to be decisive at the
choice of legal form and therefore may not lead to the economic most efficient decisions. In
my opinion, the progressive taxation on sole proprietorships is the problematic issue on this
point, as the progression does not reflect the several functions of business income. Although
an improvement is being suggested by the legislator in proposing a separate fourth box for
business profits in the current box 1, a legal form neutral business profits tax seems to be
the most appropriate solution. Therefore the proposal of a legal form neutral business
profits tax has been evaluated on the benchmark of tax neutrality and legal form neutrality.
In the evaluated legal form neutral BPT, a BPT in general means that all enterprises are
subject to a separated BPT with a (lower) proportional tax rate. The reservation and
investment function of business profits do justify this lower rate. An additional PIT is levied
when profits are distributed or withdrawn by the shareholders/entrepreneurs. Only at this
level they can be compared with other taxpayers such as employees, as they can use the
distributed profits for private purposes. In the BPT, the employment costs of both the
shareholders and entrepreneurs are taken into account for the taxable base of the business
profits. But in my opinion, the customary wage regulation should be abolished. Also, the
shareholders/entrepreneurs should be taxed for their actual received wages, just like the
normal employees. Such a customary wage regulation should be only used for mentioned
abuse behavior. Besides, it should be considered that none of the other EUCOTAX countries
do have such a CGT. Therefore, further study is required for the international context of the
CGT. However on national level, the introduction of the CGT will result in all business profits,
including the capital and labour elements, being taxed in the same way regardless the legal
form.
Fairness and taxation of different types of income
138
Overall overview
For the general overview, the box system with the implementation of the CGT and the BPT
will lead to a fairer tax burden distribution due to their accordance with the principles of
equality, ability to pay and neutrality. In this tax system, box 1 in general includes income
from work and home with progressive tax rates with a maximum of 52%. The enterprises in
box 1 will be switched to the (legal form neutral) BPT, and in this way their transparency
disappears and they will get separated tax liability, much like corporations now do. So the
current business profits regulation in box 1 can be transferred to the BPT as well, because
now it is the same that profits of corporations and sole proprietorships are in general
subject to the same determination rules. Besides, the entrepreneur deductions such as the
SME-exemption can be abolished; the current box 1-profits will now be subject to the lower
proportional tax rate of the BPT. Box 2 will be considered as an additional levy of the BPT at
the level of the shareholders and entrepreneurs, and therefore the box 1-entrepreneurs
must be transferred to box 2. If we consider that the current CIT may function as the BPT,
the current BPT-rates can stay at 20% and 25% if it is desirable to take into account
smaller enterprises as well. To keep the balance of the total tax burden of employees in box
1 (maximum 52%) similar with the box 2-levy, the box 2-rate may increased slightly, as the
current combined tax burden in box 2 is now at 43,75%. But even without doing so, the
difference may be considered as not too high or as justifiable. Box 3 will include a CGT
whereby both regular income and private capital gains are subject to a tax rate of 30%.
Because of the nature and the complexity of the determination of real income from capital
(for example because of the inflation adjustments), the promotion of savings and
investments for the national growth and the lock-in effect, the lower 30%-rate can be
justified, and limited exemptions can be provided for. These experiences are also apparent
in the other EUCOTAX countries.
Fairness and taxation of different types of income
139
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Appendix A – Overview of the personal income tax systems of the EUCOTAX
countries
The chart below illustrates the highlights of the personal income tax systems of the
participating EUCOTAX countries. As in every country, capital income is treated differently
than the other types of income (such as labour income), the chart provides an overview of
the type of the income tax system, the income tax rates and the deviating treatment of
capital income. It is a general overview, which means that specific rules, exemptions and
rates are not included.
Personal income tax
Type
Ordinary income
Capital income
Austria
Dual income tax, but
Comprehensive tax
Final capital gains tax
subject to debate.
base, progressive tax
of 25%. Taxpayers
Used to have a
rates of 0%-50%
can opt out of this tax
comprehensive tax
and choose to include
base, but have
it in the regular
introduced final capital
comprehensive tax
gains tax on capital
base (only profitable
gains
for taxpayers with low
income)
Belgium
Overall income tax
Progressive tax rates
Withholding tax of
of 25%-50%
25% on income from
movable assets with
many exemptions and
non-business related
capital gains are
exempt unless the
capital gains are
related to a
speculative regulation
France
Overall income tax
Progressive tax rates
Progressive rates of
of 0%-45%
0%-45%, but
favorable tax regimes
apply on dividends,
capital gains on
movable properties
and capital gains on
immovable properties
Fairness and taxation of different types of income
Germany
Dual income tax
153
Progressive tax rates
Final withholding tax
of 0%-45%
of 25% plus a 5,5%
solidarity surcharge
Hungary
Overall income tax
Flat rate of 16% on all
Flat rate of 16% on all
types of income
types of income, but
one reduced rate of
10% applies on capital
gains on securities
hold on a special
“long-term” account
Italy
Overall income tax
Progressive tax rates
Special tax regimes
of 23%-43%
apply on income from
capital; a withholding
of 20% applies on
qualifying dividends
and capital gains
The Netherlands
Box system
Box 1 includes income
A capital yield tax
from work and home
applies on income
taxed at progressive
from capital in box 3
tax rates of 5,10%-
in which return of
52%, box 2 includes
capital is set on a
income from
yearly 4% basis, on
substantial interest
which a 30%-rate
taxed at a
applies (an effective
proportional rate of
tax rate of 1,2%).
25% and box 3
Real earned capital
includes income from
income is thus not
savings and
taxed and not relevant
investments; set on a
for the taxation and
4% yield on which a
no separated private
proportional 30%-tax
capital gains tax is
rate applies (= an
levied.
effective tax rate of
1,2%)
Poland
Overall income tax;
Progressive tax rates
Income from capital is
semi dual system
of 18%-32%
taxed at a flat rate of
19%
Spain
Dual income tax
Progressive tax rates
Progressive tax rates
of 24,75%-56%
of 21%-27%
Fairness and taxation of different types of income
Sweden
Switzerland
Dual income tax
Overall income tax
154
Progressive tax rates
Proportional tax rate
of 31%-57%
of 30% (or 25%)
The progressive tax
Special provisions
rates on federal level
apply on certain types
are up to11,5%, plus
of income including a
the income tax rates
tax exemption on
on the level of the
capital gains on
cantons and
movable assets
communes, which
vary from each other
United States
Overall income tax
The progressive tax
Favorable progressive
rates of 10%-39,6%
tax rates apply up to
20% for long-term
qualifying capital gains
and dividends
Fairness and taxation of different types of income
155
Appendix B – Overview of the tax treatment of business income in the EUCOTAX
countries
In this appendix a general overview is included of the different tax rates applied on business
income derived from sole proprietorships in the personal income tax and the corporations
subject to corporate income tax. In addition, it gives a brief overview of how the distributed
(qualifying) dividends at shareholder level are treated in the personal income tax (whether a
reduced tax rate applies or a reduction is provided).
Taxation of business
The progressive
Corporate
Treatment of the
income
personal income tax
income tax
distributed
rate on business
rate
dividends in the
income from sole
personal income
proprietorship
tax
Austria
0%-50%
25%
Tax rate of 25%
Belgium
25%-50%
33% (SME’s are
Tax rate of 25%
subject to lower
rates of 24,25%34,50%)
France
Germany
0%-45%
0%-45%
33,33% (SME’s
Only 60% of the
may benefit from
amount of the dividend
a lower rate)
is included
15% plus the
Only 60% of the
municipal trade
amount of the dividend
tax with the
is included
highest total
corporate tax rate
of 33%
Hungary
16% (flat rate)
10% and 19%
Tax rate of 16%
Italy
23%-43%
27,5%
Only 49,72% of the
amount of the dividend
is included
The Netherlands
5,10%-52%
20% and 25%
Tax rate of 25%
Poland
18-32%
19%
Tax rate of 19%
Spain
24,75%-56%
30% (SME’s are
Tax rate up to 27%
Fairness and taxation of different types of income
156
subject to lower
rates of 20% and
25%)
Sweden
31%-57%
22%
Tax rate of 30% (of
25%)
Switzerland
On federal level up to
13%-28%
11,5% plus income tax
Tax rate reduced by
fixed percentages
rates on the cantons and
communes level
United States
10%-39,6%
15%-35%
Tax rate of 20%