Recently AIJA organized a conference to discuss the experience of lawyers with trusts. The title says it all: “Trusts and Continental law: is this marriage possible?”. The figure of the trust is not treated the same in every jurisdiction, which can cause serious legal clashes. These clashes in practice appear for instance in the form of disputes on the execution of duties by the trustee, issues in the field of succession, disputes on interpretation of duties under CRS, tax planning opportunities and issues, tax disputes and criminal investigations. In the Netherlands the trust stars in many tax disputes which sometimes evolves into a criminal investigation. What do you need to know about the Dutch tax regime?
In the past the tax department has regularly tried to tax Dutch tax payers for the assets which were placed in a trust. These cases developed jurisprudence which basically comes down to the question whether the settlor of a trust could factually use the assets which were placed in the trust as his own. If the answer is yes, than taxation under income tax laws is possible. If the answer is no, then taxation of those assets it is not possible. In that case only the gift of the settlor to the trust would be taxed. Of course, this was no guarantee that the tax authorities would not start a discussion on the qualification of the assets in the trust.
As of 2010 a new regime was adopted which led to the taxation under income tax laws of so-called “separate private wealth”. The idea is that figures in which private wealth is separated from the wealth of the owner, are deemed to remain part of the property of the owner. In other words, a figure like the trust is transparent under this regime and the settlor will be taxed accordingly. The regime does not come to taxation of the settlor if the separate private wealth was taxed in the country of establishment. According to the Dutch regime this only applies if the taxes that have been paid are reasonable. There are substantial differences between the jurisdictions in which trusts can be established.
The regime also foresees the passing of a settlor. In that situation the assets will be allocated to the heirs of the settlor following the succession laws. If the heirs however can proof the contrary – meaning that that they do not have a legal enforceable right towards the assets in the trust – then they cannot be taxed. If it is not possible to determine the settlor or the heirs, the beneficiary of the trust will be taxed. This regime can lead to the situation that an heir or beneficiary can be taxed under the income tax law, while he did not actually receive anything from the trust.
The settlor and beneficiaries also have an obligation to report their involvement with a figure which is considered ‘separate private wealth’ in their tax returns. Knowingly not reporting this is a criminal act and can even lead to criminal prosecution. Various case studies also show that the source of the funds in the trust could also be a trigger for money laundering suspicions.
With respect to our experiences in tax disputes, mostly beneficiaries end up in difficult positions if a trust is involved. In practice their discussion with the authorities usually boils down to the question whether or not they were aware of their involvement in a trust. But how do you proof that you did not know something?
It is safe to say that the involvement of a trust, usually leads to mistrust of the authorities in the Netherlands. One of the key-take-aways from the conference is therefor that anyone who is confronted with a trust should ask for advise on all involved local jurisdictions. Even though the settlor of a trust might have determined loved ones as a beneficiary of the assets with nothing but good intentions, this does not guarantee a discussion free life for the beneficiary.
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