The BOR (Business Succession Scheme) concerns a limited group of people, not even a few thousand a year, but a lot of money is involved. People who inherit a business from a family member have an advantage over people who receive an ordinary inheritance: they have to pay much less tax. This also applies to the people who receive a business through a gift, often from a parent who is retiring.
The condition is that the heir continues the business for at least five years. In 2017, the total tax benefit for this group amounted to more than 400 million euros.
That tax advantage is unnecessary and not effective, concludes the Central Planning Bureau (CPB) in an evaluation at the request of the cabinet† The four coalition parties agreed to review this Business Succession Scheme (BOR): can it be improved and can improper use be prevented?
Continuity not at risk
The low tax was once devised to prevent children who inherit and want to continue a business from getting into financial difficulties because they cannot pay the inheritance tax. Not every company has enough liquid assets for this, was the thought. Sometimes the value of the company is in bricks or machines.
That part of the BOR works, the CPB concludes: so little inheritance or gift tax has to be paid that the continuity of companies is not endangered. But this tax advantage is by no means necessary.
The planning office examined all legacies and donations between 2010 and 2017 that made use of this BOR. Suppose: the regular inheritance or gift tax would have applied to those companies. In that case, about three quarters of the inheritances and gifts of companies had sufficient ‘free resources available to pay the tax in full immediately’, writes the CPB. Either from the person who donates the company or from the person who acquires the company.
For the quarter of the inheritances and gifts for which there was not enough money to pay the tax, a payment arrangement can easily be made with the tax authorities. Then the heirs pay the tax spread over years. Officials from the Ministry of Finance have already come to a similar conclusion. The tax exemption is not necessary to ensure the survival of family businesses.
The BOR is therefore not effective, concludes the CPB. The goal – to protect the continuity of companies – is not achieved at the lowest cost. A payment arrangement is much cheaper for the government: the tax revenues go up in that case.
Benefit for the wealthy
The BOR has been criticized for some time by economists such as Bas Jacobs and Koen Caminada. For the same reasons now put forward by the CPB. The arrangement is not necessary. And the tax benefit goes to relatively wealthy households. The CPB also concluded this in the evaluation.
Entrepreneurial wealth is mainly in the hands of the wealthiest households. And “transferring these assets to the next generation increases wealth inequality within that new generation,” writes the CPB.
Only 2.2 percent of the inheritances had a value of more than 5 million euros, but they did receive 36 percent of the tax benefit
CPB director Pieter Hasekamp previously called the BOR in NRC “a spacious facility for the very richest Dutch people, namely those with a family business, to transfer virtually tax-free wealth to the next generation”.
A significant part of the tax benefit of the BOR goes to a small number of large inheritances and gifts. Only 2.2 percent of the inheritances had a value of more than 5 million euros, but they did receive 36 percent of the tax benefit. More than 80 percent of the legacies had a value of less than a million euros.
The tax benefit also applies to people who do not inherit an entire company but a ‘substantial interest’ in a company, at least 5 percent of the shares. It is precisely this wealth that is ‘highly concentrated among the wealthiest households’, the CPB writes. In 2020, 93 percent of business wealth was in the hands of the 10 percent most wealthy households in the Netherlands.
No tax on the first million
Those who meet the conditions for the business succession scheme do not have to pay any tax on the first million. Little above that. To illustrate: someone who simply inherits 2 million euros pays more than 380,000 euros in inheritance tax. Someone who inherits a company with a value of 2 million pays more than 12,500 euros in tax.
The CPB calculated the tax burden on the entire inheritance that children received in the years between 2010 and 2017: without the BOR it was almost 20 percent, with the BOR more than 5 percent.
The Netherlands is certainly not alone with this tax. Other European countries have similar tax advantages when inheriting companies. These are unnecessarily generous and especially beneficial for the highest incomes, the OECD, the club of industrialized countries, concluded earlier. If the cabinet lowers or abolishes the BOR, the CPB does not expect many entrepreneurs to move to neighboring countries.