Capital growth tax potentially detrimental for start-ups

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EY Netherlands

14 Jul 2023
Subject Tax updates
Categories Tax

Box 3 redesign and its impact on start-ups

The Cabinet wants to consider the impact on employees and investors with shares in start-ups.

The State Secretary for Finance recently answered questions put by the House of Representatives about the redesign of the investment yield tax in Box 3. The questions were specifically about the impact on those holding shares in start-ups.

Redesign of Box 3

The government eventually wants to replace the current Box 3 levy with a new scheme in which the tax levied is more in line with the actual return on assets. Various systems are being investigated, such as:

  • A capital growth tax in which the annual tax is levied on regular income from assets (such as interest, dividends and rent) and unrealised capital gains (such as share price results and property values)
  • A capital gains tax in which annual tax is also levied on the regular income from assets but where the capital gains are only considered when assets are sold

The government has yet to make a decision on what the final set up of the new system will be. 

Start-ups

To retain employees start-ups often give them share option rights. In the first instance, those share option rights are handled in the context of salary. The question that then arises is when is there salary that is subject to payroll tax? After the share option rights have been processed in the context of salary, the acquired shares form part of the employee’s Box 3 assets. 

Employees and investors can also directly buy shares in a start-up. With a shareholding of less than 5% the shares become part of the Box 3 assets. 

Capital growth tax

The State Secretary has pointed out that with a capital growth tax, no tax will be levied in a given year if the shares in a start-up neither generate any dividend in that year, nor increase in value.

A decrease in the value of shares leads to negative income that can be offset against other positive income in Box 3 that year, or Box 3 income from other years. However, with an increase in the value of the shares, a capital growth tax results in taxation on the increase in value while often no dividend is yet paid to the shareholders with which to pay the tax. 

The State Secretary notes that this could be perceived as particularly onerous by employees and angel investors who have only bought into one or a few start-ups. When investing through an investment fund, there will generally be a diverse portfolio of investments in start-ups. The increase in value of an outperformer can thereby be offset against any drop in the value of stakes held in other start-ups. Individuals investing through such transparent funds are thus expected to find a capital growth tax in Box 3 less onerous, the State Secretary believes. 

Capital gains tax

With a capital gains tax, tax is levied on the increase in value at the time of sale. The levy is thus in line with the moment of disposal of the assets. For the taxpayer this has the advantage that the tax can be paid from the proceeds of the sale.

Further redesign of Box 3

The State Secretary has indicated that the government is aware that the impact of a capital growth tax on the employees of start-ups and business angels could be detrimental. This will also be taken into account in the further redesign of Box 3. The State Secretary also intends to include its impact on the Netherlands as an attractive country in which to establish a start-up in its investigation of how to design Box 3.