In this post we will explain how capital gains tax and wealth tax work in The Netherlands.
So let’s address the one that’s easier to cover first.
Capital gains tax in the Netherlands
The capital gains tax in the Netherlands is 0%.
Let’s move on.
Wait, wait… How come!?
What do you mean? Didn’t you know that NL is a tax haven? Well, welcome!
Regardless of how big of a ROI you make, you’ll indeed pay 0% on the profits. It’s that simple.
Wealth tax in The Netherlands
This is where it gets dark.
Many countries aspiring to adopt a variation of a proven-to-fail system aim to punish the “wealthy” and enforce a tax on savings and investments. In my opinion, it is immoral and should be illegal.
In the Netherlands specifically, the net-worth above €30k is taxed.
But what’s even more interesting is how it’s calculated.
Fair warning though: I’ll be casual with my rounding, as I’m more interested in explaining how it works rather than exact numbers.
The way it’s calculated is that the Dutch government assumes a 4% growth / yield from the assets exceeding €30k. This includes cash, investments, bank accounts, cryptocurrencies… Everything!
So, for example, if you have €100k on your bank account, you can keep the first €30k tax free. The government will assume that you made 4% return on the other €70k, amounting to 2800€. And you’ll need to pay 30% of this assumed profits in taxes, which is 840€.
Once again, this is enforced regardless of whether you made 4% ROI, whether you kept the money in checking account, whether you realized any gains, or whether you doubled your money and didn’t realized it.
Again, it’s not this straight forward and it’s a progressive system, but for simplicity, it’s effectively around 1% of the total amount of wealth you owned on 1st of January that fiscal year.
So, it’s not a substitute for capital gains. It’s also not tax on unrealized gains. It’s capital gains regardless of gains.
Long-term consequences
There is one benefit though – it’s simple.
For example, you have €100k, and realized €400k in profits. You’ll pay 0 capital gains. However, the next year you’ll pay ~1% of the amount you had on 01.01.2020. Punished €5k for having money.
But wait, isn’t this a good thing? If capital gains was taxed at a 20-30% as in other countries, you’d have paid more.
Yes, this is a good thing – the example I gave. And if you lived in the Netherlands in that particular year it would be great.
However, here’s a reality check: you won’t make such gains every year.
Let’s say next year you achieved 0% return by saving your money using the dangerously low European interest rates. Guess how much tax you’ll pay?
Exactly. Punished €5k for having money again.
For the record, versus the 0€ you would’ve paid if the capital gains rate was 30%.
Again, the real problem are not the numbers for the year in which you’d be getting lucky. The problem is what happens on the long run.
If you earn 0.01% per year (which is higher than the current risk-free rate) and pay 1% in taxes, guess what’s the ultimate value of your portfolio.
Simulate it. How does it end?
Long-term investors
I’d like to give another example: the long-term investor.
Let’s say someone accumulates money in a diversified portfolio over the years.
Even if the capital gains tax was at an inhumane rate of 50% (not MonkWealth approved, but fine for an example’s sake) and there was no wealth tax, the investor would pay nothing in taxes because he’s not realizing any gains.
On the other hand, as a long-term investor living in the Netherlands, you’re giving away 1% of your wealth regardless of what happens with it every year.
And you’re left forced to take risks, potentially taking food away from your kids’ tables, and hold your guard up indefinitely because you know the socialists are notorious for punishing discipline and ambition.
If this wasn’t crazy enough, just a reminder: this is a tax you pay on top of your already taxed salary, independently of all other forms of taxes piled up, and while paying VAT using the same money… And the people somehow, over time, learned to accept and live with this.
How the government shapes the society
We described the Box 3 tax and how it affects the lives of disciplined people. Basically, have less then €30k in savings or pay continuous fines otherwise.
However, this threshold can be increased if you’re having a tax partner, setting the tax-free limit to to €60k.
Noted. What are the other exceptions of the rule?
Well, the portion of your net-worth allocated in your primary residence is wealth-tax free. So, not a relief on real estate investments or property taxes, but on the equity in your home.
Okay, but let’s digress for a second.
Gift tax is 10% above a certain threshold. However, if you’re given any amount for the purpose of buying your primary residence, then it’s gift-tax free.
And you have the chance to take advantage of this once… In life. And I’m not really against this last example as I’m all about being self-sufficient and self-made.
But why did I say all this then?
Well, back to the topic of a government shaping the society, isn’t it obvious that it’s all designed to breed obedient society by screaming “wife up, don’t save, buy a house… Work (for us), die!”?
The scariest thing, this type of covert control is not exclusive to any specific government. I use the example of my country of residence, but there are way more oppressive regimes throughout the world. The point that can’t be denied is that government intervention is an obstacle to efficiency and often make the free will limited.
Closing thoughts
The Netherlands is a quality place to spend a life in, even with all taxes priced in. I wasn’t trying to present parts of the fiscal policy in a negative way, but just stating the facts. You can find the same information on the website of the tax authorities. You can also find that they robbed many expats off of €30-40k by retroactively shortening the tax benefits they were promised and granted upon coming.
Anyway…
For most people, the pros for sure outweigh the cons… But this one con… Pun intended, of course… The con of wealth tax is something many people having difficulties closing their eyes on.
What do you think about it?
And for people having first hand experience with box 3 taxes… How do you feel when paying it?
Do you consider yourself free?
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Probably a lot of the differences across countries can be explained by their tax structures.
In Germany we have flat capital gains of 26.xx% (waived if you sell property after owning for at least 10 years). The amount you’re taxed in the end is more or less similar I suppose to the Netherlands if you invest money (haven’t checked any statistics though).
However, the wealth tax strikes me as potentially better for the general population, as it incentivizes investing. Cash loses some % every year due to inflation, but this is far less perceptible than you paying some % to the government. So you’d rather invest that cash. It could be one reason why home ownership in Germany is around the lowest in EU, and why Germans are well known to stick to savings accounts, even though they realistically return negatively since many years.
Yup, they’re a necessary evil and we can optimize around that. The bottom line will differ greatly based on so many personal factors that it’s impossible to generalize.
Although I agree that people shouldn’t be so risk averse that they miss out on every opportunity life throws at them, I also think that it should be their decision rather than “enforced” by the government.