The Tax Plan 2004 legislative proposal, part of the Fiscal Package 2004, was submitted for parliamentary approval in September 2003. Connie Smit of Loyens & Loeff provides an overview of the most important measures put forward, especially with regard to mobility and home ownership.

• Labour market and income policy 
• Mobility
• Own home

It is expected that by 2040 the Netherlands will have 1.5 million more people over the age of 65 than it has now. Also, the average life expectancy is increasing and is expected to continue to do so. This will put a lot of pressure on not only the AOW (General Old Age Pensions Act; which gives entitlement to an old age pension upon reaching the age of 65) but also on pensions and the care sector. On the other hand the participation in the labour market of those between the ages of 55 and 65 has been on the decrease over the last several years.

To deal with this increased pressure, people aged 55 to 65 must be encouraged to work. and therefore the government has decided to stop its fiscal support for those who choose to stop working before reaching 65.

Until 1 January 2005, the collective labour agreements and (early) pension plans (pre pension- and VUT-arrangements) can be adjusted accordingly. The abolishment of the fiscal contribution to these plans will generate a savings of EUR 1.6 billion by the year 2007.

In the case of early pension plans, a one-time levy will be imposed on the related rights as soon as the plan starts to pay out. The fiscal facilities will remain in place for all early and pre pension retirement plans that have already entered into force on 1 January 2005.

To encourage people within the 55 to 65 age group to work, the exemption for standing rights entitling the person in question to periodic payments (stamrechtvrijstelling) and the possibility to deduct the contributions for the bridging annuity (overbruggingslijfrente) – both of which lend fiscal support to those who wish to stop working before reaching the age of 65 – will be abolished as of 1 January 2005.

To improve the structure of the labour market, the government has decided to use certain funds to make working more attractive. To further avoid negative financial side effects, an extra labour deduction of EUR 300 million has been allocated by the government, on top of the intensification of EUR 1 billion already provided for in the strategic agreement.

The government has decided to introduce a step-by-step increase in the labour deduction (EUR 81 over 2004) and an extension of the income path over which the maximum labour deduction is accrued. The aim is to decrease the pressure on the lower and middle-income categories.

To stimulate the labour participation of dual working parents and to facilitate the combination of work and care, an additional labour deduction will be introduced. The working partner with the lower income and working single parents will be able to make use of this deduction on top of the combination deduction (EUR 290 over 2004; increasing to EUR 521 over 2007).

If an employer contributes to day care for the children (up to the 13) of his employees, then the employer has a right to a decrease in the amount of wage tax paid to an amount of 30 percent of the related expenses. In anticipation of the introduction of the Child Care Provision Act on 1 January 2005 - to help increase the number of day care places employers make available to their employees - the decrease in the amount of wage tax to be paid out will be 50 percent over the first EUR 21,400 paid for child care.

The introduction of a senior citizens’ deduction and a child deduction is meant to support the purchasing power of senior citizens and families.

Mobility

The Tax Plan also contains a simplification of the rules regarding commuting kilometres and the related administrative demands. One of the most effective simplifications is the rule that all kilometres between home and work are to be considered business kilometres.

For these kilometres a higher tax-free compensation of EUR 0.17 has been introduced, regardless of the distance or the manner of transportation (instead of the current capped fixed tax free amounts depending on the one-way commuting). A choice has been introduced for those travelling by public transport, whereby the employer can choose between reimbursing EUR 0.17 free of tax per travelled kilometre or the actual expenses.

Any other business-related kilometres can also be reimbursed, up to a maximum of EUR 0.17 per kilometre (instead of the current EUR 0,28). This type of reimbursement is more compatible with the average driving expenses for a midsize car, stimulating the use of more ‘economic’ cars.

A uniform percentage of 20 will be added to the taxable income for those who use their company car for private purposes. Employees who previously logged their rides in the company car will not have to do so. Only if they drive less than 500 private kilometres, can they avoid this addition to their taxable income by substantiating the fact that they do not exceed this number of kilometres, for instance by means of a statement issued by their employer.

The costs generated by the above simplification (approximately EUR 540 million), are largely compensated for by the lowering of the tax-free reimbursement for business kilometres (EUR 375 million). Furthermore, the measures meant to stimulate the use of low-sulphur fuel that were introduced in anticipation of the European legislation can be terminated one year before schedule, as all trucks already make use of this fuel. This will generate an additional EUR 175 million.

The motor vehicle tax rates will be indexed annually to match inflation, starting in 2004. The effects of this will be limited; the amount of extra tax that the average user of a mid size car that runs on petrol, will be approximately EUR 5 a year. The fixed amounts for extras, over which no BPM-tax is due in the case of new cars, will be made commensurate with the actual costs. This will bring in an additional EUR 50 million.

Own home

The benefits of the increase in the value of a home vary, depending on whether the owner moves or doesn’t. Those who do not move and wish to increase their mortgage can deduct the related interest only if the extra mortgage is used for home improvement.

Those who move are not subject to any such limitation. In order to mitigate this difference, the government is introducing the ‘Additional Loan Plan’, which comes into effect as soon as the taxpayer moves.

The moment a person moves to a more expensive home and takes out a higher mortgage, the tax authorities evaluate to what degree the related extra interest is deductible. They do this by deducting the proceeds of the old home (selling price minus expenses) from the mortgage necessary for the new home (based on purchasing price plus expenses). The maximum mortgage interest deduction applies to the amount of the old mortgage plus the amount of the additional loan.

Thanks to the ‘Additional Loan Plan’, the same fiscal rules apply to homeowners who move and homeowners who stay: the new or higher mortgage is deductible if it is used to acquire or improve a home. This plan does not apply to those who sold or bought a home before 1 January 2004. Nor does it have any consequences for those just entering the housing market. It only has consequences for those who move to a cheaper home or to a rental home if they buy a new house within ten years.

Aside from the introduction of this plan, the financial pressure on those who have a low or no mortgage is decreased, in the manner suggested in the ‘Hillen-proposal’ (a proposal now known as the ‘Stimulation of the financing of home ownership with own means’). This proposal, which is meant to stimulate the repayment of the mortgage loan, will be submitted before parliament along with the tax plan for 2004.

October 2003

Connie Smit, who is a tax adviser for Loyens & Loeff in the Netherlands, can be contacted at connie.smit@loyensloeff.com