Foreign assets and voluntary disclosure

Our lawyers have extensive experience representing taxpayers making voluntary disclosures.

Questions asked by the Dutch Tax and Customs Administration

As information is increasingly being exchanged at an international level, the Dutch tax authorities’ knowledge of foreign assets is growing. Over the past years, they have received information from foreign tax authorities, informants, providers of payment processing services or through the media. Think, for instance, about the previously reported group requests to Switzerland (regarding UBS, Credit Suisse, Julius Bär and BNP Paribas account holders), a debit and credit card project, the Panama Papers, the Paradise Papers, the Pandora Papers and information from the IRS regarding American Express cardholders. Information is also shared with the Dutch tax authorities on the basis of FATCA and CRS.

Following up on this information, the tax authorities may proceed to ask a taxpayer questions. In their letter of questions, they will state that a tax return is incorrect or incomplete, sometimes with a specific reference to a bank and/or bank account. Foreign bank accounts are increasingly being included in the prepopulated tax return. If that is the case, the voluntary disclosure scheme may well not be available to you. That said, the tax authorities are still expected to play by the rules when requesting information and imposing tax assessments. They are required to observe the principle of proportionality and the expediency criterion, and to comply with the deadlines for imposing tax assessments. The allocation of the burden of proof is also a key factor in this regard.

Domicile status – facts and circumstances test

The Dutch Tax and Customs Administration may take the position that a Dutch taxpayer is involved in an entity domiciled outside the Netherlands, for instance as a UBO. Alternatively, it may argue that the entity has its registered office in the Netherlands. In the first case, the Dutch tax authorities will examine whether the entity's foreign assets can be attributed to the taxpayer. Occasionally they will argue that a Dutch taxpayer is de facto responsible for a foreign entity's management. The place of de facto management is a key aspect in the facts and circumstances test. What we are seeing is that the tax authorities tend to gather a lot of information as part of a fact and circumstances test, whether it concerns the tax residency of an entity or an individual. It is important in this context to protect the rights of the taxpaying company and the shareholder, including their right to privacy and the ban on a fishing expeditions.

Cryptocurrencies

The Dutch tax authorities are not just interested in foreign bank assets in countries with banking secrecy or in foreign structures with offshore companies, as uncovered in the Panama Papers and the Paradise Papers. They are also focussing on cryptocurrencies (e.g., bitcoin, litecoin, ripple and ethereum). These assets come under the voluntary disclosure scheme as well. Cryptocurrencies are classified as ‘other assets’ in Box 3. ‘Income from other activities’ in Box 1 may also be subject to scrutiny.

Voluntary disclosure

The voluntary disclosure scheme applies if a taxpayer files a corrected tax return that includes previously unreported assets or if a taxpayer provides previously unreported correct and complete information. The scheme allows taxpayers in the Netherlands to amend an incorrect tax return. Voluntary disclosures are accepted until, objectively speaking, the taxpayer knows or should reasonably be aware that the tax authorities have found out or will find out that the tax return is incorrect or incomplete.

The voluntary disclosure scheme has been tightened a lot in recent years. It ceased to apply to the voluntary disclosure of foreign assets classifying as capital gains (Box 3 assets) on 1 January 2018. As a result, the two-year penalty-free period no longer applies, and criminal prosecution has become an option.

For now, thanks to a transitional facility which stipulates that the voluntary disclosure of foreign Box 3 assets will still be accepted for tax returns that were or should have been filed before 1 January 2018, the consequences of the voluntary disclosure of foreign Box 3 assets remain limited.

The voluntary disclosure scheme was further curtailed on 1 January 2020, when the option for the voluntary disclosure of Box 2 income and domestic Box 3 assets was cancelled. As it stands, the voluntary disclosure scheme is only available for Box 1 income and gift tax and inheritance tax.

The changes per 1 January 2020 did not include a transitional facility. As a consequence, criminal prosecution can now be considered for the voluntary disclosure of Box 2 income, domestic Box 3 assets (effective from 2020) and foreign Box 3 assets (effective from 2018). The fact that no transitional facility was provided is controversial.

Principles governing the mitigation of fines

Although the voluntary disclosure scheme has been curtailed considerably, the voluntary disclosure of inaccuracies in a tax return still qualifies as a ground for a reduced sentence. In setting the amount of a fine or when deciding whether or not to prosecute, allowance is made for whether or not the taxpayer voluntarily disclosed that their tax return was incorrect or incomplete.

The statutory fine has been capped at 100%. On 2 July 2009, the maximum statutory fine for amendments to Box 3 assets was raised to 300%. Fines are based on the amount of personal income tax due. The Dutch tax authorities have formulated general principles for the level of the fine that will be imposed upon voluntary disclosure. These are general principles; fines may vary from case to case. There are instances in which the tax authorities have the discretionary power to mitigate or increase a fine as they see fit.

Do your foreign assets have you in a bind?

If the Dutch tax authorities have raised questions about your foreign assets or if you are wondering whether it would be advisable in your situation to make a voluntary disclosure, please do not hesitate to contact Anke Feenstra  or Angelique Perdaems.