In The Netherlands a “stamrecht” is a tax structure principally postponing income and spreading it over a number of periods. The aim is normally to postpone taxation thus avoiding the application of the higher tax brackets to one-off payments.
A stamrecht (literally: annuity right) is a right to a series of periodical payments. According to Dutch fiscal law a stamrecht construction can be used for postponing taxes on severance compensations (art 11g Salary Tax Act). Some stamrecht constructions still exist which were created until 1991 under the previous articles 19 (pension reserve of a sole proprietorship) and 44j (income from selling a sole proprietorship).
To benefit from the stamrecht exemption the below conditions have to be fulfilled: – the employee cannot dispose of the lump sum severance payment but only receives an entitlement to a number of periodical payments – the payments begin at the latest at the age of sixty five – after the death of the ex-employee the entitlement can only be passed to the spouse, civil partner or his own children until the age of thirty – it is not permitted to close out or sell the right to periodical payments Another situation where the stamrecht exemption may not be applicable is in case of a golden parachute. If the employment agreement stipulates a compensation in cash there is no entitlement to annuity payments and salary tax is due immediately. Converting the compensation to a stamrecht afterwards is no remedy here. The periodical payments have to fulfill the 1 percent mortality risk criteria as usual in life insurance. This means that for the duration of the payments the risk of decease should be one percent or higher. The result of this condition is that for old people the length of time of the payments can be shorter than for young people.
According to regulation of the tax authorities periodical payments are not the same as annuity payments. While annuity payments stay the same over time, periodical payments may vary where the highest amount can be up to five times the lowest amount. The amount of the payments has to be established beforehand in the stamrecht contract. In this way beneficiaries who need money quickly can pay out a significant part of the redundancy payment in the earlier periods without violating the above mentioned 1 percent criteria.
There are three ways of benefiting from the stamrecht exemption in case of obtaining a redundancy payment:
1. Insurance policy
The employer transfers the severance compensation directly to an insurer to purchase an insurance policy with the former employee as beneficiary. The disadvantage of this option is that many insurers apply high (concealed) costs.
2. Stamrecht bank account
As of Jan 1, 2010 it is a possibility for an employer to deposit a severance payment in a stamrecht bank account. Contrary to a stamrecht policy there is no risk of decease for the bank. After the decease of the beneficiary the remainder of the money will be passed to the inheritors after taxation. This is a benefit for the beneficiaries in the event of early decease. On the other hand the ‘longevity risk’ is for the beneficiary as well: where an insurance company pays an annuity till the beneficiary deceases, a bank stops paying when the money is finished. The costs are normally lower than for a stamrecht policy.
3. Stamrecht BV
A stamrecht BV is a legal entity owned by oneself which serves as an insurance company. It receives the redundancy compensation of your employer and promises to make annuity payments to yourself. The advantage of a stamrecht BV over the other options is the flexibility both from an investment point of view as well as from a payment point of view. The disadvantage is the up front constitution charge which weighs in particular upon smaller redundancy compensations. Till 2010 a stamrecht company had to be established in Holland but as of Jan 1, 2010 it may be established in any member country of the EU.
In each case the tax advantage should be balanced against the administrative burden of a stamrecht construction. Which makes it only an attractive alternative for higher redundancy compensations.