6 Recommendations for an optimal system

The results of the review have motivated me to provide recommendations. I have formulated a first-best proposition as well as a second-best proposition. The first-best proposition is independent of the current business transfer facilities and includes propositions, which are acceptable given the assessment criteria. Payment arrangements are in my opinion the correct instruments to prevent liquidity problems, which arise from the taxation. This concerns from the business transfer resulting levy of income taxation as well as gift and inheritance taxes. During the extension period recovery rates (compounded) need to be charged, which will have to be a market conform interest rate. This will cause that a payment arrangement will be less likely invoked in case the taxpayer will have other means to pay the taxes. There is further no reason to make facilities interest-free. It is absolutely professional to owe interest over a debt. Government intervention in the form of providing interest-free deferred payments is not legitimate. Besides, a taxpayer has to provide security. Otherwise it would need to be an argument to charge an increment on the interest rate. In the first-best proposition, payment arrangements are the starting point. I do not consider roll-over reliefs acceptable with the exception of situations whereby the tax law includes provisions which work disruptive. This will take place when under the income tax a marriage is entered into or dissolved and settlements need to take place, while the position of the competent entrepreneur or holder of a substantial interest does not change. Also the gift and inheritance tax targeted conditionally exemption facility is not longer included in the first-best proposition. Likewise I do not consider this facility to be acceptable. In addition, on the basis of the same arguments as mentioned in relation to roll-over reliefs, no facilities are included which apply to the tax claim arising from a gift.

If it is not possible and/or not desirable to change to a new system, an intermediate period could be handled during a limited number of years, which I designate as the second-best solution. In this respect an argument could be put forward that a business transfer often takes a long period. Parties involved will be charged transaction costs. In this respect it may not be considered desirable to adjust the legislation suddenly, without the taxpayers having had a chance to anticipate. Consequently this study includes a second-best proposition in which improvements are suggested in relation to the present facilities to come to an improvement of the test results. The starting point is to preserve the current facilities, unless the reviewnecessitates a facility as soon to bewaived as possible. In my opinion the second-best proposition can be defended during a transition.

The roll-over reliefs are preserved in the second-best proposition. However, modifications of a number of conditions have been proposed, which have led to an improvement of the test results. Likewise, in contrast to the first-best proposition, a roll-over relief is included for the gift of a direct substantial interest. The chance of disturbance in the presence of roll-over reliefs is greater than with payment arrangements, which is in my opinion an argument to include such a roll-over relief. In the second-best proposition it has been decided not to include a roll-over facility to donate an indirect substantial interest. The starting point however is to preserve the current facilities and not to proceed to introduce new facilities. I have made one exception, which concerns the introduction of a payment arrangement at the time of death of the holder of a substantial interest. I deem this justified as payment arrangements have my preference. This payment arrangement is therefore included in the first-best proposition.

In case of the business transfer facilities regarding the gift and inheritance taxation the consequence is that this will be less generous. I deem it of great importance that it is not contrary to the principle of equality. I have waived the conditional exemption relating to 100% of the entrepreneurial capital up to an amount of € 1.028.132. The question is then only what the level of the common applicable exemption rate will need to be. Discordance with the principle of equality will become more plausible if the percentage amounts more than 50. The percentage to be applied would thus in any case need to be lower than 50. The option for a percentage is however a choice which will need to come from the democratic process. The business transfer facility will remain applicable also for gifts in the second-best proposition. Also here applies that the chance of distortion is higher in case of a conditional exemption facility than in case of a payment arrangement facility.

For the conditions in the second-best proposition inclusive of payment arrangements reference is made to the first-best proposition recorded facilities.

It can be concluded that the legislator has gone too far to proceed with the current business transfer facilities. The Government should only intervene in the market process in case of market failure or in case the current taxation calls for distortions. From the study it turns out that the current facilities included in the income tax law and the inheritance and gift tax law are not legitimate in all cases and therefore cannot be considered acceptable. In other circumstances facilities are called legitimate though, but these cannot abide to the review of other criteria. Consequently recommendations in this study have been made which lead to the conclusion that these facilities can be considered acceptable.