Reducing pension benefit payments allows for a better spread of the available capital over the expected benefit period. This, in turn, can affect a director / major shareholder and surviving dependents—e.g., from not being provided for on the unexpected death of the director / major shareholder.
Until 1 January 2013, the Dutch tax authorities asserted that in situations of pension fund deficits, practically unenforceable entitlements could not be waived until the company had used up all its resources to make pension benefit payments.
Only if the company were subsequently liquidated would no tax would be levied. In all other situations, the tax levied could be as much as 72% (under the Netherlands’ progressive tax rate plus 20% deemed interest) of the full value of the pension entitlement.
Companies, however, might have had reasons for failing to meet all pension commitments—some caused by various circumstances. Just as in the case of pension funds, a company can, for example, be affected by low interest rates and disappointing stock exchange rates. Trading losses can also be a contributing factor.
Previous measures, however, prevented a director / major shareholder from adequately setting aside capital for a pension (at least not by way of tax relief). As such, the tax relief available for pensions was often 30% to 40% too low.
The guidance contains strict conditions that apply to pension entitlement waiver. In principle, conversion may only take place on the pension’s commencement date. However, a director / major shareholder whose pension commenced on 1 January 2013 has until 31 December 2015 to reach an agreement with the tax authorities.
Read an April 2013 report prepared by the KPMG member firm in the Netherlands: Decree on waiver of director-major shareholder pension entitlements: the long wait is over