Taxpayers

Taxable income

Tax rates

Income from home and work: box 1

Income from substantial interest: box 2

Income from savings and investments: box 3

Employee savings

Foreign employees: the 30% rule

Tax returns

Taxpayers: residents and non-residents

Under the present Income Tax Act residents are liable for income tax on their world-wide income. Non-residents residing in an eu Member State or in a country with which the Netherlands has concluded a double taxation convention providing for the exchange of information may opt for enforcement of the sections of the Income Tax Act for residents. Non-residents are taxed only on the income from a limited number of sources in the Netherlands. The Netherlands has concluded many double taxation conventions to prevent the double taxation of world-wide income. If no convention is applicable, tax relief may be obtained on the basis of the Unilateral Decree for the prevention of double taxation. (If certain requirements are met, foreign employees temporarily posted to the Netherlands may request the application of a special tax arrangement known as the 30% rule)

The legal definition stipulates that someone’s place of residence is determined ‘according to circumstances’. Several factors are of relevance when deciding whether someone maintains personal and economic ties with the Netherlands. These include a family home, employment, or registration in a municipal register. Nationality is not a determining factor, but it may be relevant in some cases. The law also provides for a number of special cases. The crews of ships and aircraft with a home harbour or airport in the Netherlands are deemed to be residents of the Netherlands unless they have established residence abroad. Dutch diplomats and other civil servants serving abroad remain residents of the Netherlands. Foreign diplomats and the staff of certain international institutions are exempt from Dutch income tax.

People pay tax individually as far as possible. Therefore partners pay tax on their own income and can only use their own deductible items. However, some income and deductible items are joint. Joint income and deductible items can be divided randomly between both partners as long as 100% of the income and deductible items is declared. The choice applies, among other things, to the notional rental value for owner-occupiers and the deductible items from the owner-occupied dwelling, childcare expenses and items that come under the personal deduction.

If partners are married or have registered their partnership at the Records Office, they are automatically each other’s partners (unless they are permanently separated). Partners living together have to meet certain conditions in order to be considered fiscally as partners.

 

Taxable income

From 1 January 2001, there are three types of tax for taxable income. These types of income are brought together in three so-called boxes:

• Box 1:    taxable income from work and home;

• Box 2:    taxable income from substantial interest;

• Box 3:    taxable income from savings and investments.

Residents and non-residents are taxed on their taxable income. The taxable income is the income less the deductible losses. For residents the income may have previously been reduced by certain payments that are not related to the acquisition of income (personal deduction). The personal deduction is first subtracted from income from work and home (box 1). The income in box 1 must not result in a negative amount as a result of the deduction. Any remainder can be deducted from the income in box 3. Likewise, it must not result in a negative amount. If there is still a portion left, it can be deducted from the income from a substantial interest (box 2). If the personal deduction can not be subtracted from the total income in boxes 1, 2 and 3, the remainder can be carried over to the following year.

 

Tax rates and personal allowances (amounts 2008)

The amount of tax owed is calculated by applying the tax rates to the taxable income. The result is reduced by one or more tax credits. Everyone has the right to a general credit on the tax owed: the general tax credit. Additional credits over and above are available. Which additional credits apply depends on someone’s personal circumstances. The general credit is EUR 2,074. For individuals with income from current employment the credit is increased by a maximum of EUR 1.443. For taxpayers with children special credits are applicable.

Tax rate for income from work and home (box 1)

The tax rate is a rising scale with four brackets. The rates are (2008):

• 33.60% on the first EUR 17,579

• 41.85% on the next EUR 14,010

• 42% on the next EUR 22,271

• 52% on the remainder

The 33.60% rate consists of 2.45% tax and 31.15% social security contributions, the second rate consists of 10.70% tax and 31.15% social security contributions, whilst the 42% and 52% rates consist solely of tax. A rate of 15.70% (first rate) and 23.95% (second rate) is applicable to people aged 65 and over, as they are no longer liable for several social security contributions.

Tax rate for income from substantial interest (box 2)

There is a fixed rate of 25%.

Tax rate for income from savings and investment (box 3)

There is a fixed rate of 30%.

See also 2007, 2006 and 2005 or go to tax rates.

 

Income from home and work: Box 1

The categories which comprise the income from work and home are:

I. Profits from business or professional activities

For income tax purposes the definition of ‘profits’ is the same as that for the assessment of the corporation tax which is to be levied. However, in assessing profits for corporation tax purposes a number of special factors are taken into consideration, notably those reflecting the difference between the liability to pay income tax and the liability to pay corporation tax. This means that for income tax purposes only sections 3.2.1, 3.2.3 to 3.2.8 and 3.2.11 are applicable.

The following additional rules apply to persons carrying on a business who are liable for income tax.

• Accelerated depreciation when starting a business

Effective from 1 January 1996, accelerated depreciation of fixed assets is permitted for persons who have recently started a business, subject to certain restrictions.

• Transfer of a business to a business associate

If a person carrying on a business transfers the business or part thereof to his or her long-established business associate, the transfer may, on request, be exempted from income tax. The successor then takes the place of the person concerned. A similar tax-free transfer also takes place following the death of the person carrying on the business and the dissolution of the community of property.

• Discontinuation of a business liable for income tax when it is to be continued as a business liable for corporation tax

If a person carrying on business who is liable for income tax wishes to continue business activities in the form of a registered company subject to corporation tax, e.g. a private limited company, he or she may request exemption from income tax when this conversion is made. The company then takes the place of the person concerned. The Ministry of Finance has published standard conditions for such situations.

• Old-age reserve for the self-employed

Persons who derive income from business profits or from self-employment are allowed to offset a certain percentage of their profit towards the provision of a pension scheme. The annual contribution to this reserve may be no more than a certain maximum and no offset is allowed if the reserve exceeds the book value of the business’s assets. This reserve may be converted into an annuity when the business is terminated.

• Deduction for the self-employed

Self-employed people under 65 who spend at least 1,225 hours carrying on business are allowed to offset a deduction for the self-employed against their profit. The amount of this deduction is inversely proportional to the size of the company’s profits. Persons who have recently started a business may deduct an additional sum for the first three years.

• Deduction for assistance in the business

A deduction for assistance is allowed for persons carrying on business whose partner works for the business concerned while not on the payroll. The deduction is made from the profits at a rate that is dependent on the number of hours the partner works for the business. The rate increases to a maximum 4% when the partner works for 1,750 hours or more in the business in the given financial year.

• Deduction for profits derived from the liquidation of a business

Persons carrying on business are allowed to offset a deduction up to a certain maximum against the profits derived from the liquidation of a business.

II. Income from employment

This income consists of all income received in cash or in kind from present and former employment. Income from current employment includes wages and salaries, payments, gratuities, tips and certain periodic payments received under social security legislation (in cash), and the free use of a private car and free housing paid for by the employer (in kind). Income from past employment includes pensions and invalidity, disablement and unemployment benefits.

Salaries, wages and certain periodic payments received under social security legislation are subject to wage tax. Wage tax is withheld by the employer, and is essentially an advance levy on someone’s final income tax assessment.

Under certain conditions fixed amounts can be deducted for commuting to and from work. No other employment expenses are deductible with the exception of a sea days deduction for seafarers. Employers are allowed to pay untaxed reimbursements within certain limits.

III. Result from other activities

The result from other activities includes income from activities not contributing to either profits or the payroll. To be regarded as income there must be a reasonable expectation that these activities will yield income. Examples are the provision of boarding for lodgers, fees for services and copyrights, and securing returns from assets.

In most cases income from savings and investments is taxed in box 3. However, securing returns from assets may lead to taxation in box 1. This concerns the following situations:

• assets placed at the disposal of the taxpayer’s partner who uses the assets to secure profits from business or result from other activities;

• securing returns from assets in a way that exceeds normal, active asset management. For example, the sale of building complexes in single units;

• assets placed at the disposal of a private limited company in which the taxpayer holds a substantial interest solely, or with his or her partner.

IV. Income in the form of periodic payments

Periodic payments forming a separate source of income can be divided into different categories. Examples are:

• payments from the state, such as certain public scholarships and government subsidies;

• periodic payments under family law, such as maintenance payments, unless received from relatives once or twice removed;

• other periodic payments, claimable in court, unless received from close relatives, foster parents or members of the same household, such as maintenance payments to a former partner;

• terms of life annuity, the premiums of which were deductible.

V. Income from home

A special provision applies to owner-occupied property. Property is taxed at a notional rental value, which represents the balance of revenue and expenses connected with the use of a dwelling. This rental value, which is a positive amount, is assessed using statutory tables. The notional rental value for owner-occupiers only applies to the main residence. Second homes and other property come under box 3. As normal expenses are included in the notional rental value, no expenses other than (mortgage) interest and ground rent may be deducted. These costs can be deducted for a maximum of 30 years.

To finance the purchase of an owner-occupied dwelling, a mortgage is often taken out that is linked to an endowment insurance policy. The final lump sum of such insurance is meant to pay off the mortgage debt. Endowment insurance is taxed in box 1. If the payment is no higher than EUR 125,500 per person, this payment is not taxed under certain conditions. There is a transitional agreement for existing endowment insurance.

VI. Expenses for income provisions

A deduction of life annuity premiums is possible if a pension shortfall can be proven.

Contributions for occupational disability insurance, contributions under the Act governing the Invalidity Insurance for the Self-Employed (waz) and annuity premiums for long-term disabled children or grandchildren are not linked to a maximum deductible amount.

VII.  Negative expenses for income provisions

This category refers to the surrender of life annuities. In the event that a taxpayer emigrates, an insurance policy is deemed to be commuted into a lump sum.

VIII. Negative personal deduction

Amounts received as refund or subsequent payment for the expense that previously came under the personal deduction are considered as negative personal deduction.

IX. Childcare expenses

Expenses for the care of children under 13 can't be deducted anymore. Instead it may be possible to claim a special allowance.

• the taxpayer must have paid work for which he or she receives more than a certain amount. In the event that the taxpayer has a partner, both of them have to meet this condition;

• the childcare arrangement has to meet a number of legal requirements;

• a maximum is reimbursed per child;

• an allowance is only possible above a certain income-related threshold.

X. Personal deduction

Only residents are entitled to the personal deduction. A threshold or a fixed deductible amount has been established for certain deductible items. The following items come under the personal deduction:

• expenses for maintenance obligations (alimony);

• remission of money loans to starting entrepreneurs;

• living expenses for children up to 27;

• medical expenses and other extraordinary expenses;

• expenses for weekend visits by handicapped children aged 27 and over;

• educational expenses. Studying as a hobby does not qualify;

• expenses for protected or listed buildings;

• donations to domestic religious, ideological, charitable, cultural, and academic institutions or ones serving the public good. Donations to foreign institutions of the kinds indicated above are deductible if the Ministry of Finance has designated these institutions.

 

Income from substantial interest: Box 2

Income from a substantial interest in a company, including capital gains or losses, is subject to income tax and is taxed at a rate of 25%.

A taxpayer is regarded as having a substantial interest in a company if he or she, either solely or with his or her partner, holds 5% of the issued capital, directly or indirectly. If the company has issued different classes of shares, a substantial interest also exists if the taxpayer, either alone or with his or her partner, holds more than 5% of the issued capital of a particular class of shares. If the taxpayer holds a substantial interest in a company, profit-sharing bonds issued by that company and held directly or indirectly by him or her, either solely or with his or her partner, are regarded as forming part of the substantial interest.

Dividends and capital gains derived from the alienation of shares are taxed at a proportional rate of 25% in the income tax. In the event of capital loss, 25% of that loss may be offset against the tax which would otherwise be due. For this purpose an arrangement similar to that for offsetting losses is applicable (see 3.2.11). If the taxpayer emigrates, the substantial interest is deemed to be alienated. However, the tax due will not be collected as long as the substantial interest is not disposed of. After the elapse of 10 years, the remainder of the tax levied because of the deemed alienation at the time of emigration is pardonned.

For non-residents the income from substantial interests is only subject to tax in case of a substantial interest in a company resident in the Netherlands. With respect to non-residents a company is also deemed to be a resident of the Netherlands if it was resident in the Netherlands for at least five years during the last ten years. With respect to non-residents the substantial interest is deemed to have been alienated in case of the transfer of the place of effective management of the company from the Netherlands to elsewhere.

 

Income from savings and investments: Box 3

Taxation on income from savings and investments is based on the assumption that people will have a taxable return of 4% on their net capital. The actual level of return (for example interest, dividend, capital gains or losses) is not relevant. Net capital (the value of the assets minus any liability) is determined as the average net capital during the calendar year and will therefore be measured twice a year, on January 1 and December 31. Only capital available for savings and investment is taken into account. Consequently, the owner-occupied dwelling as well as the endowment insurance linked to it and capital invested in someone’s own company or in a substantial interest are not taxed in box 3.

Examples of assets taxed under box 3 are:

• bank and savings accounts;

• a second home;

• stocks and other shares;

• endowment insurance policy which is not linked to an owner-occupied dwelling.

There is a threshold for liabilities: the first EUR 2,500 cannot be deducted. Except for tax liabilities and liabilities related to capital generating income from work, home or a substantial interest, all liabilities can be deducted from the assets.

Certain assets are exempted. The most important are:

• movable property for personal use (household items, like a car);

• investments in forests and nature;

• objects of artistic or scientific nature unless these serve as an investment;

• annuity insurance, the premiums of which are deductible in box 1;

• social investments up to a certain amount, including green investments (environmentally friendly investments) and social or ethical investments;

• direct or indirect investments in starting companies up to a certain amount. Cultural investments are also included.

Non-residents are taxed on income from savings and investments only if they own certain assets in the Netherlands, which are:

• immovable property (including immovable rights) situated in the Netherlands;

• profit-sharing rights based on the net profits (not the turnover) of a company managed in the Netherlands, excepting profit-sharing bonds, etc., and employees’ entitlement to bonuses.

The assets mentioned are reduced only by liabilities directly related to them (such as debts secured by a mortgage on immovable property situated in the Netherlands).

Each person is entitled to a tax-free capital threshold of a certain amount. For each child under 18, the threshold is raised. Depending on their income and amount of capital, people aged 65 and over are entitled to an extra threshold of 50% of their net capital up to a certain maximum.

 

Employee savings and profit-sharing schemes

Employers and employees may agree to set up employee savings schemes in which a certain maximum amount of the salary is exempt from tax and social security contributions. Employers in the private sector can set up profit-sharing schemes to provide tax benefits for both employers and employees.

Employee savings schemes

Since 1 January 1994, new rules apply which exempt employers from paying tax and social security contributions on each employee’s pay to a maximum of EUR 631. This is applicable to pay based on:

• premium savings schemes; or

• payroll savings schemes (including blocked profit-sharing schemes and share option schemes in the private sector).

In premium savings schemes, the employer withholds an agreed amount from the employee’s net pay and deposits this in a premium savings account. The employer can then award the employee a savings premium of up to 100% of the amount withheld, to a maximum of EUR 631. Under certain conditions no tax and social security contributions need to be paid on this savings premium.

In payroll savings schemes, the employer withholds an agreed amount not exceeding EUR 631 of the employee’s gross pay and deposits this in a savings account blocked for at least four years. When the sum is paid out it is not liable to tax or social security contributions.

However, the employer is required to pay 15% payroll tax on the exempted amount.

Profit-sharing schemes

Employers in the private sector can give their employees a share in the fiscal or commercial profits of the business or of one or more businesses associated with the business. If the profit payment is blocked in a payroll savings account, the rules for payroll savings schemes are applicable (the maximum amount exempted from tax or social security contributions is EUR 631.

If the profit payment is not blocked, but is paid directly in cash or securities, the employer pays 10% payroll tax on a maximum amount of EUR 631. This amount is not liable to social security contributions. Any payroll savings received must be deducted from this amount. Insofar as the profit payment together with the payroll savings exceeds EUR 631, the normal rate of tax and social security contributions must be paid.

 

Foreign employees: the 30% rule

A special allowance is granted to certain foreign employees who are assigned to a post with a domestic employer (i.e. an employer established in the Netherlands, or an employer not established in the Netherlands who is obliged to withhold payroll tax on the pay the employee receives).

If certain requirements are met, the employer may grant a special tax-exempt allowance of 30%, which is paid in addition to employees’ pay and has to be seen as reimbursement of the extra costs of living outside the homeland. The allowance is calculated based on the level of pay in accordance with the provisions of the Payroll Tax Act. To obtain the basis for calculating the 30% allowance the salary is multiplied by a factor of 100/70. Employer reimbursements of school fees for children attending international primary or secondary schools are also exempt from tax. In addition to the 30% rule, expenses incurred in connection with employment are reimbursed tax-free.

Foreign employees have to be recruited by or seconded to a domestic employer in the Netherlands. The employer and his employee must first agree, in writing, that the 30% rule will be applied. Their joint request for the application of this rule must then be submitted to the Private Individuals Tax Unit (Non-resident Taxpayers) in Heerlen. Once the application has been approved, the 30% rule is applied from the outset. The 30% rule is applicable for a maximum period of 120 months. This period is reduced by any previous period of employment with a domestic employer in the Netherlands, or by any time previously spent by the employee in the Netherlands, unless more than ten years have elapsed since the end of such employment, or time spent in the Netherlands.

At the joint request of the domestic employer and the foreign employee, the foreign employee is regarded as a fictitious foreign taxpayer with regard to the levy of payroll tax and income tax (with a few exceptions).

For more detailed information: 30% ruling

 

returns and assessments

For income tax purposes the tax year coincides with the calendar year. If the financial year of a business does not coincide with a calendar year, the results of such a year are attributed to a calendar year.

Wage tax as an advance levy

People on the payroll are subject to tax on the pay they receive. Employers withhold the tax directly from the payroll and pay this on a regular basis to the Tax Department. The rates, deductions, and any exemptions are consistent with those applicable to income tax. This means that in many cases collecting wage tax is sufficient and no income tax return needs to be filed. This means that for many employees the wage tax is not an advance levy in respect of income tax, but is in effect the final levy.

Income tax returns and assessments

No income tax assessments will be made unless:

• the tax due exceeds EUR 22, taking into account the wage tax or dividend tax withheld

• a preliminary refund has been decreed ahead of or in the course of the calendar year, or

• the taxpayer has filed an income tax return.

As is the case with corporation tax, provisional assessments and advance levies are credited against the final income tax assessment.

Taxpayers are obliged to file an annual tax return within three months of the end of the relevant financial year. Sections 3.7.1 and 3.7.2 are also applicable to income tax. At the request of the Tax Inspector the taxpayer is obliged to supply all relevant information needed to determine his or her tax liability. The obligation to keep accounts as explained in section 3.7.3 is occasionally applicable to natural persons.