Income from home and work: Box 1
The categories which comprise the income from work and home are:
- profits from business or professional activities
- income from employment
- result from other activities
- income in the form of periodic payments
- income from home
- expenses for income provisions
- negative expenses for income provisions
1. 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.
The following additional rules apply to persons carrying on a business who are liable for income tax.
- Accelerated depreciation when starting a business
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.
2. 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.
3. 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.
4. 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.
5. 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 € 125,500 per person, this payment is not taxed under certain conditions. There is a transitional agreement for existing endowment insurance.
Some of the frequently asked questions about income from home in our knowledge base:
- Which costs are deductible if I buy a house in the Netherlands?
- Can I deduct the mortgage interest for my main residence if I have the 30% ruling?
- What is the so called WOZ value of my house?
6. 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.
7. 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.
Foreign employees: the 30% ruling
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% ruling, 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% ruling will be applied. Their joint request for the application of this rule must then be submitted to the tax authorities (Non-resident Taxpayers) in Heerlen. Once the application has been approved, the 30% ruling is applied from the outset. The 30% ruling is applicable for a maximum period of 60 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 25 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