Individual - Income determination

Last reviewed - 01 July 2022

In the Taxes on personal income section, we explained that, in the Netherlands, personal income is divided into three types of taxable income, which are taxed separately under its own schedule (referred to as ‘box 1’, ‘box 2’, and ‘box 3’). In this section, we further explain the taxation of various kinds of personal income according to the applicable ‘boxes’.

Employment income

Income from current or past employment is assessed in box 1. Box 1 income is taxed at progressive rates up to a maximum of 49.50% in 2021.

Reimbursements and benefits in kind

Within an employment relationship, all benefits in kind are, in principle, considered as taxable income. Such benefits include accommodation allowances, private use of the company car, employee stock options, home-leave allowances, and pre- and post-assignment bonuses. Employer-paid reimbursement of relocation costs relating to the acceptance of a new employment and employer contributions toward approved pension schemes are not taxable. Certain other reimbursements and benefits in kind also are not taxable, and the employer has an annual budget for tax-free reimbursements (see the Deductions section for further details).

Lucrative investments

The rules regarding ‘excessive’ remuneration brings a so-called lucrative investment (carried interest arrangements) under taxation in box 1. The income from a lucrative investment, both income and capital gains, will, in principle, be considered as ‘income arising from other activities’ and, as such, be taxable at progressive tax rates.

Non-resident employees

Non-resident employees are taxed on salary earned for employment activities performed inside the Netherlands. If an employment is partially exercised in the Netherlands, the activities are deemed to be fully performed in the Netherlands, unless the employment is fully exercised outside the Netherlands or unless the salary earned in connection with foreign duties is taxed abroad. As a general rule, a statutory director of a Dutch company is subject to Dutch taxation irrespective of the country where the duties relating to the directorship are actually performed. An exception is made only if a double taxation treaty stipulates otherwise.

Equity compensation

Income and benefits from equity-based remuneration are assessed in box 1. This type of remuneration is generally taxable at the moment the benefit becomes unconditional (share) or exercised (stock options). The income is pro-rated for the period it is earned (e.g. the vesting period) in case the individual worked in more than one country during this period. The Dutch taxable income is determined based on the net benefit (i.e. gross benefit minus any exercise price paid). Furthermore, a discount applies on the taxable value in case of a holding lock or forced postponed exercise date.

In 2021, an amendment to the Dutch employee stock option regime was proposed. However, due to the associated costs with the implementation and due to the generic character of the measure, the amendment has been postponed. A new legislative proposal is expected in the course of 2022.

In 2021, an amendment to the Dutch employee stock option regime was proposed. The House of Representatives passed the legislation in June 2022, and it is expected to take effect on 1 January 2023. The proposed change may alter the taxable moment of the stock options in certain circumstances. This relates to shares obtained by exercising stock options that are subject to a sale restriction. In case of a legal or contractual restriction on the sale of the shares following the exercise of the stock options, the moment of taxation is deferred to when the obtained shares are tradable. However, on the basis of an election, it is still possible to keep exercise as the taxable moment. The legislation will not alter the taxable moment for shares that are obtained with exercising stock options without such a sale restriction.

Business income

Income from self-employment is assessed in box 1.

Capital gains

For residents and non-residents, capital gains and investment income as such are not taxable, except as detailed for box 2 and box 3 above. For non-residents, income from lucrative investments will be considered as ‘income from other activities’ in box 1 for Dutch tax purposes according to the Dutch State Ministry of Finance. Where and to the extent (taxable) activities are performed in the Netherlands, (part of) the lucrative investment should be subject to taxation in the Netherlands. However, under the tax treaties, any gains will most likely fall under ‘the capital gains’ or ‘other income’ article. Therefore, it remains to be seen whether the Netherlands can successfully claim this allocation to the Netherlands and whether double taxation arises. Furthermore, this position could be different if it concerns an indirect lucrative investment and the substantial interest route is chosen. For individuals who enter into the Netherlands holding a lucrative investment after 1 January 2009 and who did not qualify as non-residents for Dutch tax purposes prior to the date of arrival in this respect, a step up to the fair market value of the lucrative investment on the date of arrival will be applied. In case of a temporary assignment to the Netherlands, taxation can even be avoided in case of an indirect lucrative investment.

Dividend income

Income from savings and investments (e.g. dividends) is, as such, not taxable. However, the net assets (assets minus debts) valued on 1 January of an individual are deemed to generate an annual fixed return on investment. This fixed return is taxed in box 3 at a flat rate of 31%. All net assets that are not intended for daily use and that are not taxed in box 1 or box 2 belong to the box 3 taxable base. For residents and non-residents, part of the taxable base is exempt and several specific deductions can be applicable.

The notional return on box 3 assets is calculated on the basis of three ascending fixed percentages. These percentages have been determined on the basis of relevant market information and investment results and will be reassessed periodically. For 2021, the fixed return is replaced by the following percentages (applied as progressive brackets):

  • 1.82% on assets with a total value of EUR 50,650 to EUR 101,300.
  • 4.37% on assets with a total value of EUR 101,300 to EUR 1,013,000.
  • 5.53% on assets with a total value exceeding EUR 1,013,000.

These fixed returns will continue to be taxed at a flat rate of 31%.

Non-residents are subject to taxation only on the net value of a limited number of Dutch assets, including the following:

  • Dutch real estate not used as the primary residence.
  • Profit rights unrelated to shares or an employment relationship.

Please note that in the Netherlands a dividend withholding tax (WHT) of 15% applies. Resident taxpayers use the withholding as a tax credit on their income tax that is levied in box 3. For non-resident taxpayers, the withholding would be the final levy applied in the Netherlands.

Interest income

Interest income that does not qualify as income from substantial interest (see below) is taxed in accordance with the rules on the taxation of dividend income, i.e. taxable in box 3. The actual interest income received is thus not taxable.

Income from substantial interest

A Dutch resident who, alone or together with a spouse or other close relatives, holds at least 5% of the shares or a class of shares of a company or who holds rights to acquire a 5% interest in a company has a so-called substantial interest. The benefits derived from this substantial interest are taxable in box 2. These benefits include dividends and the gain on the sale of one or more of the shares or rights. For non-resident taxpayers, taxation in box 2 will only apply to a non-resident who holds a substantial interest in a Dutch-based company. The box 2 tax rate is 26.9%.

Taxation in box 2 may apply to the aforementioned lucrative investments and could mean a tax saving. If the lucrative investment is (i) held indirectly (e.g. via a holding company, preferably benefiting from the Dutch participation exemption on capital gains and dividends); (ii) the individual investors holds a substantial interest in the intermediate holding company; and (iii) this company distributes at least 95% of profits realised to its shareholders within the tax year, the individual investors are taxed according to box 2 taxation at the level of their shareholding in the holding company.

Rental income

Rental income is taxed in accordance with the rules on the taxation of dividend income and interest payment, i.e. taxable in box 3 (see above). The actual rental income received is thus not taxable.

Nonetheless, rental income is taxable in case the income is received for services that surpass that of a ‘normal’ investor and these services are viewed as business activities. In that situation, the income is taxable as income arising from other activities in box 1. Furthermore, the property that qualifies as a primary residence is taxed in box 1, which also includes the (deemed) income from this property, which is taken into account to determine the amount of the deduction for the mortgage interest paid.