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’.
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 2020.
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).
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 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.
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.
Income from self-employment is assessed in box 1.
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.
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 30%. 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.
As of 1 January 2017, 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 2020, the fixed return is replaced by the following percentages (applied as progressive brackets):
- 1.80% on assets with a total value of EUR 30,846 to EUR 103,643.
- 4.22% on assets with a total value of EUR 103,643 to EUR 1,036,418.
- 5.33% on assets with a total value exceeding EUR 1,036,418.
These fixed returns will continue to be taxed at a flat rate of 30%.
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.
- Profits rights unrelated to shares or an employment.
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 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 26.25%.
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 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.