IntheTaxes 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 2024.
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 theDeductions 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. The approval to apply the exemption method instead of the credit method for the avoidance of double taxation over the remuneration of executive or supervisory board members has been revoked. Consequently, in tax treaty situations in which the credit method is prescribed, this method will (again) apply.
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.
A new amendment to the Dutch employee stock option regime applies as of 1 January 2023. Generally speaking, employee stock options are taxable once exercised. As of 2023, however, in case shares are not tradable after the exercise of the stock options, the taxable moment will be deferred until the shares do become tradable. An employee may, however, elect (in writing) to keep exercise as the taxable moment.
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. Income from lucrative investments will, in principle, be considered as ‘income from other activities’ in box 1 for Dutch tax purposes according to the Dutch State Ministry of Finance. However, it may be possible to have the proceeds from the lucrative investment taxed in box 2. In case you are a non-resident of the Netherlands and are able to make use of the box 2 regime, then under the respective bilateral tax treaty any gains will most likely fall under the ‘dividend’ or ‘capital gains’ articles. In case you do not make use of the box 2 regime, the Netherlands is of the opinion that based on 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. This differs from the interpretation of other countries under the respective bilateral tax treaties. It remains to be seen whether the Netherlands can successfully claim this allocation to the Netherlands and whether double taxation arises.
Income from savings and investments (e.g. dividends) is, as such, not taxable. However, the assets of an individual valued on 1 January are deemed to generate an annual fixed return on investment. This fixed return is taxed in box 3 at a flat rate of 36%. 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 2023, transitional legislation for box 3 was introduced until the implementation of a new system in 2027, at the earliest. During this period, the actual assets of taxpayers are categorised under one of three categories, namely (i) bank deposits (savings), (ii) other assets, and (iii) debts. The value under each category on 1 January will be deemed to yield a fixed percentage. The weighted average yield over all categories will be applied to the total assets above a personal exemption of EUR 57,000 (2024) in order to determine the taxable benefit that will be subject to tax at a flat rate of 36% (2024).
With regard to dividends, 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 highest box 2 tax rate is 33% in 2024.
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.
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Now, let's delve into the concepts outlined in the article regarding the taxation of personal income in the Netherlands:
- The Dutch personal income tax is divided into three boxes: Box 1, Box 2, and Box 3. Each box has its own schedule for taxing different types of income.
Box 1 - Employment Income:
- Income from current or past employment is assessed in Box 1, taxed at progressive rates up to a maximum of 49.50% in 2024.
Box 1 - Reimbursements and Benefits in Kind:
- Benefits in kind within an employment relationship are considered taxable income, including accommodation allowances, company car usage, stock options, home-leave allowances, etc.
Box 1 - Lucrative Investments:
- 'Excessive' remuneration, such as lucrative investments, falls under taxation in Box 1. Both income and capital gains from lucrative investments are considered as 'income arising from other activities' and are taxable at progressive rates.
- Non-resident employees are taxed on salary earned for employment activities performed within the Netherlands.
Box 1 - Equity Compensation:
- Income and benefits from equity-based remuneration are assessed in Box 1, generally taxable when the benefit becomes unconditional or exercised.
Box 1 - Business Income:
- Income from self-employment is assessed in Box 1.
- Capital gains and investment income are generally not taxable, except as detailed in Box 2 and Box 3. Income from lucrative investments may be considered as 'income from other activities' in Box 1.
Box 3 - Dividend Income:
- Dividend income is not taxable, but assets generate an annual fixed return on investment, taxed in Box 3 at a flat rate of 36%.
Box 3 - Interest Income:
- Interest income that does not qualify as income from substantial interest is taxed in accordance with the rules on the taxation of dividend income in Box 3.
Box 2 - Income from Substantial Interest:
- A Dutch resident with a substantial interest (at least 5% shares) has benefits taxed in Box 2. Non-residents may be taxed in Box 2 if holding a substantial interest in a Dutch-based company.
Box 3 - Rental Income:
- Rental income is generally taxed in Box 3, but if received for services surpassing that of a 'normal' investor, it may be taxable in Box 1 as income arising from other activities.
This overview provides a comprehensive understanding of how various types of income are taxed in the Netherlands under the three boxes system. If you have specific questions or need further clarification on any aspect, feel free to ask.