TaxResidence and domicile
How does an individual become taxable in your jurisdiction?
In the Netherlands, resident individuals are liable to tax on their worldwide income and wealth. Non-residents are only taxable on certain types of income and wealth with nexus to the Netherlands. Domicile is not relevant for Dutch tax purposes.
For tax purposes, the residence of a person is based on a 'all-relevant-facts-and-circumstances test': if, based on all relevant facts and circumstances, a durable bond of personal nature exists with the Netherlands, that person is considered resident for tax purposes. Relevant considerations (or 'connecting factors') in this respect are the availability of a dwelling, the place of habitual abode and the location of family members, among others. The number of days spent in or outside the Netherlands is, in practice, one of the less relevant factors.
For non-residents, the connecting factor is the ownership of certain assets with a nexus to the Netherlands. These assets include real estate in the Netherlands, substantial interests in companies effectively managed in the Netherlands, and rights to shares in the profit of an enterprise effectively managed in the Netherlands, among others. The actual tax liability in the Netherlands is subject to the application of a treaty for the avoidance of double taxation.Income
What, if any, taxes apply to an individual’s income?
In the Netherlands, the taxable income of resident taxpayers is allocated to three different 'boxes' according to source:
- Box 1: income from labour, business and principal residence.
- Box 2: income from a substantial interest.
- Box 3: income from savings and investments.
The tax year is equal to the calendar year. Tax returns must be filed before 1 May the next year, but an extension is granted upon requeset. In case of late filing, interest on tax is charged.
Income from present and past employment, business activities, certain other activites (eg, freelance work), and deemed income from the principal residence is taxed at a progressive rate in box 1. Rates vary from 37.35 per cent to 49.5 per cent (2020) and from 37.10 per cent to 49.5 per cent (2021). These rates include contributions to the Dutch compulsory social security system (effectively capped at €9.597 (2020) annually).
Income from employment is generally also taxed with wage tax. Wage tax is an advance payment for personal income tax, and can be set off against the tax due in box 1.
The principal residence is taxed on a certain percentage of its value for tax purposes; capital gains are not taxed. Subject to certain conditions, interest paid on a loan relating to the principal residence (ie, taken out for the acquisition, improvement and maintenance of a princpal residence) can be deducted in box 1 for 30 years. The rate against which the deduction of interest in the highest income tax bracket takes place is limited at 46 per cent (2020), and will be gradually reduced to 37.10 per cent in 2023.
Income from real estate other than the principal residence is usually not taxed in box 1, but in box 3 (see below). Income from real estate other than the principal residence (including capital gains) is only taxed in box 1, if it the taxpayer is actively involved in the management of the real estate.
In case of a business succession, the levy of personal income tax in box 1 may be deferred if certain strict requirements are met. The main requirements are that a business enterprise is transferred, and that the successor has been working with the business enterprise for at least 36 months prior to the transfer (ie, the succession).
Income from a substantial interest is taxed in box 2 at a flat rate of 26.25 per cent (2020) or 26.9 per cent (2021). A substantial interest is a shareholding (including, under certain circumstances, options on shares, profit rights and economic ownership) in a company of 5 per cent or more. Taxable income includes both dividends and capital gains. Box 2 also applies to non-resident taxpayers with a substantial interest in a company that has its place of effective management in the Netherlands. Tax treaties may prevent the Netherlands from levying its full domestic rate.
Dividends paid by companies effectively managed in the Netherlands are subject to 15 per cent dividend withholding tax. This dividend withholding tax can be set off against the personal income tax due in box 2.
Dividends and capital gains also include certain deemed dividends and deemed capital gains. For instance, a shareholder with a substantial interest in a low-taxed or exempt portfolio investment company is taxed on a deemed annual dividend of 5.28 per cent (2020) of the substantial interest's fair market value. This annual deemed dividend is reduced by actual dividends received during the year. In addition, the Dutch government has submitted a legislative proposal in 2020 to also recognise a deemed dividend if loans in excess of a certain threshold are taken up from a company in which a substantial interest is held. The legislation is due to enter into force as of 2023 (effective 31 December 2023, entry into force deferred because of COVID-19).
Deemed capital gains include the repurchase of shares by a company, liquidation of the company, inheritance of the shares, emigration of the substantial shareholder (exit taxation), and the transfer of the place effective of management of the company out of the Netherlands. Deemed capital gains also include the emigration of a substantial shareholder. Upon emigration, the substantial shareholder receives a protective assessment for the personal income tax due on the capital gain deemed realised. An interest-free delay for tax payment for an unlimited period is granted automatically (for emigration within the EU/EEA) or upon request (for emigration outside the EU/EEA; security must be provided). The delay for tax payment is withdrawn, and a protective assessment is (partially) collected, if the emigrated substantial shareholder receives a dividend or realizes a (deemed) capital gain. Upon request, a further delay for tax payement may be possible.
In case of a business succession, the levy of personal income tax in box 2 may be deferred if certain strict requirements are met. The main requirements are that the substantial shareholding represents a business enterprise, and that the successor has been working with the business enterprise for at least 36 months prior to the transfer (ie, the succession).
Income from savings and (portfolio) investments is taxed in box 3 at a flate rate of of 30 per cent (effective tax rates in 2020 vary from 0.54 per cent to 1.58 per cent). The flat rate is appllied to a deemed yield on the net value of assets and liabiliies allocated to box 3, irrespective of the actual income or capital gains. The deemed yield increases progressively with a taxpayer's net wealth. Box 3 also applies to non-resident taxpayers. For non-resident taxpayers, taxation is limited to certain assets and liabilies with a nexus to the Netherlands, most notably (debts relating to) real estate located in the Netherlands.
For both resident and non-resident taxpayers, certain assets may be excluded from the taxable base. A tax exemption of €30,846 (2020) per year applies to every taxpayer individually, or €61,692 (2020) for partners.
In recent years, the deemed yield has been widely ciritsized for being too high compared to risk free market yields. Addressing this critisism, the Dutch governement has indicated it is looking for a way to tax the actual income (and capital gains) from savings and (portfolio) investments in box 3 as part of a complete overhaul of the personal income tax system in the years to come. In the meantime, it will increase the tax exemption to €50,000 (2021) individuallly, or €100,000 (2021) for partners, and amend the deemed yield.
Expatriates – 30 per cent ruling
An important income tax incentive for expats (incoming employees) immigrating to the Netherlands is the 30 per cent ruling. Subject to certain conditions, this ruling allows for a deduction of 30 per cent of the incoming employee’s income for deemed extraterritorial expenses.
More importantly, the individual can opt to be treated as a non-resident taxpayer for box 2 and box 3. As a result, the individual will, in principle, not be taxed on a substantial shareholding in a company incorporated and effectively managed outside the Netherlands, and on private wealth (except for real estate in the Netherlands).
A 30 per cent is valid for a period of five years. This period of validity is reduced by the period (in months) spent in the Netherlands prior in the 25-year period prior to immigration. An incoming expat is only eligible for a 30 per cent ruling, if that expat has not resided within a 150km radius of the Dutch border for more than two-thirds of the 24-month period prior to immigration.Capital gains
What, if any, taxes apply to an individual’s capital gains?
The Netherlands does not impose a separate capital gains tax. However, certain capital gains may be subject to personal income tax in the Netherlands depending on the source. For instance, capital gains derived from a substantial interest (box 2) are subject to tax, and so are capital gains realised as entrepreneur (box 1). Capital gains derived from a principal residence are not taxed in box 1, and capital gains realised in box 3 are exempt from tax (other than the deemed yield) as well.
What, if any, taxes apply if an individual makes lifetime gifts?
Gift tax is payable on (the fair market value of) lifetime gifts made by a resident of the Netherlands. For Dutch gift tax purposes, all persons, regardless of their nationality, who emigrate from the Netherlands are deemed resident for a period of one year after emigration. Dutch nationals are deemed resident for gift and inheritance tax purposes for a period of 10 years after emigration.
Gift tax rates (2020) are:
Up to €126,723
€126,723 and more
Various gift tax exemptions exist. An important exemption for gift tax is the annual exemption for children of €5,515 (amount for 2020). A one-time increase of this exemption to €26,457 (2020) is allowed if the child is aged between 18 and 40 at the time of the gift. If a donation was made for the financing of an education that is more expensive than average, the one-time increase of €55,114 is allowed. Alternatively, a one-time increase to €103,643 is allowed if a donation relates to the acquisition or renovation of a principal residence or is used to repay a debt in connection with the principal residence.Inheritance
What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?
Inheritance tax is only payable on the (fair market value of the) worldwide estate of a resident. Dutch nationals are deemed resident for gift and inheritance tax purposes for a period of 10 years after emigration. The inheritance tax is payable by the recipient(s).
For inheritance tax rates, we refer to the gift tax rates above.
Albeit different from gift tax, various inheritance tax exemptions exist as well. These exemptions depend on the relationship between the deceased and the beneficiary. For 2020, the most important inheritance tax exemptions are:
for partners: €661,328 (half of the cash value of pension rights derived by the partner from the death of the deceased is deducted from this amount; the minimum exemption is €170,846);
for children whose cost of living was, for the greatest part, paid by the deceased and for whom it is expected that within the coming three years they will not be able earn half of the income a physically and mentally healthy person would earn: €62,830;
for other children and grandchildren: €20,946;
for parents: €49,603; and
for others: €2,208.
Business succession facility
In the Netherlands, the Personal Income Tax Act 2001 and the Inheritance Tax Act 1956 provide for a tax facility for the transfer of business assets and substantial shareholdings that represent business assets as part of a business succession: the business succession facility.
Subject to strict terms and conditions, business assets and substantial shareholdings representing business assets are (largely and) conditionally exempt from gift and inheritance tax. Under the business succession facility:
- assets and substantial shareholdings are valued as going concern (exemptions appy);
- €1,102,209 of the going concern value and 83 per cent in excess of €1,102,209 of the going concern value is conditionally tax exempt; and
- a conditional delay for tax payment is granted for the tax on the remaining 17 per cent of the going concern value.
The BOR is intended to facilitate genuine business successions and is, therefore, subject to strict conditions. Among others, the acquirer must continue the business for at least five years.
In addition to gift and inheritance tax, personal income tax may also (partly) be deferred if certain conditions are met. As with gift and inheritance tax, deferral is only available to the transfer of business assets and substantial shareholdings that represent business assets. In addition, a main condition is that the successor has been working with the business enterprise for at least 36 months prior to the transfer (ie, the succession).
Under certain strict conditions, real estate portfolios could also qualify as business assets / business enterprise eligble for the business succession facility. However, the Dutch tax authorities are know to take a very strict view, in most cases arguing that real estate portfolios are to be considered passive investment assets to which business succession facilities cannot be applied.Real property
What, if any, taxes apply to an individual’s real property?
The acquisition of real estate is subject to real estate transfer tax. For 2020, the real estate transfer tax rate is 6 per cent for commercial real estate and 2 per cent for residential real estate. Recently, the Dutch government has announced it will amend these rates as of 2021.
As of 2021, the 'default' tax rate for the acquisition of commerical and residential real estate will be increased to 8 per cent. For the acquisition of owner occupied (principal) residences the rate will remain 2 per cent. For people aged 18 to 35, a one-time exemption will be introduced for the acquisition of a owner occupied (principal) residence.
Under certain conditions, shareholdings in real estate companies are deemed real estate for real estate transfer tax purposes. This may also apply to shares in (holding) companies outside the Netherlands, if these shares directly or indirectly derive their value from real estate in the Netherlands.
There is often discussion whether the business succession facility can be applied to real estate portfolios (including substantial shareholdings in real estate companies). In most cases, the Dutch tax authorities are known to take a very strict view, arguing that real estate portfolios are to be considered passive investment assets to which the business succession facility cannot be applied. Recent case law indicates that, under certain circumstances, this point of view may be too strict: if certain requirements are met, real estate portfolios could qualify as business assets. Those qualifying assets should therefore be eligible for the business succession facility.Non-cash assets
What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?
Generally speaking, customs duties and VAT may be due in the Netherlands on the import of goods from outside the EU. Within the EU, in principle, no customs duties apply, and VAT is payable under the local VAT legislation in the jurisdiction where the purchase is made.
For migrations from an EU country to the Netherlands, generally speaking, no customs declaration has to be made for the removal of personal goods. For cars, certain conditions must be fulfilled to make use of an exemption from private vehicle and motorcycle tax. Special attention may also need to be given to specific goods, such as pets and goods with cultural value. In the case of migration to the Netherlands from a non-EU country, one will, generally speaking, be allowed to import furniture without paying taxes. However, one must apply for a permit in this case.Other taxes
What, if any, other taxes may be particularly relevant to an individual?
Dutch VAT is charged on supplies of goods and services in the Netherlands. The basic VAT rate is 21 per cent (2020). Certain supplies, such as educational services, medical services and financial services, are VAT-exempt. The low VAT rate of 9 per cent (2020) applies to the supply of, for example, food, (non-alcoholic) drinks, medicines, books, daily newspapers and magazines, and to services such as passenger transport, hairdressing and the letting of holiday homes.Trusts and other holding vehicles
What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?
If an individual taxpayer in the Netherlands transfers wealth into a trust or trust-like entity (eg, a foundation) without receiving ownership or profit-sharing rights in return, the transferred assets and liabilities will continue to be attributed to the individual taxpayer for personal income tax and gift and inheritance tax purposes under the 'separated private estate regime' (SPE regime).
As a result of the application of the SPE regime, a transfer of assets to a trust or trust-like entity does result in the levy of tax. Instead, personal income tax and gift and inheritance tax are levied on the settlor of the trust or trust-like entity.
The SPE regime does not extend to Dutch corporate income tax. It should therefore be verified whether the trust or trust-like entity is subject to corporate income tax in the Netherlands. This would only be the case insofar a trust or trust-like entity carries on a business enterprise. If the assets and liabilities of the trust or trust-like entity consist of portfolio investments or mere shareholdings, it is usually not considered to be carrying on a business enterprise.Charities
How are charities taxed in your jurisdiction?
Gifts and inheritances made by a Dutch resident to a qualifying charity (ie, algemeen nut beogende instelling or ANBI) are exempt from gift and inheritance tax. Subject to certain conditions, gifts to ANBIs are also deductible for personal income tax purposes.
Gifts made by an ANBI are exempt from gift tax, provided the gift is made in accordance with the charitable purpose of the ANBI. The SPE regime does not apply to ANBIs, and ANBIs are generally not subject to corporate income tax in the Netherlands.
To qualify as ANBI, a charity must meet requirements, the most important being that at least 90 per cent of the charity's actual activities support the public interest.Anti-avoidance and anti-abuse provisions
What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?
The Netherlands has implemented the EU Anti-Tax Avoidance Directive (1 and 2). The directive concerns different anti-avoidance measures, including, among others, the earnings stripping rule (limitation of interest deduction), exit taxation (the Dutch tax law already contains an exit taxation rule) and the general anti-abuse rule (GAAR).
The Netherlands has also signed and ratified the Multilateral Instrument (MLI). The MLI adds various anti-avoidance measures to existing tax treaties, for instance by introducing a principal purpose test (PPT). From1 January 2020, the MLI is gradually 'covering' tax treaties the Netherlands is a party to.
The Netherlands has also implemented the Mandatory Disclosure Directive (DAC6) in its domestic legislation. DAC6 requires intermediaries (eg, lawyers, tax advisers, and bankers) and under certain circumstances taxpayers themselves to report certain arrangements to the Dutch tax authorities. These arrangements are potentially aggressive tax planning arrangements with a cross-border dimension and arrangements designed to circumvent reporting requirements (eg, CRS and UBO). Because of the current situation (covid-19), the Dutch tax authorities announced in June 2020 that they will apply a six-month deferral for the filing and exchange of reportable cross-border arrangements. The first reportable cross-border arrangements now have to be filed and exchanged by 31 January 2021.
Further, the Netherlands has implemented the amended fourth EU Anti-Money Laundering Directive into its domestic legislation. As of 27 September 2020, Dutch corporate and other legal entities have to register information on their ultimate beneficial owners (UBOs) in the Dutch UBO register. The UBO register will include personal information of a UBO as well as the nature and extent of the beneficial interest. Part of this information will be publicly accessible; other information will only be accessible to certain competent authorities and the Financial Intelligence Unit.
The Dutch government has also published a draft legislative proposal to implement a UBO register for trusts and similar legal arrangements (Trust register). This publicly accessible register will contain certain personal details of UBOs of trusts and similar legal arrangements.
Considering the above, one should expect an important increase of the information exchanged on the corporate ownership structures of private clients and transactions within that structure and with the private client. We expect that as a result of the combination of increased information and the application of GAAR and PPT, clients may need to reconsider their existing ownership or governance structure.
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