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 a Dutch nexus as listed in the Income Tax Act. Domicile is not a relevant consideration for taxation purposes in the Netherlands.
The residence of a person has to be determined on the basis of all relevant facts and circumstances. Factors connecting an individual to the Netherlands are, for example, the availability of a dwelling, where one has his or her place of habitual abode, and where one’s family is located. 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 link to the Netherlands. Among other things, ownership of real estate in the Netherlands, a (profit) stake in a business in the Netherlands and a substantial shareholding in a Dutch company (subject to application of a treaty for the avoidance of double taxation) result in tax liability as a non-resident taxpayer.Income
What, if any, taxes apply to an individual’s income?
In the Netherlands, income tax is levied according to a system of boxes for different types of income as explained below. Certain types of income are subject to a pre-levy, such as wage tax (labour income) and dividend withholding tax. The Netherlands does not levy a withholding tax on interest and royalty income.
The taxable income of resident taxpayers from different sources is divided over three boxes:
- Box 1: income from labour, business and principal dwelling;
- Box 2: income from a substantial shareholding; and
- Box 3: income from savings and investments.
The tax year is equal to the calendar year. In principle, taxpayers must file their tax declaration before 1 May of the calendar year following the tax year concerned. Interest is due for income tax assessments issued after 1 July of the year following the year on which the tax is due.Box 1
The income from work and principal residence (Box 1) is taxed at progressive rates. The following rates (according to the Tax Plan 2020) apply to individuals who are not entitled to an old age pension.
Up to €34,712*
From €34,712 to €68,507
* The first bracket includes social security premiums.
In Box 1, the income from employment and owner-occupied dwellings is taxed. This includes income from business activities, income from present and past employment, income from other (eg, freelance) activities, certain periodic payments, and deemed income from owner-occupied dwellings.
The progressive rates in Box 1 vary from 9.7 per cent (income tax rate bracket 1 excluding social security premiums) to 49.5 per cent. If an individual is insured under Dutch social security schemes, he or she also has to pay 27.65 per cent social security contributions on the first €34,712 of the income in Box 1. Social security premiums are only due in the first bracket and, therefore, capped at some €9,600.
Box 1 has a limited number of deductions, the most important of which is interest paid on a loan for the acquisition, improvement or maintenance of the principal, owner-occupied dwelling. Although an anomaly in a box that taxes active income, this interest deduction has stimulated the ownership of personal dwellings in the Netherlands for decades. In recent years, this tax incentive has been economised several times. Since 2001, this interest deduction has been time-limited to a period of 30 years from the first deduction taken in the personal income tax return.
As of 2013, mortgage interest payments on new loans will only be tax deductible if the loan is fully repaid within a maximum of 30 years on (at least) an annuity basis. Loans entered into before 1 January 2013 will be grandfathered under certain conditions. In addition, with effect from 1 January 2014, the maximum rate for the deductibility of mortgage interest of 52 per cent will be reduced by 0.5 per cent per year, resulting in a 42 per cent rate over a 20-year period. This reduction will apply for both existing and new mortgages. As such, in 2020, mortgage interest will be deductible at a maximum rate of 46 per cent. The current government has proposed to step up this reduction of the rate against which the interest deduction can be taken to 3 per cent per annum as of 2020 until 2023. As a result, in 2023, the effective income tax rate against which mortgage interest can be deducted will be 37.05 per cent.Box 2
In Box 2, the income from substantial interests is taxed. 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 effective place of management in the Netherlands.
The personal income tax in Box 2 currently has a flat rate of 25 per cent, which will increase to 26.25 per cent for the year 2020. As of 2021, this rate will increase once more to 26.9 per cent. Dividends paid by companies resident in the Netherlands are subject to a 15 per cent dividend withholding tax. This dividend withholding tax may be credited against Dutch personal income tax in Box 2.
In the case of a substantial shareholding in a low-taxed or exempt portfolio investment company, a deemed 5.6 per cent (for the year 2020) yield over the net wealth of the company will be imputed on the income of the substantial shareholder in Box 2 to the extent no, or a lower amount of, actual dividends is distributed.
On Budget Day 2018 (18 September 2018), the Dutch government announced its intention to enact legislation countering excessive borrowing by substantial shareholders from their (personal holding) company. The draft legislative proposal was published for consultation in April 2019. Under the proposal, borrowings from the (personal holding) company in excess of €500,000 on 31 December of a given year are deemed distributed as a dividend for the amount of the excess. The measure should enter into force on 1 January 2022. Loans related to the principal dwelling are exempted under certain conditions.
Alongside alienations of substantial shareholdings, the Income Tax Act specifies several events in which the shares are deemed alienated, such as the repurchase of shares by the company, liquidation of the company, inheritance of the shares, emigration of the substantial shareholder (exit taxation), and the transfer of the effective place of management of the company out of the Netherlands.
Under exit taxation, individuals with a substantial shareholding receive a protective assessment for the gain from the deemed disposition of their substantial shareholding upon emigration. The emigrating individual is granted an interest-free delay of payment for the income tax (26.25 per cent as of 2020) due on this assessment. The taxpayer must provide security if he or she emigrates outside the European Economic Area.
Until 15 September 2015, the assessment was collected if, inter alia, the individual disposed of all or part of the shareholding within the 10 years following the individual’s emigration. As of the first day of the 10th year following the year of emigration, the remaining amount of the protective tax assessment was waived following a written request by the taxpayer. As of 1 January 2016, the legislation concerning exit taxation was amended with retroactive effect to 15 September 2015. For emigrations of substantial shareholders after this date, the protective assessment is no longer waived after 10 years, but will be imposed for an unlimited period. Furthermore, each euro of dividend distribution received on the substantial shareholding will result in a pro rata collection of the protective assessment (while respecting double tax treaties). Previously, only a distribution of over 90 per cent of the distributable reserves upon emigration would result in the collection of the protective assessment. Assessments issued for emigrations prior to 15 September 2015 are grandfathered.Box 3
In Box 3, the income from savings and investments is taxed. The taxable income is a deemed income over the net value of assets and debts that qualify for Box 3, irrespective of the actual income or capital gains generated with the assets concerned. The Dutch tax authorities assume that the income or capital gains generated from the assets will progressively increase with the value of the net wealth. A specific allocation is given by the Dutch tax authorities regarding the saving and investment part of the net value of the assets and the corresponding rates of deemed yield. The reference date for the valuation of the taxable assets in Box 3 is 1 January of the relevant year. The deemed income is taxed at a flat rate of 30 per cent. The actual tax rate depends on the net value of assets and debts that qualify for Box 3. For non-resident taxpayers, Box 3 applies, among others, to real estate in the Netherlands and rights that are directly or indirectly attached thereto. Debts connected to Dutch real estate may be deducted.
The deemed yield is progressive depending on the net wealth in accordance with the following thresholds (amounts and rates for 2019):
- from €30,360 to € 71,650, the deemed yield is 1.94 per cent;
- from €71,650 to € 989,736, the deemed yield is 4.45 per cent; and
- above €989,736, the deemed yield is 5.6 per cent.
The deemed yields are determined under the assumption that up to around €100,000, people tend to hold their wealth in savings accounts and that with an increase in their wealth, they shift their wealth allocation to securities with a full allocation to securities as of around €1 million in wealth. Thus, the deemed yields are adjusted annually based on a five-year moving average of yields on saving accounts and a certain mix of securities.
Up to 2017, the deemed yield was fixed at 4 per cent (taxed against 30 per cent). This deemed yield has been subject to much debate. Even though the Supreme Court ruled that the Box 3 taxation was within the ‘wide margin of appreciation’ left to the legislator and did not impose an excessive burden for the taxpayer, the Box 3 taxation was amended as of 1 January 2017, with the ‘progressive yield’ described above as result. This regime, which also uses a deemed yield instead of the actual yield, is again widely criticised.
Following the 2017 changes to the Box 3 system, the Ministry of Finance in the Netherlands continued to investigate further adjustments to the Box 3 taxation in order to arrive at a more balanced taxation of wealth given the low risk-free market yields. On 6 September 2019, the Ministry of Finance announced the introduction of a new system for the taxation on savings. Under the new system, the Box 3 income tax is no longer levied based on a deemed yield over the net wealth. Rather, a deemed net income is determined based on the value of assets and liabilities on January 1 of a given year. Through a significant reduction of the deemed savings yield to 0.09 per cent combined with an exemption of €400 for Box 3 income, effectively €440,000 of savings will not be taxed. The deemed yield will be adjusted annually based on the actual savings yield. For assets other than savings accounts, a deemed yield of 5.33 per cent is foreseen, whereas debts are deemed to carry 3.03 per cent interest. The new system should be effective as of 1 January 2022.Expatriates - 30 per cent ruling
An important income tax incentive for expats (incoming employees) immigrating to the Netherlands is the 30 per cent ruling. Under specified 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 foreign taxpayer for Box 2 and Box 3. As a result, he or she will, in principle, not be taxable for a substantial shareholding in a company incorporated and managed outside the Netherlands or private wealth (with the exception of rights related to Dutch real estate).
The 30 per cent ruling had previously been granted for a period of eight years. However, as of 1 January 2019, the applicable period of eight years has been reduced to five years. The new period of five years will apply both to new expats and to expats who have already immigrated to the Netherlands under the 30 per cent ruling. As a result, expats who have been living in the Netherlands for five or more years can no longer apply the 30 per cent ruling.
The grant period under the 30 per cent ruling is reduced by the period (in months) spent in the Netherlands in the 25-year period prior to immigration. Furthermore, in order to be eligible for the ruling, the incoming individual should not have resided within a 150km radius of the Dutch border for more than two-thirds of the 24-month period prior to emigration. The latter requirement has been challenged before the Dutch Courts and the European Court of Justice. In the spring of 2016, the Dutch Supreme Court, following the ruling of the European Court of Justice, upheld the 150km requirement.Capital gains
What, if any, taxes apply to an individual’s capital gains?
The Netherlands does not impose a separate capital gains tax. Instead capital gains on substantial shareholdings are taxed in Box 2 (see question 2). All other capital gains fall within the deemed yield of Box 3, and hence the actual gains are not subject to income tax. The only exception is made for gains on the principle dwelling, which are exempt from the income tax in box 1 (see question 2).Lifetime gifts
What, if any, taxes apply if an individual makes lifetime gifts?
Gift tax is imposed on the value of all that is acquired as a gift from an individual who was (deemed to be) resident of the Netherlands at the time of the gift.
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 following the date of emigration. The Inheritance and Gift Tax Act 1956 holds various provisions to prevent tax avoidance by transactions during an individual’s lifetime.
Gift tax rates are equal to inheritance tax rates and are as follows (2019 rates).
Up to €124,727
€124,727 and more
Various thresholds apply for inheritance tax and gift tax. An important threshold for gift tax is the annual exemption for children of €5,428 (amount for 2019). A one-time increase of this exemption is allowed if the child is aged between 18 and 40 at the time of the gift. The increase is permitted up to an amount of €26,040. If the donation was made for the acquisition of a principal residence or for the financing of an education that is more expensive than average, the increase is permitted up to an amount of €54,246.
As of 1 January 2017, the latter amount of the one-time increase of the annual tax-free allowance has been raised to €102,010 (amount for 2019) if the 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?
Upon the death of a Dutch resident taxpayer, all acquisitions as a result of his or her death are subject to inheritance tax payable by the recipients. This does not just concern the assets that are directly acquired from the estate. A non-resident donor or deceased is not subject to Dutch gift or inheritance tax, not even with regard to Dutch situs assets.
For inheritance tax purposes, the most important tax-free allowances are as follows (amounts for 2019):
- for partners: €650,913 (half of the cash value of pension rights derived by a partner from the death of the deceased is deducted from this amount);
- for children and grandchildren: €20,616;
- for parents: €48,821; and
- for others: €2,173.
For inheritance tax, the same rates as those for gift tax are applicable (see question 4).Business succession facility
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 (BOR). Business assets acquired through gift or inheritance are conditionally exempt such that 100 per cent of the amount up to €1,084,851 and 83 per cent of the surplus of €1,084,851 is exempt (for 2019).
The BOR is intended to facilitate real 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 the facility in inheritance and gift tax, personal income tax may, under certain conditions, be (partially) deferred if a qualifying business is transferred as a gift or as part of an inheritance.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. The rate for real estate transfer tax is 6 per cent for commercial real estate and 2 per cent for residential real estate (2019 rates). The rate of real estate transfer tax for commercial real estate will be increased to 7 per cent as of 2021. If the real estate is gifted and the gift has been subject to Dutch gift tax, the real estate transfer tax may be partly offset against the gift tax due. If real property in the Netherlands is acquired by inheritance, no real estate transfer tax is levied.
Under certain conditions, shareholdings in real estate companies are deemed taxable 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.
Because the Dutch tax authorities take the position that real estate portfolios, including in real estate companies, are to be considered passive investment assets even if it concerns an actively managed portfolio, real estate owners, in principle, cannot apply the business succession facilities. As a result, the sale of shares in a real estate company could result in income taxation over the gain in Box 2. There have been a number of lower court cases that have recognised large real estate portfolios as entrepreneurial assets. Nevertheless, the qualification of real estate portfolios either as entrepreneurial assets or passive investments is highly dependent on the facts and circumstances of each case, and the outcome remains very uncertain.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. Certain supplies, such as educational services, medical services and financial services, are VAT-exempt. The low VAT rate of 9 per cent 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, a foundation or a similar vehicle without receiving ownership or profit-sharing rights in return, the transferred assets and liabilities will continue to be attributed to the individual taxpayer for income, gift and inheritance tax purposes under the provisions for the taxation of separated private wealth (APV). The attribution is effective if the transfer was done for personal or family reasons.Charities
How are charities taxed in your jurisdiction?
Gifts and inheritances to qualifying charities are exempt from gift and inheritance tax. Furthermore, the individual taxpayer, under certain conditions, is allowed a deduction of certain gifts for income tax purposes.
To benefit from this tax treatment, the charity needs to be recognised as supporting the public interest (algemeen nut beogende instelling). For this purpose, the charity needs to meet certain strict conditions. The most important condition requires that at least 90 per cent of the actual activities of the charity 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).
On 5 March 2019, the upper house of the Dutch parliament approved the Multilateral Instrument (MLI) ratification bill. The Netherlands signed the MLI, which implements treaty-related anti-tax avoidance measures alongside the existing treaties for the avoidance of double taxation. As of 1 January 2020, the MLI will gradually enter into effect for covered tax treaties until ratification of the MLI in the other jurisdiction is completed as well. The entry into force of the MLI is likely to affect the entitlement to tax treaty benefits under covered tax treaties concluded by the Netherlands. The MLI, among others, introduces a principal purpose test (PPT).
The Netherlands will also implement the Mandatory Disclosure Directive (DAC 6) in its national law as of 2020 with retroactive effect for restructurings started after 25 June 2018. Under DAC 6, intermediaries (tax advisers, notaries, banks, and ultimately the client personally) will need to report arrangements which meet the hallmarks as listed in the Directive.
Together with the implementation of the 4th and 5th Anti-Money Laundering Directives, in particular the ultimate beneficial owners (UBO) register, as of early 2020, 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.