Scope of Dutch personal income tax
An individual may be subject to income tax on any income received depending on the status of the individual’s tax residence, ordinary residence and domicile. Residence is determined according to the facts of each particular case. An individual that is tax resident, ordinarily resident and domiciled in the Netherlands, is subject to income tax in respect of its worldwide income (reference is made to the paragraph personal income tax).
Taxable income is divided into three separate categories, known as ‘boxes’. The three boxes operate independently from each other. This means that taxable income is computed according to the rules applicable to each relevant box and that separate tax rates apply for each box. Resident taxpayers are liable to tax on their worldwide income covered by these boxes, while non-residents are in principle liable only in respect of such income that is specified as being derived from the Netherlands (Dutch source income), such as income from Dutch employment or income from Dutch real estate.
Employment income and dividends may also be subject to tax by way of withholding. These taxes are referred to as payroll tax (see below) and dividend withholding tax (see below). These taxes may be credited against the final income tax liability or refund. This depends on the circumstances of the individual taxpayer.
Taxable income (boxes)
Residents are subject to income tax on their worldwide taxable income. Taxable income is divided into three ‘boxes’ and consists of the net income (or gain) that is attributable to a specific box, less any applicable ‘personal deductions’. The three categories of income are:
- box 1 (living and working): includes business and employment income, and (deemed) income related to the principal residence (qualifying loan interest on the principal residence is deductible in this box);
- box 2 (substantial shareholding): includes income and gains from substantial shareholdings;
- box 3 (savings and investment): covers income from (passive) capital.
Non-resident individuals are subject to Dutch income tax on income derived from specified Dutch sources. These are categorized according to the same ‘box’ system as for resident taxpayers.
Personal deductions include obligatory maintenance payments, such as alimony, exceptional expenses, such as medical expenses above a certain threshold, and qualifying gifts or donations. These personal deductions are considered first in box 1, then box 3 and finally box 2. Any resulting excess may be carried forward to future years.
Income in box 1 is taxed at the following progressive rates for resident as well non-resident individuals below the age of 65 (2016):
|1||To € 19,922||36.55%|
|2||€ 19,923 – € 33,715||40.4%|
|3||€ 33,716 – € 66,421||40.4%|
|4||Exceeding € 66,422||52%|
For individuals aged 65 or above, the percentage in bracket 1 is 18.65% and in bracket 2 is 22.5% (2016).
Social security contributions are generally payable by residents and by non-residents who are subject to payroll tax, unless otherwise provided by internationals agreement or EU regulations.
Business income is income from a trade or business as well as income derived from independently provided services (e.g. by doctors, lawyers and other advisors). Income derived as a limited partner in a partnership is generally taxed as business income, although certain computational restrictions apply.
This includes all employment income, such as wages, salaries, pensions, benefits in kind and also tips and other benefits received from third parties. Employment income (including the benefit of a company car) is in general subject to payroll tax. Payroll tax is normally credited in determining the final income tax liability, or refunded. Social security and welfare payments are in general also subject to payroll tax.
Income from other activities
Earnings that are not employment related (such as freelance and consultancy income) are treated on a similar basis to business income. However, business income relief (such as the deduction for pension contributions) is in general not available. A taxpayer may file a request with the Dutch tax authorities to determine the tax status of his or her activities (business income, employment income or income from other activities).
Income related to the principal residence (positive and negative)
Income from the principle residence is taken into account in box 1. The most significant item under this heading is interest on qualifying mortgage and other loans used to finance the principle residence. This is treated as negative income and therefore tax deductible in box 1. The amount of the deductions is limited to a maximum period of 30 years.
Income and gains from a substantial shareholding are taxable in box 2. Taxable income in box 2 is taxed at a flat rate of 25% (applicable on residents as well on non-residents). A substantial shareholding exists broadly when an individual (alone or together with a fiscal partner) owns, directly or indirectly, at least 5% of the share capital (or shares of one class) of a resident or non-resident company. Stock options on at least 5% of the share capital (or shares of one class) may also constitute a substantial shareholding. Where a taxpayer’s fiscal partner or certain family members hold a substantial shareholding in a company, shares in that company held by the taxpayer are deemed to constitute a substantial shareholding. Taxable income under box 2 is computed on a net basis. Interest on loans taken up to purchase a substantial shareholding is accordingly deductible.
The third box relates to (passive) income from savings and investment. Taxable income is based on a deemed return on capital, without regard to the actual income or expenses. This deemed return has been fixed at 4% of average net capital (assets less liabilities) measured over the year from 1 January to 31 December. The 4% is applied after deduction of a threshold (in principle € 24.437 for 2016) per resident taxpayer. Unlike residents, however, the taxable capital of non-residents is not reduced by an exempt amount. The deemed income is taxed at 30%. This equates to a tax of 1.2% on average net capital above the threshold.