Personal Income Tax in the Netherlands

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Personal Income Tax in the Netherlands

Dutch Personal Income Tax is the final Dutch tax due on the employee's taxable (earned and/or non-earned) income. The Dutch Government Tax Offices provides information.

Double Taxation

Because of the potential for double taxation of income, and the denial of deduction for expenses, taxes are a significant issue for most international employees. The Netherlands is a member of the Organisation for Economic Co-operation and Development (OECD) and has an extensive network of double tax treaties based on the OECD model convention, aimed at avoiding double taxation of the same income and discrimination on the grounds of nationality.

The normal principle of a double tax treaty is to permit the host country to tax the earnings of the international employee first, with the home country giving an exemption or a credit for tax on the same income where it is still liable in that jurisdiction. International employees on short-term assignments can sometimes escape host country liability by taking advantage of certain treaty provisions. Where there is a conflict between the laws of the home and host countries over which has the right to tax, the treaty usually provides a tiebreaker.

Employees will be taxable in the Netherlands for their taxable Income. This income could consist of income generated worldwide (resident tax liability) or of income generated from a limited number of (Dutch) sources (non-resident tax liability). A combination of both is also possible (partial non-resident tax liability).

When to File a Personal Income Tax Return

Dutch personal income tax is levied together with the general insurance contributions in one amount, although a split can be made. The amount of the final tax/general insurance contributions is determined on the basis of the taxable income reported in an annual income tax return filed with the Dutch Tax Authorities. The Dutch tax year is the calendar year.

Where an individual is entitled to a refund of income tax, he or she can ask the Dutch tax authorities for a preliminary tax refund to be paid during the current year.

Resident Tax Payers in the Netherlands

As from 1 January 2001 there are three types of taxable income. These types of income are brought together in three so-called 'boxes':

• Box I: taxable income from work and home
• Box II: taxable income from substantial interest
• Box III: taxable income from savings and investments

Resident taxpayers are taxed on their taxable income. Taxable income is defined as the income less the deductible losses.

The income may have previously been reduced by certain payments that are not related to the acquisition of income (personal deduction). The personal deduction is first subtracted from income from work and home (Box I). The income in Box I must not result in a negative amount as a result of the deduction.

Any remainder can be deducted from the income in Box III. Likewise, it must not result in a negative amount. If there is still a portion left, it can be deducted from the income from a substantial interest (Box II). If the personal deduction cannot be subtracted from the total income in Boxes I, II and III, the remainder can be carried over to the following year.

Taxpayers pay tax on an individual basis. As a consequence, they pay tax on their own income and can only use their own deductible items.

However, some income and deductible items are joint. Individuals have to meet certain conditions in order to be considered fiscally as partners. Joint income and deductible items can be divided randomly between both partners as long as 100 percent of the income and deductible items is declared.

Income from work and home: Box I

The categories which make up the income from work and home are:

1. profits from business or professional activities
2. income from employment
3. income from other activities
4. income in the form of periodic payments
5. national income and deductions from own dwelling
6. expenses for income provisions
7. negative expenses for income provisions
8. negative personal deduction
9. childcare expenses
10. personal deductions

1. Profits from business or professional activities

For personal income tax purposes 'profits' are generally determined in the same manner as for entities being subject to Dutch corporate income tax.

2. Income from employment

This income consists of all income received in cash or in kind from present and former employment. Income from current employment includes wages and salaries, payments, gratuities, tips and certain periodic payments received under social security legislation (in cash), and the free use of a private car and free housing paid for by the employer (in kind). Income from former employment includes pensions and invalidity, disablement and unemployment benefits.

Salaries, wages and certain periodic payments received under social security legislation are subject to wage tax. Wage tax is withheld by the employer, and is essentially an advance levy on someone's final income tax assessment (see later).

Under certain conditions fixed amounts can be deducted for commuting to and from work. No other employment expenses are deductible with the exception of a sea days' deduction for seamen. Employers are allowed to pay tax-free expense reimbursements within certain limits.

The benefit of the private use of a company car is considered taxable income, As of 2006, employers have to add this benefit as national income to the employee's salary, and it is set at a percentage of the list price (purchase price) of the car (including VAT and BPM). Employees can only avoid this if they can deliver proof of driving fewer than 500 Km for private use with the company car.

3. Income from other activities

The result from other activities includes income from activities not contributing to either profits or the payroll. To be regarded as income there must be a reasonable expectation that these activities will yield income. Examples are the provision of boarding for lodgers, fees for services and copyrights, and securing returns from assets.

4. Income consisting of periodic payments

Periodic payments forming a separate source of income can be divided into different categories. Examples are payments by the State, such as certain public scholarships and government subsidies, periodic payments under family law, alimony payments to a former partner and terms of life annuity, the premiums of which were deductible.

5. Notional income and deductions from own dwelling

A special provision applies to owner-occupied property. Property is taxed at a notional rental value, which represents the balance of revenue and expenses connected with the use of a dwelling. This rental value, which is a positive amount, is assessed using statutory tables. The notional rental value for owner-occupiers only applies to the main residence. Second homes and other property are taxed under Box III. As normal expenses are included in the notional rental value no expenses other than (mortgage) interest, other financing expenses and ground rent may be deducted. These costs can be deducted for a maximum of 30 years.

As from 1 January 2004 the deduction of mortgage interest is limited to interest that is related to the so-called "own-dwelling-debt". This debt may be lower than the actual mortgage of a taxpayer since it is being reduced by any capital gains realised upon the sale of own-dwellings from 1 January 2004 onwards, clearly the Dutch tax authorities aim to gradually phase out the unlimited deduction of mortgage interest over the coming decades.

6. Expenses for income provisions

Contributions for occupational disability insurance, contributions under the Self-Employed Persons Disablement Benefits Act (WAZ) and annuity premiums for long-term disabled children or grandchildren can be deducted without limitation.

7. Negative expenses for income provisions

This category refers to the surrender of life annuities. In the event that a taxpayer emigrates, an insurance policy is deemed to be surrendered against a lump sum. However, the tax due will not be collected (directly). See treatment of Box II for further explanation.

8. Negative personal deduction

Amounts received as refund or subsequent payment for the expense that previously came under the personal deduction are considered as negative personal deduction.

9. Childcare expenses

Expenses for the care of children under the age of thirteen can be deducted if certain conditions have been met.

10. Personal deductions

Only resident taxpayers are entitled to certain personal deductions. A threshold or a fixed deductible amount has been established for certain deductible items.

Tax rates and personal allowances Box I

The amount of personal income tax due is calculated by applying the tax rates to the taxable income. The result is reduced by one or more tax credits. Everyone has the right to a general credit on the tax due. Additional credits over and above are available. Which additional credits apply depends on the person's circumstances.

Income from substantial interest: Box II

Income from a substantial interest in a company, including capital gains or losses, is subject to income tax and is taxed at a (fixed) rate.

A taxpayer is regarded as having a substantial interest in a company if he or she, either solely or with his or her partner, holds 5% or more in the issued capital, directly or indirectly.

If the taxpayer emigrates, the substantial interest is deemed to be alienated. However, the tax due will not be collected as long as the substantial interest is not disposed of. After 10 years (it may be less under an applicable tax treaty), the remainder of the tax levied because of the deemed alienation at the time of emigration is written off.

Income from savings and investments: Box III

Examples of assets taxed under Box III are:

• bank and savings accounts
• a second dwelling
• stocks and other shares
• endowment insurance policy which is not linked to an owner-occupied dwelling

Non-Resident Tax in the Netherlands

The tax base for non-resident individuals is generally determined in the same way as for resident taxpayers. The source of income, however, must originate in the Netherlands:

• Taxable income from work and home in the Netherlands
• Taxable income from substantial interest in a Dutch resident company
• Taxable income from savings and investments in the Netherlands

For non-residents the income from substantial interests is only subject to tax in case of a substantial interest in a company resident in the Netherlands. With respect to non-residents, a company is also deemed to be a resident of the Netherlands if it was resident in the Netherlands for at least five years during the last ten years. With respect to non-residents the substantial interest is deemed to have been alienated in case of the transfer of the place of effective management of the company from the Netherlands to elsewhere.

See the categories above for the various items of a non-resident taxpayer's income boxes. It should be noted that some of these items do not constitute taxable income for non-residents (such as interest income from bank accounts with Dutch banks) and that various personal deductions do not apply to them.

If certain conditions are met non-residents may elect to be treated as resident taxpayers. Obviously they will only do so if it improves their tax position.

Partial Non-resident Tax Payers

To make things even more complicated there is another possibility: the partial non-resident. In this situation, an individual is a resident of the Netherlands and thus a resident tax payer, but (upon request) he or she could be treated as a non-resident taxpayer for income taxed in Box II and Box III. This individual remains, however, a resident tax payer for income and deductibles in Box I. This is an additional benefit of the 30%-ruling and is therefore only possible for individuals who have such a ruling.

The choice whether to be treated as a partial non-resident tax payer must be made when filing the personal income tax return over the relevant tax year at the latest. It could be advisable to express the preference on the application form for the 30%-ruling, the choice can be reconsidered each year.

30 Percent Tax-Free Reimbursement

The Dutch income tax law provides a concession for tax-free reimbursement of extraterritorial expenses since experience has shown that in the case where an employee is temporarily employed in the Netherlands from abroad, he or she incurs expenses which an employee who is a local does not. In this matter, temporarily means that the employee will normally return to his or her home country.

Extraterritorial Employee

If an employee qualifies as a so-called extraterritorial employee, his or her employer can reimburse, tax-free, all expenses that qualify as extraterritorial expenses (see below). An extraterritorial employee is an employee who lives abroad and starts working in the Netherlands. The employee must be hired outside the Netherlands by a withholding entity or seconded to a withholding entity and must have a specific expertise that is not or is scarcely available in the Dutch labour market.

Extraterritorial expenses

Extraterritorial expenses are additional expenses incurred in connection with an employee's stay in the Netherlands. Examples of such expenses could be additional housing expenses, expenses for finding suitable accommodation, for double housing, for finding a suitable school for the employee's children, for the application for official documents such as driver's licence, and for language courses. Examples of such expenses could be:

• additional housing expenses
• additional expenses for finding suitable accommodation
• additional expenses for double housing
• additional expenses for finding a suitable school for the employee's children
• additional expenses for the application for official documents (such as driver's licence, permits)
• additional expenses for language courses
• additional expenses for home leave or bringing in relatives and other persons from the employee's home country

The employer can reimburse the employee for the actual expenses (of which proof must be delivered) or on a notional basis by granting the employee a non-taxable fixed allowance of up to 30% of his or her salary (including the (taxable) reimbursement of extraterritorial expenses, as well as the amount of school fees for international schools) during a maximum period of ten years. Earlier periods during which an employee has lived or worked in the Netherlands will be deducted from the maximum period of ten years, unless there is a period of at least ten years between the date of leaving the Netherlands and the date of return.

If the employer and the employee prefer to apply for the fixed 30%-allowance instead of the reimbursement of actual extraterritorial expenses, they should file a request to the Dutch tax authorities in Heerlen for their formal approval by applying for a ''decision 30%-ruling''.

Disclaimer: Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of Dutch tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.