The tax system in any given country is invariably an extremely important criterion when it comes to companies finding a country of incorporation. The view taken by the Dutch government is that the tax system may under no circumstances form an impediment for companies wishing to incorporate in the Netherlands. In that framework, it is possible to obtain advance certainty regarding the fiscal qualification of international corporate structures in the form of so-called Advance Tax Rulings. In addition, the Netherlands has also signed tax treaties with many other countries to prevent the occurrence of double taxation.
The following are a few of the benefits offered by the Dutch tax system:
- The Netherlands does not charge tax at source on interest and royalties.
- In most cases all the profits that the Dutch parent company receives from foreign subsidiaries are exempted from tax in the Netherlands (participation exemption).
- The Netherlands offers attractive tax-free compensation in the form of the 30% scheme for all foreign personnel who are temporarily employed in the Netherlands.
The Dutch tax system can be divided into taxes based on income, profit and assets, and cost price increasing taxes.
Below you find a summary regarding income tax.
Income tax is a tax levied on the income of natural entities with domicile in the Netherlands (domestic taxpayers). They are taxed on their full income wherever it is earned in the world. Any natural person who is not domiciled in the Netherlands, but earns an income in the Netherlands, is liable to pay income tax on the income (foreign taxpayers). Foreign taxpayers can also opt to pay domestic taxes. In the latter instance, the taxpayer is subject to all the rules applicable to domestic taxpayers.
In principle, income tax is charged on an individual basis: Married persons, registered partners and unmarried cohabitants can however mutually distribute certain joint income tax components.
Income tax is charged on all taxable income. The different components of taxable income are broken down into three ‘closed’ boxes; each at a specific tax rate.
Each source of income can only be entered in one box. A loss in one of the boxes cannot be deducted from a positive income in another box. A loss generated in Box 2 can be deducted from a positive income in the same box in the previous year (carry back) or in one of the nine subsequent years (carry forward). A loss in Box 1 can be deducted from a positive income in the same box in the 3 preceding years or in one of the subsequent 9 years. Box 3 does not recognize a negative income.
Box 1: Taxable income from work and home
The income from work and home is the sum of:
- The profit from business activities;
- The taxable wages;
- The taxable result of other work activities (e.g. freelance income or income from assets made available to entrepreneurs or companies);
- The taxable periodic benefits and provisions (e.g. alimony and government subsidies);
- The taxable income derived from the own home (fixed amount reduced by a deduction equivalent to a specified interest paid on the mortgage bond);
- Negative expenditures for income provisions (e.g. repayment of specific annuity premiums);
- Negative personal tax deductions.
The following allowances apply to the above-mentioned income components:
- Expenses for income provisions (e.g. premiums paid for an annuity insurance policy or a disability insurance);
- Personal deductions. This concerns costs related to the personal situation of the taxpayer and his family that influence his ability to support himself and his dependents (e.g. medical expenses, school fees and specific living expenses for children).
The tax rate in Box 1 is progressive and can accumulate to a maximum of 52%.
Business allowances and exemptions for Small and Medium-size Enterprises (SME) (MKB in Dutch)
A natural person who derives income from business activities qualifies for tax allowances for entrepreneurs under certain circumstances. The tax allowances for entrepreneurs include self-employed allowance, research and development allowance, overtime allowance and discontinuation allowance. In addition, a starting entrepreneur is also entitled to a start-up allowance.
The SME Allowance (MKB-vrijstelling) will also come into effect in 2007. This entails that entrepreneurs will be entitled to an additional exemption of 12% (2010) of the profits following deduction of the start-up allowance.
Box 2: Taxable income from substantial interest
Substantial interest applies where the taxpayer, with or without his partner, is a direct or indirect holder of a minimum of 5% of the paid-up capital in a company of which the capital is distributed in shares.
The income from substantial interest is the sum of the regular benefits and / or sales benefits reduced by deductible costs. Regular benefits include dividend payments and payments on profit-sharing certificates. Sales benefits include the gains or losses on the sale of shares. Examples of deductible costs include the following: consultancy fees and the interest on loans taken out to finance the purchase of
The tax rate in Box 2 is 25%.
Box 3: Taxable income from savings and investments
Box 3 charges tax on the taxpayer’s assets. This assumes a fixed return on investment of 4% of the yield base. The yield base is the average value of the assets less the average value of the debts. The average value is obtained by adding up the assets at 1 January and at 31 December and dividing the sum by two.
The following assets are included under Box 3: Savings, a second house or holiday house, properties that are leased to third parties, shares that do not fall under the substantial interest regime and capital payments paid out on life insurance.
Debts in Box 3 include the following: Consumer loans and mortgage bonds taken out to finance a second house. Per person, the first € 2,900 (2010) of the average debt is not deductible from the assets.
All taxpayers are entitled to untaxed assets in Box 3 of € 20,661 (2010). The amount is intended to reduce the yield base. The untaxed assets can be increased by a child allowance of € 2,762 (2010) per minor. Taxpayers of 65 and older are entitled to an extra increase up to a maximum of € 27,350 (2010) under certain conditions. A fixed return of 4% is then calculated on the amount remaining after deduction of the exemption. 30% tax is then paid on this return.
The tax rate in Box 3 is 30%.
Once the due tax has been calculated for each box, certain tax allowances are deducted from those amounts. All domestic taxpayers are entitled to a general tax allowance of € 1,987 (2010). Depending on the personal situation of the taxpayer and the actual amount of the annual income, the taxpayer may also be entitled to additional tax deductions.
Advance tax payments
Tax is withheld in advance over the course of the tax year for income deriving from work activities and from dividends. Both wage withholding and dividend tax are advance tax payments on income. The withheld amount may be deducted from the income tax due.
The income tax declaration for any given tax year must be submitted to the tax authority in principle before 1 April of the next year. If a firm of accountants produces the return an extension scheme applies. This means that the return may also be submitted later in the year.
Author: Harry den Hond, Schagen Lensen & van Krieken Accountants, www.slk.nl