Section I - Criteria for Individuals to be considered a tax resident

According to Article 2.1 of the Income Tax Act 2001 a natural person is considered subject to income taxation when he is resident in the Netherlands.Article 4 of the Dutch General Tax Act states that the place of tax residency of a natural person is based on facts and circumstances.

According to Dutch law a natural person is tax resident in the Netherlands if his or hers permanent residence or whereabouts is in the Netherlands. The main facts and circumstances that determine tax residence are:

• you spend most of your time at a Dutch address;
• your partner and/or family lives in the Netherlands;
• you work in the Netherlands;
• you have insurance in the Netherlands;
• your (family) physician is resident in the Netherlands;
• you are a member of one or more clubs / societies in the Netherlands;
• your kids receive an education in the Netherlands

Taxpayers

Income tax is a tax on the income of individuals. Individuals living in the Netherlands (resident taxpayers) and individuals who do not live in the Netherlands but who receive income from the Netherlands (non-resident taxpayers) are liable for income tax. Residents are taxed on their entire income, regardless of the place of origin (worldwide). Non-residents are only taxed on income directly connected with the territory of the Netherlands. This is different if they avail themselves of the option of choosing to be treated as a resident taxpayer. Then the rules that apply to resident taxpayers also apply (see also paragraph 4.3). Income tax is in principle levied on an individual basis. However, fiscal partners are permitted to allocate joint income components between them for their tax return. Fiscal partners are spouses and registered partners. In addition, unmarried couples living together may under certain conditions also be deemed to be partners for tax purposes. Joint elements of income are the taxable income from an owner-occupied dwelling, taxable income from substantial interest and the personal tax deductions. 

Tax base and tax rates

Income tax is levied on the taxable income of natural persons and is reduced by the amount of (general) levy rebates.

Three categories of taxable income 

There are three categories of taxable income (box 1, 2 and 3) for income tax, each type of taxable income having its own rate: 

• Box 1 taxable income from work and dwellings; 

• Box 2 taxable income from substantial interest; 

• Box 3 taxable income from savings and investments. 

The income tax payable is the aggregate amount of the tax on the taxable income in the three boxes. The income of resident taxpayers is reduced by the amount of the personal tax deductions. 

Profit from business activities

Taxable income from work and dwellings is taxed in box 1. This includes profit from business activities.
Businesses operated in the form of, for instance, the legal status of a one-man business, a general partnership or partnership are taxed under the income tax scheme. The profit is calculated in principle in the same way as outlined in Chapter 4.1 Corporate Income Tax. There are a few differences. The income tax scheme includes a number of arrangements for entrepreneurs who satisfy the hour criterion (e.g. self-employed persons deduction, fiscal pension reserve, profit exemption for small and medium-sized companies (mkb).
The hour criterion is met if an entrepreneur spends more than 50% subject to a minimum of 1,225 hours of his time available for work during a calendar year on running a business for his own account. Furthermore, the period for retroactively setting off losses is three years under the income tax scheme.
 

Profit exemption for small and medium-sized companies (‘MKB-winstvrijstelling’)

This arrangement only applies to entrepreneurs satisfying the hour criterion. The taxable profit of entrepreneurs is reduced by this mkb-winstvrijstelling. The exemption is 12% of the taxable profit less the entrepreneurs’ allowance [ondernemersaftrek].
 

Personal tax deductions

The personal tax deductions mainly comprise costs that affect the financial capacity of the taxpayer personally and his family and that affect his ability to pay. For example, the costs of maintenance commitments (child or partner maintenance), study expenses and exceptional expenses (e.g. on account of illness). Personal tax deductions are deducted from taxable income derived from work and dwellings (box 1). If this is insufficient, deductions from taxable income from savings and investments (box 3) will follow, followed by deductions on taxable income from substantial interest (box 2). Any remaining deductions will be carried forward to subsequent years.

Rates 2012

Tax on taxable income for income from work and dwellings (box 1) is: 

• The first bracket: 33.10% on the first EUR 18,945. This rate comprises 1.95% tax and 31.15% social security contributions. 

• The second bracket: 41.95% on the next EUR 14,918. This rate comprises 10.80% tax and 31.15% social security contributions. 

• The third bracket: 42% on the next EUR 22,628. This rate consists solely of tax. 

• The fourth bracket: 52% on the excess. This rate also consists solely of tax. 

Taxpayers aged 65 or older are taxed at a rate of 15.20% in the first bracket and 24.05% in the second bracket because persons over the age of 65 are no longer required to pay old-age pension (AOW) contributions of 17.90%.

Individuals working in the Netherlands generally have social security coverage and must therefore pay social security contributions. An exception to this may, for example, apply in the event of (temporary) secondment.

Taxable income from a substantial interest (box 2) is taxed at 25%.

Taxable income from savings and investments (box 3) is taxed at a flat rate of 30% taking into account a lump-sum yield of 4%.

Levy rebate 

Tax due from resident taxpayers is reduced by the amount of the levy rebate. The general rebate applies to all resident taxpayers. The general rebate comprises a tax element and a social security contribution element. Entitlement to the contribution element of the levy rebate only applies if the employee has compulsory Dutch social security coverage. In addition to this levy rebate, there are all kinds of supplementary rebates that take account of the amount of income earned and the taxpayer’s personal circumstances. The rebates for those who are engaged in work, for parents with children, for single parents and elderly people with a small income, people who keep on working as of the age of 62, generally contribute towards an equitable distribution of the tax burden.

Taxable income from work and dwellings (box 1) 

Taxable income from work and dwellings is the aggregate amount of:
 

• Taxable profits from business activities; 

• Taxable wages; 

• Taxable income from other activities (income from activities that can not be qualified as wage, nor as profits from business activities such as freelance income and income from making available assets to companies in which the taxpayer has a substantial interest, e.g. renting of premises to the company or income from carried interests); 

• Taxable periodical payments and grants (e.g. some periodic payments provided for under public law); 

• Taxable income from an owner-occupied dwelling; 

• Expenditure for income provision (e.g. the premium for retirement annuities); 

• Negative expenditure for income provision (e.g. annuities that are surrendered and that were previously deducted from income); 

• The negative personal allowance (e.g. refund for expenses that have been deducted from the income in a previous year as a personal deduction); 

• Personal deductions (this deduction may partly run over into box 3 and after that possibly into box 2).

Taxable income from substantial interest (box 2)

A taxpayer is regarded as having a substantial interest in a company if he, either alone or together with his partner, holds, directly or indirectly, at least 5% of the shares. Income from substantial interest is the aggregate amount of the dividends received and the proceeds from disposal (profits from the sale of shares, profit-sharing certificates, debts and such), after deduction of the costs. If a taxpayer has a substantial interest in a company, profit-sharing certificates or other types of shares issued by that company are deemed to be part of the substantial interest. This is known as the ‘pull along arrangement’ [meesleepregeling]. If a taxpayer makes assets available to a company in which he has a substantial interest, the income generated is taxed in box 1 as a result of other activities. One example of this is the renting of premises to the company.

For non-residents, income from a substantial interest is only subject to tax if the substantial interest is in a company resident in the Netherlands. For non-resident taxpayers, a company is also deemed to be resident in the Netherlands if it was resident there for at least five of the last ten years. 

Taxable income from savings and investments (box 3)

The tax levied on income from savings and investments is based on the assumption that a taxable yield of 4% is made on the net assets, irrespective of the actual yield (such as interest, dividend, capital gains and losses). The net assets (the fair market value of the assets after the deduction of the fair market value of the debts) are valued at the average for the calendar year and are therefore noted on two reference dates:
1 January and 31 December. As of 2011 there is one reference date: 1 January.

Examples of assets and debts that fall in box 3:
 

• Savings; 

• A second home or a let property; 

• Shares and other securities; 

• Annuity insurances for which the premium is non-deductible; 

• An endowment insurance not linked to the taxpayer’s own home; 

• Consumer loans; 

Certain assets do not need to be taken into account in calculating the value of the assets. This applies, for example, to:
 

• Assets which are used to generate proceeds which are taxed in the boxes 1 or 2 (examples are assets deployed in the business of a self-employed entrepreneur, owner-occupied dwellings shares in a company in which the taxpayer has a substantial interest, etc.); 

• Articles for personal use such as household effects, a passenger car or caravan; 

• Works of art and science not kept as an investment; 

• Ethical investments up to a maximum of € 55,476 per person. 

A taxpayer may not deduct all debts in box 3. For example, the mortgage debt for an owner-occupied dwelling (the interest on this is deductible in box 1) and tax debts are not deductible. The first € 2,900 of the other debts may not be deducted from the assets. The income in box 3 may not be negative, not even if the amount of the debt is greater than the amount of the assets.

In box 3 taxpayers are entitled to a tax-free threshold of € 20,785 (tax-exempt capital). The threshold is raised by € 2,779 for each child under the age of 18 of whom the taxpayer has custody on December 31, 2011. Depending on their income and wealth, taxpayers aged 65 and older are entitled to an additional threshold up to a maximum of € 27,516. If the taxpayer had a partner throughout the whole year 2011, a debt threshold of € 5,800 may be taken into account upon request of both partners for benefit of the taxpayer and his partner together. The taxpayer and his partner may allocate this amount between them, but they may not use a threshold higher than the part of the debts allocated to themselves. If no request is made, the threshold will be € 5,8 00 for each partner.

Non-resident taxpayers are only taxed on income from savings and investments in the Netherlands. The profit base in the Netherlands is the value of assets in the Netherlands less the value of debts connected with the assets, likewise in the Netherlands. Assets in the Netherlands are:
 

• Real estate (including rights to real estate) in the Netherlands; 

• Rights to shares in the profits of a company the management of which is established in the Netherlands, as long as it does not arise from shareholdings or employment.

Income tax return

Income tax returns have to be filed each year with the Tax Administration by April 1 of the year following the relevant tax year. If the Tax Administration does not receive the return on time, it sends a reminder and may impose a fine. It is possible to apply to the Tax administration in writing for a deferment. Everyone who files his or her return by April 1, receives notification from the Tax Administration by July 1, of the same year. For companies this means that the annual statement of employee wages must be provided to the employees long before 1 April so that they can file their income tax returns with the Tax Administration in a timely fashion. Entrepreneurs can only file their income tax returns electronically. 

Source: https://kroesewevers.nl/en/actueel/news/personal-income-tax-in-the-netherlands