Box system of Dutch taxation
In the Netherlands, residents are taxed on their worldwide income and non-residents are taxed on Dutch sources of income.
Taxable income is divided into three categories or “Boxes”. Different tax rates and regimes apply to the taxable income per Box. Designated and permitted deductions related to the income in each Box, reduce the income in that particular Box. Deductions (or losses) belonging to one Box cannot (generally) be used to reduce the taxable income in another Box.
Certain personal allowances (that do not belong specifically to any of the Boxes), such as study expenses, alimony payable and qualifying gifts, may be deducted in a certain order, i.e. starting in the Box with the highest tax rate (Box 1), then any remainder reduces the taxable income in the next highest rate (Box 3) and then the last one (Box 2). If such personal deduction has not yet been fully settled, a carry-forward applies.
Box I: Income from work and home ownership
In Box I, the following categories of income are collectively taxable or deductible at the progressive tax rates mentioned in the table below:
• income from employment (present and past);
• income from business activities;
• income from other activities, like freelancer, artist, professional athlete, etc. (this includes income in the form of scholarships and government subsidies);
• periodic payments (like pensions and annuities, and also alimony and maintenance);
• (negative) income from principal residence
• Premium for certain designated life annuities and disability insurances
|Taxable Income|| Progressive income tax and national insurance Box 1 in 2021
(for individuals below state pension age)
|Up to € 68,508||37.10%|
|€ 68,508 and more||49.50%|
Box I deductions can be used to reduce the entire taxable income in Box I; it is not necessary to set-off business expenses with only business income. For instance, negative income from principal residence (i.e. mortgage interest deduction) may be used to reduce business income and the entire taxable income from Box I may be negative.
However, negative Box I income cannot be offset against positive income in Box II or Box III. Negative Box I income of the current year must be set-off against positive Box I income of the 3 previous years and positive Box I income of the 9 following years. It is mandatory to offset negative Box I income of a current year first, with the positive Box I income of the 3 previous years and then, with the positive Box I income of the 9 following years.
The settlement of losses in this way, does not affect the aggregate income. The loss to be settled is reduced from the aggregate income to arrive at the taxable income.
Box II: Income from substantial interest
In Box II, a flat tax rate of 25% applies to income from substantial interest in a domestic or foreign company. In essence, directly or indirectly owning 5% (or more) stake in a company, solely or with a family member (partner or kids) qualifies as substantial interest. Standard examples of Box II income include dividend and capital gains from the alienation of shares.
Any losses are carried back 1 year and carried forward for max. 6 years.
Box III: Income from savings and investments
In Box III, income from savings and investments, by means of a progressively determined return on investment (ROI) rate applied to a net asset basis, is taxed at 31%. It is an income tax, but more or less in the form of a wealth tax. Not the actual income, nor capital gains is relevant. The “net asset value” is considered as the basis to determine the deemed ROI per the following scale (applicable for 2021):
|Net asset value after tax free amount||Low ROI rate (0.03%) applied to % of net asset value||High ROI rate (5.69%) applied to % of net asset value||Average ROI rate||Effective rate (31% on ROI)|
|€ 0 – € 100,000||67%||33%||1.90%||0.59%|
|€ 100,001 – € 1,000,000||21%||79%||4.50%||1.39%|
|> € 1,000,000||0||100%||5.33%||1.60%|
Net asset value is the total of assets minus debts and minus a personal threshold of € 50,000 (€ 100,000 for fiscal partners). The nature and value of an asset on January 1st of the year is decisive.
Examples of the Box III taxable assets, include:
• Bank and savings accounts
• Shares and securities
• Gold, silver, bitcoins, etc
• Real estate (other than the Dutch principal residence). Value reduction rules apply to real estate that is rented out and/or for which (periodical) ground interest (“erfpacht”) is payable.
• Entitlements to real estate, such as usufruct (value is determined on income tax valuation tables and depending on various factors)
• Endowment insurances (unless exempted)
• Certain (non Box I qualifying) life annuity and certain (foreign and/or international) pension entitlements (value is determined on income tax valuation tables and depending on various factors)
• Other property rights and claims, such as a loan provided to someone else
Not considered is movable property unless this is used as an investment. For instance, paintings or some collections or a boat for private use are exempted, but when meant for investment it will be part of Box III.
Debts are deductible, with the exception of tax debts. Also, a Box I qualifying mortgage loan for the principal residence is not a Box III debt. A non-Box I qualifying loan, e.g. loan not meeting mortgage interest deduction, is considered as Box III debt.
There are also some (smaller) exemptions, such as for environmental friendly investments, Dutch net pension scheme, entitlements to certain risk insurances (for death, disability subject) and cash (if not more than € 543 (€ 1,086 for partners)).
Note that a trust is in principle considered transparent for Box III (and also for gift / inheritance tax purposes), meaning that the net assets of the trust are considered as assets of the settlor.
The Netherlands will allow for double tax treaty relief for foreign real estate by means of the exemption with progression method, i.e. the foreign real estate is considered for determining the progressively determined ROI but then exempted at the average rate.
The Box system is an analytical system, meaning that assets in Box I (such as principal residence or employer options or SARs) and Box II (share value in a company in which a substantial interest is kept) are not part of the Box III basis. As regards employer equity, equity that qualifies as employment income (Box I), such as options or SARs held, become only subject to Box III taxation after exercise (i.e. after there has been a taxable moment for wage tax, the shares or money obtained, will be considered as personal (Box III) income).