Personal income tax in netherlands

316

BULLETIN

AUGUST/SEPTEMBER 2006

Personal Income Taxation in the Netherlands
Philip Siekman and Nicolien Luijsterburg, Tax Advisers*
Loyens & Loeff, Amsterdam

Contents 1. INTRODUCTION 1.1. General principles 1.2. Tax rates 1.3. Levy rebates 2. BOX 1: INCOME FROM WORK AND HOME OWNERSHIP 2.1. Business income 2.2. Employment income 2.3. Pension schemes 2.3.1. Formal requirements2.3.2. Substantive requirements 2.4. Stock option rights 2.5. Income from other activities 2.6. Periodical payments 2.7. Income from a principal residence 2.8. Deductions for maintenance and personal expenses 3. BOX 2: INCOME FROM A SUBSTANTIAL INTEREST 3.1. Substantial shareholding 3.1.1. Regular income 3.1.2. Alienation benefits 3.2. Rollover relief 3.3. Losses 4. BOX 3: INCOME FROM NET WEALTH 5.TAX LIABILITY OF NON-RESIDENT TAXPAYERS 5.1. Election to be treated as a resident taxpayer 5.2. Tax liability of partial non-resident 5.3. Taxable income of non-residents 5.3.1. Box 1 income 5.3.2. Box 2 income 5.3.3. Box 3 income

1. INTRODUCTION 1.1. General principles The personal income tax is considered to be the cornerstone of the tax system of the Netherlands, and it has changedsignificantly during the last decade. Until 2001, the personal income tax was based on worldwide income, i.e. all income was added together and tax was levied on the total using one tax rate structure. At the beginning of the new millennium, the Netherlands government implemented a new income tax which contains elements of a schedular system with different tax rates and exemptions for different types ofincome. From the start, various tax experts have predicted that the new system would not have a great and continuing future. The current Income Tax Act (ITA 2001), however, has survived beyond the first five years since its implementation on 1 January 2001. On 24 May 2006, a Bill proposing amendments to the Corporate Income Tax Act 1969 was submitted to the Netherlands parliament; for details on theBill, see the article by Hans Bakker and Wendela van de Rijt, in this issue of the Bulletin. A few amendments were also proposed regarding the ITA 2001. This article takes into account the proposed amendments.

The main difference with the former income tax is that, in the ITA 2001, income is put into three different categories (“boxes”), each with its own rules and rates. To prevent income frombeing included in more than one box, the rule is that, if income is included in Box 1, it cannot be income in Box 2 or 3, etc. The three categories of income in the ITA 2001 can be summarized as follows: Box 1: income from work and home ownership, including business profits, wages, pensions, social security benefits, private use of a company car, deemed income from a principal residence ifoccupied as such by the owner; Box 2: income from a “substantial interest” and capital gains from the disposition of a substantial interest; and Box 3: income from capital (e.g. shares, bank deposits and real property). The main principle of this system is that every box has its own set of rules and rates and that neither losses nor negative income in one box can be offset against positive income inanother box. Losses can be carried over to other years in the same box. For example, losses included in Box 1 can be offset only against income in Box 1, taking into account a three-year carry-back period and an eight-year carry-forward period. However, the carry-back period for losses incurred in an enterprise is indefinite. As from 2007, the carry-forward period will be nine years. Another majorchange as from 2001 is that the actual income from capital, such as interest and dividends, is no longer taken into account as taxable income. Instead of taxing the actual income, a fictitious income, calculated at 4% of the defined average value of capital, is taxed at a flat rate of 30%. While formally part of the ITA 2001, many regard this as actually being a net worth tax with a rate of 1.2%,...