Income tax in the Netherlands
Encyclopedia
Income tax
in the Netherlands (personal, rather than corporate) is regulated by the Wet inkomstenbelasting 2001 (Income Tax Law, 2001).
The fiscal year is the same as the calendar year. Before April 1 citizens have to report their income from the previous year. The system integrates the income tax
with fees paid for the basic old-age pension system (AOW
), the pension system for partners of deceased people (ANW), and the national insurance
system for special medical care (AWBZ). In this article the term "tax" is used for the total of the income tax and the fees. The figures are for fiscal years 2010 and 2011.
There are three categories of income, each with their own tax rates. They are referred to as "boxes".
on wages, profits, social security
benefits and pension
s. Thus there are tax bracket
s, each with its own tax rate. Mathematically, apart from discretization
(whole euros both for income and for tax), the tax is a continuous, convex
, piecewise linear function of income.
For 2010, income tax for persons under 65 is as follows:
For 2010, the total tax on income (income tax plus mandatory pension, social security and state funded medical care payments, all of which are a percentage of income) for persons under 65 is as follows:
For 2011, income tax for persons under 65 is as follows:
For 2011, the total tax on income (income tax plus mandatory pension, social security and state funded medical care payments, all of which are a percentage of income) for persons under 65 is as follows:
Under certain conditions a life annuity
is treated as a pension: premiums are deducted from the income, the benefits are taxed, and the scheme is not counted as asset in box 3. The conditions concern the type of life annuity and the necessity, based on the principle that the more the income is, the more pension plus life annuity one needs to build up for the future, up to a maximum.
For the value of an owner-occupied dwelling and for mortgage
debt related to that, this box and not box 3 applies. Based on the value of the dwelling, a "fixed rentable value" is counted, while interest
for the mortgage is deductible. This is an important factor, since interest on a mortgage can easily be over a thousands euros per month, which is subtracted from income before any income tax is applied. If the value of an owner-occupied dwelling would be positive (fixed rentable value is greater than interest) it is changed to zero.
An employer may set up an employee savings scheme (spaarloon) allowing employees to save up to EUR 613 per year of their wages without paying income tax on that part of their wages, provided that they do not withdraw their savings within four years, or for designated purposes (including but not limited to buying a new house and starting a business). The employer pays the income tax, but only a reduced rate of 15%. During this period the savings are also exempted from the tax of box 3.
A competing savings scheme (levensloopregeling (nl)) allows employees to save 11% of their pre-tax income, with taxes and premiums deferred until the money is taken out. Money saved in this manner may only be used to receive income during leave. In this way, an employee can save up money to take a sabbatical, extended holiday, or early pension. However, the employer must approve the leave. The two savings schemes are incompatible (an employee must choose either one or the other), the latter being unpopular.
For taxpayers aged 65 or older (to be referred to as 65+) reduced rates apply for the first two brackets: 15.75 % and 23.5 %, respectively. The discount of 17.9 % of the income in these brackets corresponds to the AOW
contributions, which are not owed by the AOW beneficiaries. There are plans to abolish this discount for people with an income which is more than EUR 15,000 per year above the AOW pension, if they have not worked until the age of 65. Details of the plan are yet unknown.
For employed and self-employed people there is an employment rebate of up to EUR 1,392 (more for people in the age range 57–64, up to EUR 2,138, less for 65+).
The wage withholding tax
is a deduction of wages, social security benefits and pensions, as an advance payment for the income tax, paid through the employer, etc.
See also .
scheme (zorgverzekering(swet), Zvw ). The premium is partly income-dependent and paid as a tax supplement. It applies for the "contribution income" (bijdrage-inkomen ), which is part of box 1, including labor income, social security benefits, pensions, and life annuities (it does not include the "owner-occupied dwelling income"). It is withheld if the wage withholding tax applies. The rate is 6.5% for e.g. wages and 4.4% for e.g. life annuities, coming on top of the tax percentages mentioned above. The total income for which these rates apply is limited to 30,015 euro.
of 25 % on income from a substantial business interest, usually meaning a (direct or indirect) shareholding of at least 5% in a private limited company (BV ).
If the fiscal partner of the taxpayer or a blood relative (first vertical kin) holds a substantial interest in a company, the shares of the taxpayer constitute a substantial interest, even if they do not amount to 5%.
Income from substantial interest includes:
For 2007 only there was a reduced rate ranging from 22 to 25%.
See also .
The amount of money invested in approved "green" investments (up to EUR 53,421) is exempted
. Moreover, a tax credit
per year of 1.3 % of the value is applied for these investments. The credit only counts towards box III.
See also .
s, e.g. for gift
s (see below).
The deductible amount is subtracted from the income in box 1; if this is not enough, the remainder is subtracted from the income in box 3, and finally from box 2.
, ANBI). Often this is a foundation (stichting). It can also be a voluntary association
(vereniging), but not e.g. a sport club, or association of personnel. Also it cannot be a commercial institution.
If the sum of someone's gifts to ANBIs exceeds 1% of the threshold income, the excess, with a maximum of 10% of that income, is deductible income.
not to be confused with a tax deduction
; see also . The resulting amount of tax may be less than zero, in which case the amount is paid out, provided that one has a spouse and the tax of both together is not less than zero.
The purpose of the 30 Percent Rule to compensate employees for the extra costs of their temporary stay in the Netherlands. The effect is to make the Netherlands competitive in the international marketplace for skilled labour, since normal Dutch income tax rates are high (in comparison with other countries) and may discourage some employees from accepting assignments in the Netherlands.
However, there are consequences for possible future unemployment aid, tax deduction for a mortgage and other benefits.
The 30 Percent Rule allows an employer to exempt from income tax up to 30% of the employee's annual remuneration (the "Basis") for the first 10 years of their stay in the Netherlands Inkomstenbelasting Wet 2001.
The Dutch tax authority allows for two options:
In addition, the employer may provide a tax-free reimbursement of the fees paid for the employee's children to attend an international school.
The Dutch income tax law does not, however, specify, how will the benefit of the 30% rule be divided between the employee and his/her employer. Some employers (e.g. Shell B.V.) have stipulated in their general working conditions that the 30% rule benefit is solely for the benefit of the company argueing that salaries of their local workers would not be on par with their foreign work force.
A similar rule also applies to compensate Dutch employees who are assigned to work in designated developing countries or to the Dutch nationals returning to the Netherlands after a substantial period of living abroad.
Note that it typically takes two to three months from the application for the rule to be granted. The excess tax paid in the meantime is repaid to the applicant once the rule is granted.
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
in the Netherlands (personal, rather than corporate) is regulated by the Wet inkomstenbelasting 2001 (Income Tax Law, 2001).
The fiscal year is the same as the calendar year. Before April 1 citizens have to report their income from the previous year. The system integrates the income tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
with fees paid for the basic old-age pension system (AOW
Algemene Ouderdoms Wet
The Algemene Ouderdoms Wet is a 1956 Dutch law that installed a state pension, guaranteed for all. This law was a continuation of a 1947 temporary law. The old law was a proposal by Willem Drees and the new one came about when he was prime minister...
), the pension system for partners of deceased people (ANW), and the national insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
system for special medical care (AWBZ). In this article the term "tax" is used for the total of the income tax and the fees. The figures are for fiscal years 2010 and 2011.
There are three categories of income, each with their own tax rates. They are referred to as "boxes".
Progressive tax on wages etc. (box 1)
There is a progressive taxProgressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
on wages, profits, social security
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
benefits and pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s. Thus there are tax bracket
Tax bracket
Tax brackets are the divisions at which tax rates change in a progressive tax system . Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.-Example:Imagine that there are three tax brackets: 10%, 20%, and 30%...
s, each with its own tax rate. Mathematically, apart from discretization
Discretization
In mathematics, discretization concerns the process of transferring continuous models and equations into discrete counterparts. This process is usually carried out as a first step toward making them suitable for numerical evaluation and implementation on digital computers...
(whole euros both for income and for tax), the tax is a continuous, convex
Convex function
In mathematics, a real-valued function f defined on an interval is called convex if the graph of the function lies below the line segment joining any two points of the graph. Equivalently, a function is convex if its epigraph is a convex set...
, piecewise linear function of income.
For 2010, income tax for persons under 65 is as follows:
- For the part of income up to € 18,218: 2.3%; tax on €18,218 is €419
- For the part of income between €18,219 and €32,738: 10.8%; tax on €14,520 is €1,568
- For the part of income between €32,739 and €54,367: 42%; tax on €21,629 is €9,084
- On all income over €54,367: 52%
For 2010, the total tax on income (income tax plus mandatory pension, social security and state funded medical care payments, all of which are a percentage of income) for persons under 65 is as follows:
- For the part of income up to € 18,218: 33,45%; tax on €18,218 is €6,094
- For the part of income between €18,219 and €32,738: 41.95%; tax on €14,520 is € 6,091
- For the part of income between €32,739 and €54,367: 42%; tax on €21,629 is €9,084
- On all income over €54,367: 52%
For 2011, income tax for persons under 65 is as follows:
- For the part of income up to € 18,626: 1.85%; tax on €18,626 is €345
- For the part of income between €18,627 and €33,436: 10.8%; tax on €14,808 is €1,599
- For the part of income between €33,437 and €55,694: 42%; tax on €22,258 is €9,348
- On all income over €55,694: 52%
For 2011, the total tax on income (income tax plus mandatory pension, social security and state funded medical care payments, all of which are a percentage of income) for persons under 65 is as follows:
- For the part of income up to € 18,628: 33%; tax on €18,628 is €6,147
- For the part of income between €18,629 and €33,436: 41.95%; tax on €14,808 is € 6,212
- For the part of income between €33,437 and €55,694: 42%; tax on €21,258 is €9,348
- On all income over €55,694: 52%
Under certain conditions a life annuity
Life annuity
A life annuity is a financial contract in the form of an insurance product according to which a seller — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer in exchange for the immediate payment of a lump sum or a series...
is treated as a pension: premiums are deducted from the income, the benefits are taxed, and the scheme is not counted as asset in box 3. The conditions concern the type of life annuity and the necessity, based on the principle that the more the income is, the more pension plus life annuity one needs to build up for the future, up to a maximum.
For the value of an owner-occupied dwelling and for mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
debt related to that, this box and not box 3 applies. Based on the value of the dwelling, a "fixed rentable value" is counted, while interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
for the mortgage is deductible. This is an important factor, since interest on a mortgage can easily be over a thousands euros per month, which is subtracted from income before any income tax is applied. If the value of an owner-occupied dwelling would be positive (fixed rentable value is greater than interest) it is changed to zero.
An employer may set up an employee savings scheme (spaarloon) allowing employees to save up to EUR 613 per year of their wages without paying income tax on that part of their wages, provided that they do not withdraw their savings within four years, or for designated purposes (including but not limited to buying a new house and starting a business). The employer pays the income tax, but only a reduced rate of 15%. During this period the savings are also exempted from the tax of box 3.
A competing savings scheme (levensloopregeling (nl)) allows employees to save 11% of their pre-tax income, with taxes and premiums deferred until the money is taken out. Money saved in this manner may only be used to receive income during leave. In this way, an employee can save up money to take a sabbatical, extended holiday, or early pension. However, the employer must approve the leave. The two savings schemes are incompatible (an employee must choose either one or the other), the latter being unpopular.
For taxpayers aged 65 or older (to be referred to as 65+) reduced rates apply for the first two brackets: 15.75 % and 23.5 %, respectively. The discount of 17.9 % of the income in these brackets corresponds to the AOW
Algemene Ouderdoms Wet
The Algemene Ouderdoms Wet is a 1956 Dutch law that installed a state pension, guaranteed for all. This law was a continuation of a 1947 temporary law. The old law was a proposal by Willem Drees and the new one came about when he was prime minister...
contributions, which are not owed by the AOW beneficiaries. There are plans to abolish this discount for people with an income which is more than EUR 15,000 per year above the AOW pension, if they have not worked until the age of 65. Details of the plan are yet unknown.
For employed and self-employed people there is an employment rebate of up to EUR 1,392 (more for people in the age range 57–64, up to EUR 2,138, less for 65+).
The wage withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
is a deduction of wages, social security benefits and pensions, as an advance payment for the income tax, paid through the employer, etc.
See also .
Health insurance premium
From 2006 there is a new national health insuranceHealth insurance
Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...
scheme (zorgverzekering(swet), Zvw ). The premium is partly income-dependent and paid as a tax supplement. It applies for the "contribution income" (bijdrage-inkomen ), which is part of box 1, including labor income, social security benefits, pensions, and life annuities (it does not include the "owner-occupied dwelling income"). It is withheld if the wage withholding tax applies. The rate is 6.5% for e.g. wages and 4.4% for e.g. life annuities, coming on top of the tax percentages mentioned above. The total income for which these rates apply is limited to 30,015 euro.
Flat tax on income from a substantial business interest (box 2)
There is a flat taxFlat tax
A flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...
of 25 % on income from a substantial business interest, usually meaning a (direct or indirect) shareholding of at least 5% in a private limited company (BV ).
If the fiscal partner of the taxpayer or a blood relative (first vertical kin) holds a substantial interest in a company, the shares of the taxpayer constitute a substantial interest, even if they do not amount to 5%.
Income from substantial interest includes:
- dividends
- capital gains (except in case of succession and divorce)
For 2007 only there was a reduced rate ranging from 22 to 25%.
See also .
Flat tax on savings and investments (box 3)
There is a flat tax on the total value of the savings and investments of 1.2% per year. It is nominally part of the income tax, as a 30% tax on a fixed assumed yield of 4% of the value of the assets (this is regardless of the actual income from the assets). EUR 20,014 (higher for 65+ with a low income) of the value of the assets is exempted.The amount of money invested in approved "green" investments (up to EUR 53,421) is exempted
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
. Moreover, a tax credit
Tax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
per year of 1.3 % of the value is applied for these investments. The credit only counts towards box III.
See also .
Threshold income
The sum of the incomes in the three boxes is the "threshold income". It determines thresholds for tax deductionTax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
s, e.g. for gift
Gift
A gift or a present is the transfer of something without the expectation of receiving something in return. Although gift-giving might involve an expectation of reciprocity, a gift is meant to be free. In many human societies, the act of mutually exchanging money, goods, etc. may contribute to...
s (see below).
The deductible amount is subtracted from the income in box 1; if this is not enough, the remainder is subtracted from the income in box 3, and finally from box 2.
Gifts
The Dutch Tax Service can declare an institution to be an "institution for general benefit" (algemeen nut beogende instellingAlgemeen nut beogende instelling
The Dutch Tax Administration can declare an institution to be an "institution for general benefit" . Often this is a foundation, though not every foundation qualifies. It can also be a voluntary association , but not e.g. a sport club, or association of personnel...
, ANBI). Often this is a foundation (stichting). It can also be a voluntary association
Voluntary association
A voluntary association or union is a group of individuals who enter into an agreement as volunteers to form a body to accomplish a purpose.Strictly speaking, in many jurisdictions no formalities are necessary to start an association...
(vereniging), but not e.g. a sport club, or association of personnel. Also it cannot be a commercial institution.
If the sum of someone's gifts to ANBIs exceeds 1% of the threshold income, the excess, with a maximum of 10% of that income, is deductible income.
Total tax
The total tax is the sum of the taxes in the three boxes, minus EUR 2,043 (less for 65+), a tax creditTax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
not to be confused with a tax deduction
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
; see also . The resulting amount of tax may be less than zero, in which case the amount is paid out, provided that one has a spouse and the tax of both together is not less than zero.
The 30 Percent Rule
The 30 Percent Rule is a personal income tax reduction for select employees in the Netherlands. It applies to specialized foreign employees who are brought to the Netherlands because their skills are scarce in the Dutch marketplace. The scarcity of work force with particular skills is reviewed annually "The 30% rule".The purpose of the 30 Percent Rule to compensate employees for the extra costs of their temporary stay in the Netherlands. The effect is to make the Netherlands competitive in the international marketplace for skilled labour, since normal Dutch income tax rates are high (in comparison with other countries) and may discourage some employees from accepting assignments in the Netherlands.
However, there are consequences for possible future unemployment aid, tax deduction for a mortgage and other benefits.
The 30 Percent Rule allows an employer to exempt from income tax up to 30% of the employee's annual remuneration (the "Basis") for the first 10 years of their stay in the Netherlands Inkomstenbelasting Wet 2001.
The Dutch tax authority allows for two options:
- 30% tax-free is reimbursed based on registered receipts for extraterritorial costs (e.g. maintenance of an own house in the country of origin, travel expenses, relocation costs, language courses, long-distance telephone calls)
- the Dutch tax office can upon an approved application of an employee grant 30% tax exemption on the employees remuneration.
In addition, the employer may provide a tax-free reimbursement of the fees paid for the employee's children to attend an international school.
The Dutch income tax law does not, however, specify, how will the benefit of the 30% rule be divided between the employee and his/her employer. Some employers (e.g. Shell B.V.) have stipulated in their general working conditions that the 30% rule benefit is solely for the benefit of the company argueing that salaries of their local workers would not be on par with their foreign work force.
A similar rule also applies to compensate Dutch employees who are assigned to work in designated developing countries or to the Dutch nationals returning to the Netherlands after a substantial period of living abroad.
Note that it typically takes two to three months from the application for the rule to be granted. The excess tax paid in the meantime is repaid to the applicant once the rule is granted.