Taxes in the Netherlands
Expats who work in the Netherlands quickly notice the large amount of payroll tax (loonheffing) listed on their salary slips. But many don’t figure out how this amount is calculated or how this affects their total tax bill.
Income tax in the Netherlands
Residents in the Netherlands are liable to be taxed on their worldwide income. To avoid double taxation, the Dutch government has bilateral tax treaties with many other countries.
There are also general provisions that apply to expats where a treaty hasn’t been concluded with their home country.
There are three categories of taxable income in the Netherlands which are referred to as ‘Boxes’, and each has its own rate:
Box 1 – taxable income from work and dwellings
Box 2 – taxable income from a substantial interest
Box 3 – taxable income from savings and investments
The amount of income tax an expat has to pay is the total amount of tax on all three boxes.
Box 1 tax in the Netherlands
The tax payable on taxable income from work and dwellings is as follows:
The first bracket: 36.5 percent on the first 19,822 EUR
The second bracket: 40.2 percent on the next 13,767 EUR
The third bracket: 40.2 percent on the next 23,996 EUR
The fourth bracket: 52 percent on the remainder
Taxable income from work and dwellings in the Netherlands
Taxable income from work and dwellings consist of:
Taxable income from an owner-occupied dwelling (interest on a mortgage loan is tax deductible)
Taxable income from other activities like freelance and copyright income
Taxable periodical payments and grants like scholarships and government subsidies
Expenditure for income provision like retirement and disability contributions, which are tax deductible
Box 2 tax in the Netherlands
Taxable income from a substantial interest in a legal entity is taxed at a flat rate of 25 percent.
Taxable income from a substantial interest in the Netherlands
Taxpayers are regarded as having a substantial interest in a legal entity, like a besloten vennootschap (BV – closed corporation), if they hold at least five percent of its shares either alone or together with their partner.
The income from this consists of the dividends they receive on their shares or profits from selling their shares. If the taxpayer makes assets available to the company they have a substantial interest in (for example by letting premises to the company) the income generated is taxed in Box 1.
Box 3 tax in the Netherlands
Tax levied on income from savings and investments is based on the assumption that a taxable yield of four percent is made on net assets like interest, dividends, capital gains, and losses, irrespective of the actual yield. This assumed yield of four percent is taxed at a flat rate of 30 percent.
Taxable income from savings and investments in the Netherlands
Examples of assets and debts that fall into Box 3 include:
A second home or rental property
Shares and other securities
Debts that don’t belong in the other two Boxes
A person’s net assets are valued at the average for the calendar year, so they’re noted on two reference dates: 1 January and 31 December. Net assets are the market value of a person’s assets after the value of their debts has been deducted.
In Box 3, taxpayers are entitled to a tax-free threshold of 21,330 EUR (tax-exempt capital). If dividends tax is withheld from dividends they’ve received on their investments, it can be offset against their total tax bill.
Personal allowances on tax in the Netherlands
Besides paying tax on income that’s been mentioned, tax payers are also entitled to deduct personal allowances on items like:
Alimony payments to an ex-partner and child maintenance
Health care expenses not covered by insurance
Fees for studies that improve opportunities in the Dutch labour market
Every personal allowance has its own specific threshold, ceiling and conditions.
The total amount of deductible personal allowances is first offset against the Box 1 income. If that isn’t enough to deduct all of the allowances, the rest is offset against Box 3 income. If that isn’t enough either, the rest is offset against Box 2 income. If all of the taxpayer’s personal allowances still haven’t been fully offset, the rest is carried forward to the next tax year.
Calculating the final tax bill in the Netherlands
An expat's total tax bill is determined based on their income in the three Boxes and their personal allowances.
The total tax bill is reduced by deducting tax credits. There are more than 10 of these, which application depends on a person’s personal circumstances. The most important ones are:
The general tax credit
The employment credit
The working parent's credit
The payroll tax on an expat’s wages is considered to be an advanced levy of tax and will be offset against their income tax bill.