Residency

Residents are taxed on their worldwide income and non-residents are taxed only on income from a limited number of sources in the Netherlands.

The term “resident” is not defined in the Dutch Income Tax Act. Whether an individual is regarded as resident or non-resident is determined on a case-by-case basis. Of overriding importance are the individual’s personal and economic ties with the Netherlands, including the existence of a family home and employment in the Netherlands or registration in a register of the local authorities. Nationality is not the decisive factor, but may be relevant.

Taxable Income and Rates

Personal income from work is taxed on a sliding scale up to a maximum rate of 52%. The lowest marginal rates fell slightly for 2007.

Skilled foreigners employed in the Dutch market may be eligible for a tax-exempt allowance on 30% of their earnings. Non-residents owning assets in the Netherlands are subject to tax only on income generated from property or a substantial holding in a Dutch company, although exemptions may apply under an applicable income tax treaty.

The combined basic tax and social security contribution rates for personal income from work and home are 33.65% on the first €17,319, 41.4% on €17,319-31,122, 42% on €31,122-53,064 and 52% on anything higher. The two lowest rates are 33.65% and 41.4%. The two lowest rates for persons older than 65 are 15.75% and 23.5%, since they are not subject to certain social security contributions.

Determination of Taxable Income

The taxable year for individuals is the calendar year. Residents are taxed on their total gross income, which is income from all domestic and foreign sources less associated expenses (and double taxation relief is often available). Social security premiums deducted from wages are considered an advance levy on income tax; annual tax filings are also required to assess tax due on income from investments, corporate holdings and other assets. Individuals are taxed only on their own personal income – they may not deduct a spouse’s items in addition to their own. A few joint items (such as childcare expenses) may be divided between spouses, but the separate deductions must total 100% of the costs.

Taxable income comprises three sources of income:

(1) work and home;
(2) enterprise (income from a substantial holding in a company); and
(3) savings and investments. Under the “three-box system”, income from one box may not be offset against income from another box.

Box 1: Work and home income is taxed at progressive rates that range from 33.65% on the first €17,319 to 52% on income exceeding €53,064. Deductions are available for charitable donations, life annuity premiums and mortgage interest on an owner-occupied home. Deductions may also be available for expenses for childcare, education, alimony and medical treatment.

Box 2: Income from a substantial holding in a company is taxable only if the individual’s direct or indirect holding exceeds 5% of the company’s issued capital. The tax rate is 25% on dividends (from 2007 the dividend withholding tax is 15%, but the personal income tax rate on dividends remains 25%) and capital gains from the transfer of shares. In the event of a capital loss, 25% of the loss may offset tax otherwise due.