There are various ways of investing and living in the Netherlands without paying an undue amount of tax there. The country is well-known for not having any withholding taxes on interest and royalties, but were you aware of the fact that, as a non-resident, you can own real estate in the Netherlands and pay only a minimal amount of tax on the income? And for expatriates coming to the Netherlands, there are also opportunities, although these are subject to change.
We’ll start with investments because these are taxed in a somewhat alternative fashion.
One of the unusual aspects of the Dutch taxation system is the way in which investment income is taxed. Income is divided into three ‘boxes’ or schedules, and income from investments (other than significant shareholdings - broadly speaking five per cent or more of the shares in a company) is taxed in ‘box three’ on the basis of a notional income ranging from around two per cent to around 5.4 per cent of the value of the asset on 1 January of the year concerned. This percentage is deemed to cover both income and capital gains. The notional income is subject to a 30 per cent tax rate, which means that the effective box three tax rate ranges from 0.6 per cent to 1.61 per cent of the value of the assets. The taxable income calculated on this basis is therefore not related to the actual income and gains. This means that, if significant income and gains are made, they will be taxed at a low effective rate, while on the other hand, if there is not much income, the effective rate will be high. While this might look rather like a wealth tax, it is treated as an income tax (also under tax treaties; this is important for double tax relief).
For those living in the Netherlands, assets such as shares, loans and real estate, but also assets not obviously producing income, such as gold bars, are taxable in box three. Art is exempt unless it is considered an investment. Liabilities are generally deductible from the value of the assets to provide a net taxable figure.
The main residence and related (mortgage) loans are generally not included in this calculation as they are taxed separately (in ‘box one’). Interest on a loan taken up to acquire a main residence is deductible against regular income from employment or other earned income, subject to certain conditions. This can also be very beneficial since capital gains on the disposal of the main residence are not taxable. There is a requirement to pay off the loan over a maximum of 30 years.
The only Dutch tax most non-residents will pay on income from assets is income from real estate located in the Netherlands (there is also a dividend withholding tax of 15 per cent and in certain limited cases they could also be taxed on income from a significant shareholding of five per cent or more in a Dutch resident company). The tax on deemed real estate income can be reduced by deducting amounts borrowed to finance the acquisition from the value of the asset. If the real estate is 100 per cent financed then, assuming that the value of the real estate does not change, there will be no tax payable in the Netherlands as the notional income will be zero (the asset is equal to the liability). Of course, if there is a loan, consideration will need to be given to tax payable on the interest received by the lender if it is a related party.
In some cases it may be better to hold assets in an entity such as a company, especially if they are unlikely to yield much return since only the actual profit will be taxed. For a company subject to a normal rate of corporate income tax (20 to 25 per cent) this results in a total maximum tax charge of 43.75 per cent of the actual amount received if the income is paid out as a dividend (this income is taxed to the individual in box two at a rate of 25 per cent). The benefit of a company is that profits do not have to be distributed immediately so that part of the tax can be postponed. However, there are restrictions on switching between box two and box three too frequently since a transfer back within 18 months of the original transfer can result in double tax. Certain types of investment company are not subject to tax and can therefore reduce the effective tax rate further. Significant conditions apply to these types of companies so they will not be suitable for everybody.
A further advantage of the Netherlands for non-residents is that Dutch estate and gift tax is not charged on inheritances from, and gifts made by non-residents, (other than in certain limited cases for people who have lived previously in the Netherlands who may still be deemed to be resident). Unlike many countries, real estate is not subject to estate tax or gift tax on a transfer by inheritance or gift.
Trusts are also subject to an unusual taxation system in the Netherlands. Trusts cannot be set up under Dutch law, but as the Netherlands is a signatory to the Hague Convention, it will often recognise a trust. Care is needed in respect of the taxation of trusts in the Netherlands: a discretionary trust or private foundation can offer planning possibilities, but there can also be expensive pitfalls. The Dutch rules for taxation of discretionary trusts and similar foundations basically mean that the assets of the entity are allocated to the settlor or, on the death of the settlor, to his or her heirs. The position of the beneficiaries is not normally taken into account. This means that if the settlor (or subsequently the heirs) are not residents of the Netherlands they are not subject to Dutch tax on the income of the entity (except effectively on Dutch real estate, or a significant interest in a Dutch company), and the beneficiaries, even if they receive distributions from the trust, are also not subject to tax on the income of the trust or the distribution. If done carefully, this can result in significant tax savings for the beneficiaries. There can also be significant gift and inheritance tax savings if a trust is used.
For expatriates, the 30 per cent ruling can offer an interesting opportunity. This ruling is available for non-residents who come to work in the Netherlands and means that 30 per cent of the remuneration for a specific employment can effectively be paid tax-free. Furthermore, and for some this is the most interesting part, the individual can opt for treatment as a partial non-resident, which means that unearned income is in most cases not taxable in the Netherlands. Exceptions are significant holdings in a Dutch resident company (broadly more than five per cent) and Dutch real estate.
The individual concerned must be taken on from abroad or be assigned to the Netherlands by a foreign member of a group of companies and he/she should have lived at least 150 km from the Dutch border for at least two thirds of the previous 24 months. There is also a minimum salary requirement of approximately €38,000, excluding the 30 per cent allowance. There are also various other conditions.
The ruling used to be valid for eight years but it has been announced that the period will be reduced to five years from 2019.
The ruling does not apply to inheritance and gift taxes. These are applicable on a normal basis which means that a donation by, or inheritance from any resident is subject to these taxes on a worldwide basis, irrespective of the location of the asset concerned or the recipient.
So one can conclude that there are various tax opportunities in the Netherlands but, of course, for those wishing to make use of these opportunities, it is important to obtain proper advice both in their country of origin and in the Netherlands.
John is Partner of Graham Smith & Partners International Tax Counsel, specialising in international taxation, including family owned companies and the (international) families behind them, trusts in civil law jurisdictions, international structures and expatriates. He has written for various publications on international and Dutch taxation, and is the former editor of the International Handbook of Corporate and Personal Tax (Chapman & Hall). He also taught International Tax and European Tax Policy at the School of International Studies, AVANS University of Applied Science.