During the COVID pandemic the Dutch government, like many others, not only took measures to limit potential casualties but also to provide support to businesses that suffered from the lockdowns. This has been followed by the economic consequences of Russia’s invasion of Ukraine; and resultingly the Dutch government has had to seek additional tax income.
A number of measures took effect on 1 January 2023 and below we discuss four which can affect foreign investors and expatriates.
Taxation Of Unearned Income, Including Real Estate Income And Gains
For many years the Netherlands has taxed income from net wealth on the basis of a notional return, irrespective of the amount actually earned. This notional return is deemed to cover income and capital gains. When this arrangement was first introduced there was a fixed deemed return of 4 per cent on net assets and that was taxed at 30 per cent. Effectively this amounted to a wealth tax of 1.2 per cent but it was treated as income tax, also for the purposes of double tax treaties.
In December 2021 the Dutch Supreme Court held that part of the net wealth taxation contravened the right to peaceful enjoyment of one’s property provided for in the Protocol to the European Convention on Human Rights (ECHR) and that it contravened the prohibition on discrimination in article 14 of that treaty because the tax exceeded the actual return. Consequently, as of 2017 the Dutch tax authorities had to refund a significant amount of tax but chose only to do this to individuals who filed an appeal on a timely basis. Currently there are cases before the courts to determine whether those who did not file an appeal can also benefit from this decision.
In the meantime, the Dutch government has amended the legislation several times although it is not clear that these changes make the legislation compliant with the ECHR. Initially this resulted in the notional return on investments being calculated on the basis of a notional mix. Smaller amounts of net assets were deemed to be invested more in bank deposits which had a lower yield, while larger amounts of net assets were considered to be more heavily invested in securities with a higher deemed return. The notional return was then taxed at 31 per cent.
The highest effective tax on the net value of the investments (less any related debts) was 1.71 per cent of the value of the asset.
From 1 January 2023 the taxation of deemed income from net wealth (box 3 tax) is as follows:
For cash and bank deposits and debts these figures are provisional and will be finalised at the beginning of 2024. The notional returns apply regardless of the actual income or expenses and are taxed at a rate of 32 per cent (2023). In the future the relevant notional return will be based on market conditions and therefore may vary from year to year.
It is noted that prior to 2023 the maximum effective tax on the net value of the investments (balanced with any related debts) was 1.71 per cent. As of 2023 the effective tax increases to 1.97 per cent, not taking into account related debts; from 2023 debts are deductible from the notional income at a considerably lower notional rate. Consequently, in certain situations the tax may increase significantly; situations are known where the effective tax increased by a factor of four.
At this stage the government is looking further at how to tax unearned income. Parliament expressed the wish to have a system by 2026 where the actual income (including capital gains) will be taxed but there are still those who consider taxation on the basis of a notional return more efficient.
It is quite likely there will be further court cases in respect of subsequent years under the current system so taxpayers should not simply accept an assessment even if it is in agreement with the letter of the law.
Real Estate Transfer Tax
For Real Estate Transfer Tax (RETT) purposes the government distinguishes between real estate used for a main residence and all other real estate.
RETT on real estate used as main residence amounts to 2 per cent; an exemption is available for persons younger than 35 years of age who purchase their first main residence, up to a purchase value of €440,000. The excess is taxed at the 2 per cent rate.
As of 1 January 2023 the RETT on all other real estate, including residential and commercial property, has increased from 8 per cent to 10.4 per cent.
Maximum Income To Be Covered By 30 Per Cent Ruling
The 30 per cent ruling is available to employees recruited from abroad who are considered to have specific skills and knowledge which are (considered) scarce or absent on the Dutch labour market.
Expats generally incur extra expenses as a result of the fact that they have to move to a new country for their employment, for example double housing costs, schooling, etc. The employer can reimburse these expenses provided that there is proper evidence of the costs. Alternatively, in order to reduce this administrative burden a qualifying individual can apply for the 30 per cent ruling. The 30 per cent ruling essentially allows an employer to pay up to 30 per cent of an individual’s gross remuneration in the form of a tax-free allowance to cover such costs, without the need to document the actual expenses.
Those who qualify for the ruling can obtain it for a period of a maximum five years.
From 1 January 2024, the 30 per cent allowance is subject to a tax-free maximum of 30 per cent of the maximum wage allowed for public service employees (2023: €223,000).[i]
Although the amendments enter into force from 1 January 2024, they have retroactive effect to 30 per cent rulings granted after 31 December 2022, so from 1 January 2024 the maximum base will apply for rulings entered into from 1 January 2023. For 30 per cent rulings granted before 1 January 2023 the tax-free maximum will only apply from 1 January 2026 for the remaining period of the ruling.
The maximum does not apply if an individual elects for a reimbursement of the actual expat expenses, which may be preferable if these expenses exceed the maximum net allowance.
The ability for a person with a 30 per cent ruling to be treated as partially non-resident is not affected by these changes.
Tax Treatment Of Employee Options
Until the end of 2022, stock options involving the right to acquire shares in the employer (or an affiliated company) were taxed on exercise of the option. The gain on exercise, i.e. the fair market value on the date of exercise less the exercise price, was considered remuneration for tax purposes and the employer was required to withhold wage withholding taxes and pay these to the tax authorities accordingly.
This tax treatment meant that liquidity problems could arise if the shares were not tradable or there was a lock-up period, because it was not possible to sell (part of) the shares in order to pay the taxes due. It also could be challenging to value shares that were not tradable, especially shares in start-ups, as these shares are most likely not listed. From 1 January 2023 the legislation was amended to solve this liquidity issue by means of a deferral.
Under the new rules the taxation moment relating to shares obtained by exercising a stock option that are subject to selling restrictions can be deferred. Depending on whether the shares are tradable upon exercise, taxation will be as follows:
The taxable basis in all situations is the fair market value of the shares less the exercise price at the moment of taxation. In the case of option 3, where a lock-up period applies, a discount may apply. It is important to note that if tax is deferred the fair market value at that later moment is considered the taxable value.
The disposal of stock option rights remains taxable at the moment of disposal.
If an employee receives benefits such as dividends during the deferral period these are considered remuneration and therefore subject to wage withholding tax. However, once the exercise or the shares have been subject to wage withholding tax, any subsequent benefits realised are no longer considered remuneration; in most situations the shares would be included in the net wealth of the employee and would be taxed in box 3 (see above), regardless of any benefits realised.
An ex-employer is required to withhold (and pay) wage withholding taxes due on options exercised by ex-employees. This can also apply in case of international secondments. This requires adequate administration. Furthermore, cross border situations can be complex because of mismatches between domestic and treaty definitions on the timing of the taxation or the amount taxed. This may lead to double taxation.
[i] Wet Normering Topinkomens, “WNT”
Patrick van Rooij
Patrick is Partner of Graham Smith & Partners International Tax Counsel of Amsterdam, specializing in international taxation, including global mobility, family owned companies and the (High Net Worth) individuals behind them, the tax treatment of trusts in civil law jurisdictions, international corporate structuring and transfer pricing. He has written for various publications on international and Dutch taxation and is a member of the Dutch Association of Tax Advisers (“Nederlandse Orde van Belastingadviseurs”) and a member of the Dutch Association of Tax Knowledge (“Nederlandse Vereniging voor Belastingwetenschap”).