Income tax (and social security contributions)

Income tax is a tax on earnings. In the Netherlands there are three categories of taxable income (three ‘boxes’), each with its own rate.

Box 1
This category includes income from work and home. A progressive rate applies of 34.15% up to a maximum of 52% (including social security contributions, see below).

Box 2
Income from a substantial interest falls in this category: the tax rate is 25%. A substantial interest is deemed to be the holding at least 5% of the shares in a public (NV) or private (BV) limited company (possibly together with partner or spouse).

Box 3
Income from savings and investments falls in this box. The rate is 30% and is levied on a deemed fixed yield of 4% of the total net worth. Net worth is the value of the assets, which may be savings deposits, rented property, shares etc., after the deduction of debt, based on the average balance for the year. The reference dates are 1 January and 31 December. Tax is levied on the value in excess of € 19,698.

Social security contributions

In addition to income tax, the Netherlands also levies social security contributions, which are collected by the tax administration.
Social security includes the old age pension (AOW), the surviving relatives benefit (Anw) and exceptional medical expenses (AWBZ) and the child benefit (AWK). Contributions do not need to be paid for the child benefit. The social security contributions are payable in one amount, together with income tax.

Wage tax (advance levy in respect of income tax)

In order to avoid a person having to pay a single large payment for income tax and social security contributions each year, two types of withholding tax have been introduced. One of these is the wage tax. This withholding tax payment is made at the time the income is received. The employer withholds the wage tax and social security contributions. This is called wage withholding tax. The other withholding tax in respect of income tax is dividend tax.

Corporate income tax

Corporate income tax is a tax levied on the profits of certain companies, e.g. public limited (NV) and private limited (BV) companies. Foundations and associations may also be subject to corporate income tax if they run a business.

Tax is levied at a rate of 25.5% on the first € 22,689 of the total taxable profit, and 29.6% on the excess. If a company has suffered a loss in previous years, this loss may be deducted from its profits. The profits distributed to shareholders are not deductible from taxable profits for corporate income tax.

Dividend withholding tax (advance levy in respect of income tax)

Many enterprises are operated as a public limited (NV) or a private limited (BV) company. The company’s capital is contributed by its owners (shareholders), who in return receive shares. Whenever the company makes a profit, it may distribute part of this profit to its shareholders. This is usually done in the form of a dividend.

A company distributing dividends is required to withhold tax at a rate of 25% on these dividends and to remit this dividend tax to the tax administration. The shareholders thus only receive 75% of the dividend. The dividend withholding tax withheld by the company, like the wage tax, may be set off against the income tax payable and works like an advance levy.

When distributing dividends to a (foreign) entity, a dividend tax of 25% applies in principle. However, there are a number of exceptions. If the company distributes a dividend to an entity the stock of which falls under the participation exemption (see paragraph 1.4) and this participation belongs to a company run in the Netherlands, the dividend payment is exempt from dividend tax.

If the recipient entity is established in a Member State of the European Union and this entity holds more than 20% of the stock of the distributing company, a dividend tax exemption also applies, under conditions. As of 2007, the limit of 20% will be lowered. At present, a lower limit of 10% already applies for a number of European Union Member States.

For both Dutch non-resident natural persons and companies not established in the Netherlands, to which the exemption from dividend tax does not apply, a dividend tax lower than the aforesaid 25% often applies under tax treaties.

Inheritance tax, gift tax and transfer tax

The Inheritance Tax Act distinguishes three different taxes: inheritance tax, gift tax and transfer tax.

Inheritance tax

Inheritance tax is a tax levied on the value of everything acquired from the estate of an individual whose last place of residence was situated in the Netherlands. Spouse, children and close relatives pay less tax than do distant relatives or non-relatives.

Substantial amounts are exempt from inheritance tax. There are exemptions for property inherited by spouses, unmarried couples living together who satisfy certain conditions, children, handicapped children, parents, other blood relatives, public entities serving a social or general interest and other cases of inheritance. A number of these cases are subject to further conditions for the application of the exemption. Pension entitlements are deducted in full or in part from the exemption of some beneficiaries.

Inheritance tax is levied on the taxable part of the property acquired (= property acquired less exemption).There is a minimum and a maximum percentage, depending on the value of the property acquired. The Inheritance Tax Act draws a distinction between the following three categories.
Spouses, children and unmarried couples living together are subject to a minimum rate of 5% and a maximum of 27%; for parents, brothers and sisters the minimum rate is 26% and the maximum 53%, and for non-relatives the minimum is 41% and the maximum 68%.
Exemptions exist for religious, ideological, charitable, cultural, scientific or public entities serving a social or general interest in the Netherlands as from 1 January 2006.

Gift tax

Gift tax is a tax levied on the value of anything received by way of a gift from an individual resident in the Netherlands.
Again, some amounts are exempt from gift tax. They include exemptions for gifts made by parents to children, as well as other such cases. As in the case of inheritance tax, exemption is subject to further conditions in a number of cases.

The rates are the same as those for the inheritance tax.

Transfer tax

Transfer tax is payable when certain domestic assets, e.g. real estate, pass by inheritance or by way of a gift from persons whose last place of residence was outside the Netherlands. There are no exemptions for transfer tax.

Transfer tax is levied at the same rates as inheritance tax.

Tax on games of chance

Anyone winning a prize valued at more than € 454 in a game of chance has to pay tax. All goods to which a market value can be assigned are considered prizes. Dutch lotteries pay net prizes – in other words, they must withhold and pay the tax. Anyone winning a prize in a foreign game of chance is obliged to give notice of this on a gaming tax return, which can be obtained from the tax administration.
The rate is 29%.