Individuals resident in the Netherlands are subject to income tax on their worldwide income. Companies established in the Netherlands are subject to corporate income tax on their worldwide profits. This is known as resident tax liability. Measures have been taken to avoid double taxation, where resident taxpayers pay tax twice on all or part of their worldwide income or profits.
In addition, individuals non-resident in the Netherlands are subject to income tax on income from a number of sources in the Netherlands. Companies resident outside the Netherlands are subject to corporate income tax on their taxable profits from certain sources in the Netherlands. This is known as non-resident tax liability.

Non-resident taxpayers paying income tax may opt to be treated as resident taxpayers.

There are two ways in which resident taxpayers can avoid being taxed twice on their foreign-source income and foreign-source profits. In the first place, the Netherlands has concluded bilateral tax treaties with a large number of countries. In the second place, the Netherlands has unilateral provisions that in general apply to situations where no treaty has been concluded with a specific country or where a tax treaty does not include a provision pertaining to a specific case. These unilateral provisions are contained in the 2001 Unilateral Decree on the Avoidance of Double Taxation.

Methods to avoid double taxation

The credit method

The credit method usually applies under tax treaties for foreign withholding taxes on income from investments such as dividends, interest and royalties. This tax is usually levied on the gross amount. Under the double taxation treaties it is possible to elect for application of the credit method for income from each individual country. On the basis of a decision granted by the State Secretary of Finance, it is possible under the tax treaties to opt for application of the credit method on the aggregate foreign income from all countries. The Dutch tax is reduced by the foreign tax levied or by the Dutch tax payable on the foreign dividends, interest and royalties, whichever is lower.

Since the foreign withholding taxes for which credit is allowed in the Netherlands are usually levied on a gross basis, whilst Dutch income tax is levied on a net basis (after deduction of costs), it is quite possible that the Dutch tax will not be sufficient to provide credit for the tax levied by the foreign source country. Full credit is thus not possible. In these cases the excess of the foreign tax not credited may be ‘carried forward’ and, where possible, credited in subsequent years.

Under the 2001 Unilateral Decree on the Avoidance of Double Taxation the credit method only applies to foreign dividends, interest and royalties from designated developing countries.

Deduction as costs

In situations in which there are no arrangements for avoiding double taxation, foreign taxes may be deducted as costs related to the relevant income. Also, in situations in which a credit would normally be granted for dividends, interest and royalties, the taxpayer may opt for non-recognition of the tax credit. This is particularly advantageous if, as already stated, the (high) foreign tax in a year cannot be fully credited because this is higher than the amount that must be paid in the Netherlands. It may then be deducted as a cost. This option (for income tax and corporate income tax purposes) applies to the year in which the income is received and to the total amount of dividends, royalties and interest received in that year. The taxpayer may elect to deduct the costs against income tax in box 1 or box 2 individually. Costs may not be deducted in box 3.

The exemption method

The exemption with progression method usually applies to foreign elements of income for income tax and corporate income tax. In principle, foreign elements of income are exempt per individual country. The exemption method means that reductions will be granted for Dutch tax relating to foreign income. For income tax, the exemption is calculated per box.

If the income or profits from foreign sources exceed the total income or total profits (for example because the domestic income is negative), exemption may not or may not fully be granted in the year in question for the foreign income. In such cases, the total amount of the foreign-source income respectively the excess of the exemption may be carried forward and reduction of tax may be granted in subsequent years. This enables the Dutch tax liability to be reduced in the subsequent years.

Foreign losses decrease the Dutch tax liability in the year they are suffered and when calculating the reduction in subsequent years deducted from the positive foreign income qualifying for exemption.