Box 1 income includes employment income, business profits and income from a primary residence. Profits received from personal business operations, from independent personal services and from certain shares of partnership income are taxed as business profits. Tax on income in Box 1 is levied at progressive tax rates, with a maximum tax rate of 49.5% on income over €73,031. Wage tax is levied throughout the year (pay-as-you-earn) on employment income and directors’ fees if a Dutch wage tax withholding agent is available. The wage tax paid serves as an advance payment of the final income tax payable. Penalty taxes for employers can apply for excessive severance payments (rate of 75%) and certain early retirement payments (rate of 52%).
Employment income - Employment income includes salaries, wages, pensions, stock options, bonuses and allowances (for example, home leave and cost-of-living). Housing allowances may be taxable in certain situations. Some allowances for expenses may be paid as a tax-free allowance, subject to certain limitations and restrictions. The system of tax-free employment benefits and allowances is embodied in the work-related costs scheme. This scheme has a major impact on employment conditions policy as a whole. Expatriates may qualify for a special tax regime, the 30% facility. This facility exempts 30% of certain employment income from taxation.
A non-resident individual receiving income from employment actually carried on in the Netherlands is subject to Dutch income tax. In certain situations involving multinational companies, the so-called 60-days rule applies. Under this rule, the Netherlands gives up its right to levy tax on employment income if the employee works in the Netherlands less than 60 days in any 12-month period. A non-resident who is employed by a Dutch public entity is also subject to Dutch income tax, even if the employment is carried on outside the Netherlands. A non-resident who is employed by a Dutch employer and is working in the Netherlands for part of the time may be liable to tax in the Netherlands on the full remuneration received from the employer.
Self-employment income - Annual profit derived from a business must be calculated in a consistent manner and in accordance with sound business practices. Annual profit is reduced by related business expenses, and taxable income is then determined by subtracting the deductions and the personal allowances.
Directors’ fees - Directors’ fees are treated as ordinary employment income.
An employee who is a 5% or greater shareholder is deemed to earn a salary of at least €451,000 a year. A lower amount may be taken into account for a shareholder who can prove that their actual salary at arm’s length is less than €51,000. However, if the tax authorities can prove that a salary at arm’s length would be higher than €51,000, the director’s salary must equal the salary at arm’s length (with a minimum of €51,000) and at least as much as 100% of the highest salary of other non-shareholder employees. These rules do not apply if the salary at arm’s length of the employee/shareholder does not exceed the amount of €5,000 a year.
A non-resident receiving income as a director of a company resident in the Netherlands is subject to Dutch income tax. Tax treaties entered into by the Netherlands generally grant the right to tax this income in the resident country of the company that pays the directors’ fees. Exemptions are made, among others, in the tax treaties with Switzerland and the United Kingdom.
Income from a primary residence - The owner of a primary residence is taxed on the deemed rental value of the residence which is determined based on the so-called “real estate valuation act,” which aims to reflect fair market value. For dwellings with a value exceeding €75,000, in general, a rate of 0.35% applies to calculate the deemed rental value. For dwellings with a value exceeding EUR1,200,000, a rate of 2.35% applies on the excess. Besides this taxable income from the primary residency, tax deductions related to the primary residency are available. For a period of up to 30 years, mortgage interest paid for the acquisition, maintenance or improvement of a primary residence is deductible for tax purposes from Box 1 income. Restrictions are imposed on the deduction of mortgage interest. One of the restrictions is that the mortgage should include at least an annuity scheme for paying off the mortgage; that is, there is a prohibition on interest-only mortgages. Annual instalments must be made within a maximum of 30 years. Transitional rules apply to mortgages in existence before 2013. In general, the acquisition of a primary residence cannot be fully financed by a mortgage if a capital gain on the previous primary residence was realised within three years before the purchase of the new residence. In principle, income from a second residence is taxed as Box 3 income.
The mortgage interest is deductible against the basic tax rate of 36.93% in 2023.
