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In this article, I will attempt  to explain the Dutch Tax System as briefly as possible. I realize that this is not a subject dear to anyone’s heart (except possibly the tax inspectors!), but if you are living and working in The Netherlands, it is something that probably affects you and so it may make sense to have some understanding of it.

The Dutch Tax System is split into three so called ’Boxes’ each related to three different types of taxable income. Each Box has its own rules and rates. Your income or assets will be taxed in one, two or possibly all three of these boxes. This does not necessarily apply if you are working for an international organization and are enjoying a tax free income.  If you fall into this category, you should ask your employer to clarify your liability or otherwise for Dutch tax.  And for those of you who have the benefit of a 30% ruling, Box 3 does not apply (yet).

Box 1 concerns income from work (labour) and the value of your principal residence (ie your own home).

 A progressive rate applies. The higher your income, the more tax you pay. Below are the rates that apply for 2010.

In Box I you may deduct certain costs from your taxable income. Mortgage interest payments and also certain costs for obtaining a mortgage are deductible.  So are premiums for future income, such as pension and annuities. There are some other deductions possible, but only income and deductions related to working and owning a home are explained in this article.

So in Box I, tax is levied on income from one’s own company, salary from employment or freelance employment. But also included are pensions, social security benefits, partner alimony and income from annuities.

If you own your own home, you will have to pay tax on the so-called “eigenwoningforfait”. This is fictitious income and it is calculated by taking a percentage of the so called WOZ-value of your home, the WOZ value being the value that the municipality (gemeente) of your town has put on your home. As already mentioned, mortgage interest payments for your principal residence are tax deductible, though this deduction is limited for a maximum of 30 years. The tax deductibility of your mortgage interest payments may be affected if you have made a capital gain (profit) on the sale of your previous home if this took place after 1^st January 2004. Your financial advisor can calculate for you how much of your mortgage interest is still tax deductible.

Box 2 concerns income from a limited company (a so-called B.V or N.V.) is taxed. This applies if you have a substantial interest in this B.V. or N.V.

You are considered to have a substantial interest in a B.V. or N.V. if you, possibly together with your partner, own at least 5% of the shares or have options to acquire at least 5% of the shares. Any income you receive from this company will be taxed at a rate of 25%.

Box 3 concerns Wealth (Assets)

In Box 3 your World-wide assets are taxed. These include stocks, shares, bonds, savings accounts etc that you possess, wherever they may be held or deposited. Tax is levied on the total value of your assets over and above a so-called exemption limit. This currently € 20.661 per person, and thus twice this amount for couples (if you are tax partners). Your children’s savings or assets are part of your assets from a tax point of view for as long as they are minors. Again, if you have the benefit of 30% ruling you are not required to pay tax in this Box for the duration of your 30% ruling. Your principal home (the house that you live in) is not taxed in this Box, since it is taxed already in Box 1. To calculate your taxable assets is simple: it is the sum of all your assets (excluding your principal home), minus any debts you have. The mortgage for your principal home cannot be used to reduce your taxable wealth, since this also belongs in Box 1.  The tax rate for Box 3 is 1,2% of the total value of your assets over and above the exemption limits above, minus your debts.

For example: if you own a second home, tax is calculated on the so-called WOZ value of this home, minus a possible mortgage or other loan you may have.  Any surplus value, if it exceeds the exemption, is subsequently taxed at 1,2% per year. However, if this home, not being your principal residence, is outside the Netherlands, other tax rules and exemptions may apply, especially if The Netherlands has a double taxation agreement treaty with the country concerned (thus ensuring that you are not taxed twice on the same assets).

This articles aims to give you some idea of the Dutch Tax System. If you have any questions, you should contact a financial advisor or a tax advisor.