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 EUR68,507. 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 EUR46,000 a year. A lower amount may be taken into account for a shareholder who can prove that his or her actual salary at arm’s length is less than EUR46,000. However, if the tax authorities can prove that a salary at arm’s length would be higher than EUR46,000, the director’s salary must equal at least 75% of the salary at arm’s length (with a minimum of EUR46,000) 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 EUR5,000 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 EUR75,000, in general, a rate of 0.6% applies to calculate the deemed rental value. For dwellings with a value exceeding EUR1,090,000, 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 realized within three years before the purchase of the new residence. In principle, income from a second residence is taxed as Box 3 income.
The rate in the top bracket (49.5%), against which mortgage interest is deductible, is lowered yearly and for 2020 is 46%.
I am a seasoned tax expert with an in-depth understanding of international taxation, particularly in the context of the Netherlands. My expertise extends to various aspects of income taxation, including Box 1 income, employment income, self-employment income, and income from a primary residence. I am well-versed in the intricate details of the Dutch tax system and can shed light on the concepts and regulations discussed in the provided article.
Let's break down the key concepts mentioned in the article:
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Box 1 Income:
- Definition: Box 1 income includes employment income, business profits, and income from a primary residence.
- Tax Rates: Progressive tax rates apply, with a maximum rate of 49.5% on income over EUR68,507.
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Wage Tax and Pay-As-You-Earn:
- Wage tax is levied throughout the year on employment income and directors' fees.
- Functions as an advance payment of the final income tax payable.
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Penalty Taxes for Employers:
- Applied for excessive severance payments (rate of 75%) and certain early retirement payments (rate of 52%).
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Employment Income:
- Includes salaries, wages, pensions, stock options, bonuses, and allowances.
- Housing allowances may be taxable in certain situations.
- Work-related costs scheme impacts employment conditions policy.
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Expatriates and the 30% Facility:
- Expatriates may qualify for a special tax regime exempting 30% of certain employment income from taxation.
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Non-Resident Individuals and 60-Days Rule:
- Non-residents working in the Netherlands less than 60 days in any 12-month period may be exempt from Dutch income tax.
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Self-Employment Income:
- Annual profit calculation based on sound business practices.
- Deductions and personal allowances reduce taxable income.
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Directors' Fees:
- Treated as ordinary employment income.
- Specific rules apply to employee/shareholders with a 5% or greater stake.
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Income from a Primary Residence:
- Taxed on the deemed rental value based on the real estate valuation act.
- Mortgage interest deductions available for up to 30 years with certain restrictions.
- Transitional rules apply to mortgages existing before 2013.
- Income from a second residence is generally taxed as Box 3 income.
These concepts collectively provide a comprehensive overview of the Dutch tax system's treatment of various types of income, ensuring a nuanced understanding of the regulations and implications for individuals and businesses. If you have any specific questions or need further clarification on any of these topics, feel free to ask.
