Tax rates and personal allowances

Income tax is levied on the taxable amount calculated as shown above. This is a progressive tax. The rates are:

The 33.90% rate is comprised of 4.5% tax and 29.40% social security contributions, the second rate is comprised of 8.55% tax and 29.40% social security contributions, whilst the 50% and 60% rates consist solely of tax. A rate of 16% (first rate) and 20.05% (second rate) is applicable to persons aged 65 and over, as they are no longer liable for several social security contributions.

The above diagram shows that a personal allowance is deducted from the total net income before tax is levied. The level of this allowance is determined by the tax class to which the person is assigned. This level depends on the individual circumstances. The basic personal allowance is NLG 8,950. For married or single persons with a spouse or partner without an income the personal allowance is NLG 17,473. For single parents with children living with them the allowance is NLG 15,768. For single parents in paid employment this amount is increased by a maximum of NLG 6,821. For persons older than 65 years the personal allowance is increased by NLG 520 to a maximum of NLG 5,678.

Total gross income

The Income Tax Act distinguishes five different sources of income, which together comprise the total gross income. The five categories are:

I. Profits from business or professional activities

For income tax purposes the definition of 'profits' is the same as that for the assessment of the corporation tax which is to be levied, except that in assessing profits for corporation tax purposes a number of special factors, notably those which reflect the difference between liability to pay income tax and liability to pay corporation tax, are taken into consideration. This means that for income tax purposes only sections 3.2.1, 3.2.3 to 3.2.6 (in part), 3.2.7, 3.2.8 and 3.2.11 are applicable.

The following additional rules apply to persons conducting a business who are liable for income tax.

· Accelerated depreciation when starting a business
From 1 January 1996 an accelerated depreciation of fixed assets is permitted, subject to certain restrictions, for persons who have recently started a business.

· Exemption of profits derived from the liquidation of a business
Only part of the profits derived from the liquidation of a business are taxable. The exemption varies with the age of the person who conducted the business. The maximum exemption is NLG 45,000.

· Transfer of a business to a relative
If a person conducting a business transfers the business or part thereof to his or her spouse or partner or children, the transfer may, on request, be exempted from income tax. The successor then takes the place of the person conducting the business. A similar smooth transfer also takes place following the death of the person conducting the business and the dissolution of the community of property.

· Discontinuation of a business liable for income tax when it is to be continued as business liable for corporation tax
If a person conducting a business which is liable for income tax wishes to continue the business activities in the statutory form of company which is subject to corporation tax, e.g. a private company, then he or she may request an exemption from income tax when this conversion is made. The company then takes the place of the person conducting the business. The Ministry of Finance has published standard conditions for such situations.

· Deduction for assistance in the business
If the spouse or partner of a taxpayer conducting a business works for that business for a certain number of hours per year then the taxpayer may make a deduction for that assistance from his or her gross income. The deduction is made from the profits at a rate which is dependent on the number of hours the spouse or partner works for the business. The rate increases to a maximum 4% when the spouse or partner works for 1,750 hours or more in the business in that financial year. At the request of both the taxpayer and his or her spouse the deduction for assistance in the business may be waived. The spouse is then assessed separately on the basis of the wage or salary received from the business.

· Old-age reserve for the self-employed
Resident taxpayers who derive income from the profits of a business or from self-employment are allowed to offset a certain percentage of their gross income towards the provision of a retirement pension. The annual contribution to this reserve may be no more than NLG 21,367 and at no time may the reserve exceed the book value of the business's assets. If this reserve is not converted into an annuity when the business is terminated then tax will be levied over this amount at a rate of 45%.

· Deduction for self-employed persons
Resident self-employed taxpayers between the ages of 18 and 65 who devote at least 1,225 hours to running a business are allowed to offset a deduction for self-employed persons against their gross income. The amount of this deduction is in inverse proportion to the size of the company's profits. A fixed deduction of NLG 13,110 is allowed on profits of less than NLG 96,170. The allowance gradually declines to NLG 8,730 on profits of NLG 108,395 or more. Persons who have recently started a business may deduct an additional sum of NLG 3,840 for the first three years.

II Income from a substantial holding

Income, including capital gains or losses, from a substantial holding in a corporation is subject to income tax and is taxed at a rate of 25% insofar as this income exceeds the first two tax brackets.

A taxpayer is regarded as having a substantial holding in a corporation if he or she, either alone or with his or her spouse, holds directly or indirectly 5% of the issued capital. If the corporation has issued different classes of shares, a substantial holding also exists if the taxpayer, either alone or with his or her spouse, holds more than 5% of the issued capital of a particular class of shares. If the taxpayer holds a substantial interest in a corporation, jouissance rights and debt-claims issued by that corporation and held directly or indirectly by the taxpayer, either alone or with his or her spouse, are regarded as forming part of the substantial holding.

Interest derived from debt-claims forming part of a substantial holding is taxed at the normal rate of income tax. Dividends and capital gains derived from the alienation of shares or from the redemption of debt-claims are taxed at a proportional rate of 25% in the income tax, insofar as this income exceeds the first two tax brackets. In case of a capital loss 25% of that loss may be offset against the tax which would otherwise be due. For this purpose an arrangement similar to that for the offsetting of losses is applicable (section 3.2.11). In case of emigration of the taxpayer the substantial holding is deemed to be alienated. However, the tax due will not be collected as long as the substantial holding is not disposed of. After the elapse of 10 years the remainder of the tax levied because of the deemed alienation at the time of emigration, is pardonned.

For non-residents the income from the substantial holding is only subject to tax in case of a substantial holding in a corporation wich is a resident in the Netherlands. With respect to non-residents a corporation is also deemed to be a resident of the Netherlands if it was resident in the Netherlands for at least five years during the last ten years. With respect to non-residents the substantial holding is deemed to have been alienated in case of the transfer of the place of effective management of the corporation from the Netherlands to elsewhere.

III. Net income from employment and services rendered outside employment

This income is comprised of all income other than business income that is received in cash or in kind from present and former employment, together with income derived from services rendered outside employment.

Income from present employment includes salaries, payments, gratuities, tips and certain periodic payments received under social security legislation (in cash), and the free use of a private car and free housing paid for by the employer (in kind). Income from past employment includes pensions, and invalidity, disablement and unemployment benefits.

Salaries, wages and certain periodic payments received under social security legislation are subject to the salaries tax. This tax is withheld by the employer, and is essentially an advance levy on the person's final income tax assessment (see 4.5.1).

Income from activities and services which does not qualify as income from business or employment is considered to be income from services rendered outside employment. To be regarded as income there must be a reasonable expectation that these activities will yield income. Examples are the provision of boarding for lodgers, and fees for services and copyrights.

In principle expenses incurred in connection with employment and the provision of services are deductible from the income derived from these activities. The deduction is equal to the actual expenses less reimbursements or, subject to upper and lower limits, 12% of the gross salary, whichever is larger. A fixed sum is tax-deductible for travel between home and work.

IV. Net income from capital

Net income from capital is comprised of all income from movable and immovable property and rights not related to goods. Only the yield from property and rights is taxable; the increase in the value of the assets is exempted. There is no capital gains tax in the Netherlands.

A special provision is applicable to owner-occupied property. The property is taxed at an imputed rental value, which represents the balance of the revenue and expenses connected with the use of a dwelling. This rental value, which is a positive amount, is assessed on statutory tables. As normal expenses are included in the imputed rental value, no expenses other than (mortgage) interest and ground rent may be deducted.

Interest and dividends received by private investors from designated credit or investment institutions which mainly participate in environmental projects are exempt from income tax.

Income from stocks and shares includes cash dividends, stock dividends and bonuses. The final payment to the shareholder following the liquidation of a corporation is regarded as a dividend if it exceeds the average amount paid on the shares concerned.

Notional dividends from foreign investment corporations and funds are income from assets, and are taxed accordingly. In principle the income from the latter is set at 6% of the market value of the shares.

A maximum allowance of NLG 1,000 is granted insofar as dividends subject to Dutch dividends tax exceed related expenses (including interest expenses). Under certain conditions the amount of the dividend allowance can be raised:

· for dividends received from specific private participation companies, the allowance is raised by a maximum of NLG 1,000;

· for dividends received in connection with employee savings and profit-sharing schemes, the allowance is raised by a maximum of NLG 1,000;

· For dividends received from specific participation companies which mainly participate in starting entrepeneurs (both natural persons and corporate bodies), the allowance is raised by a maximum of NLG 5,000. However, insofar as the corresponding interest allowance in connection with starting entrepeneurs is utilized, this amount of NLG 5,000 is reduced.

For married taxpayers the above mentioned amounts of the dividend allowance are doubled. The dividend allowance is not applicable with respect to dividends from a substantial holding in a corporation.

Interest is more than just the interest received from a debtor or bank. There are special provisions for taxation of the increase from the lower issue price to par value of zero bonds and deep discount bonds, and the notional interest on the bare ownership of rights and claims of which the temporary usufruct is divided.

A maximum allowance of NLG 1,000 is granted insofar as any interest received exceeds the interest paid in connection with sources of income and personal obligations. This is exclusive of the interest paid on a mortgage, which is related to the purchase or renovation of owner-occupied property. Under certain conditions the amount of the interest allowance can be raised:

· for interest received in connection with employee savings and profit-sharing schemes, the allowance is raised by a maximum of NLG 1,000;

· for interest received in connection with a subordinated loan to a starting entrepeneur of at least NLG 5,000, or interest originating from specific participation companies wich mainly participate in starting entrepeneurs (both natural persons and corporate bodies), the allowance is raised by a maximum of NLG 5,000.

For married taxpayers the above mentioned amounts of the interest allowance are doubled. Furthermore, the taxpayer is entitled to an additional interest allowance when his children under the age of 18 receive interest, up to a maximum of NLG 500 per child.

The interest component of a capital payment from a life insurance policy (and the investment income) is not taxed if the payment occurs because the person insured dies before the age of 72. The beneficiary is generally allowed the same exemption for payments upon the death of the insured person at or after the age of 72 if the premiums have been paid over a period of at least 15 years. Interest included in payments of up to NLG 62,000 on a fixed date is exempt from income tax if the annual premiums are paid over a period of at least 15 years. This is also applicable to interest included in life insurance payments of up to NLG 210,000 if the annual premiums are paid over a period of at least 20 years. Both exemptions are subject to the condition that the highest annual premium paid for the insurance may not be more than ten times the lowest premium.

Income from capital includes income from life annuities and other periodic payments resulting from either a lump-sum payment or the payment of premiums. These payments are liable to tax over the amount that the payments and the payments received in the past exceed the total premiums or lump sum paid under the policy.

V. Net income in the form of periodic payments

There are two categories of periodic payments, those which are classed as income from capital, and those which qualify as a separate source of income.

Periodic payments forming a separate source of income can be divided into different categories. Examples are:

· payments from the state, such as certain public scholarships and government subsidies;

· periodic payments under family law, such as maintenance payments, unless received from relatives once or twice removed;

· other periodic payments, claimable in court, unless received from close relatives, foster parents or members of the same household, such as maintenance payments to a former partner.