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2000
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3. (Corporation Tax). 7
3.1 Taxpayers 7
3.2 Tax base and rates 7
3.2.1. General 7
3.2.2. Tax rates 7
3.2.3. Determination of profits according to sound business practice 7
3.2.4. Depreciation of fixed assets 8
3.2.5. Stock valuation 8
3.2.6. Tax-deductible expenses; mixed expenses 8
3.2.7. Reserves 9
3.2.8. Investment allowance 9
3.2.9. Education allowance 10
3.2.10. Tax-deductible donations 10
3.2.11. Offsetting of losses 10
3.3. Participation exemption 10
3.3.1. General 10
3.3.2. Shareholdings 10
3.3.3. Gains 11
3.3.4. Costs 11
3.3.5. Converting a permanent establishment into a subsidiary 12
3.3.6. Losses resulting from liquidation 12
3.3.7. Directive on parent companies and subsidiaries 12
3.4. Fiscal unity; consolidation for tax purposes 12
3.5. Investment institutions 13
3.5.1. General 13
3.5.2. Conditions 13
3.5.3. Reserves 14
3.5.4. Allowance for foreign withholding tax 14
4. (Income Tax) 14
4.1 Taxpayers: residents and non-residents 14
4.2 Taxbase and rates 15
4.2.1. Taxable income of residents 15
4.2.2. Tax rates and personal allowances 15
4.2.3. Total gross income 16
4.2.4. Non-source-related deductions 20
4.3. Employee savings and profit-sharing schemes 21
4.3.1. Employee savings schemes 21
4.3.2. Profit-sharing schemes 21
4.4. Foreign employees: the 35% rule 22
5. (Wealth Tax) 22
5.1. Taxpayers: residents and non-residents 22
5.2. Tax base and rates 23
5.2.1. Exemptions 23
5.2.2. Tax rates 24
5.2.3. Special allowances 24
5.3. Tax returns and assessments 24
6. (Value Added Tax and Excise Duty) 25
6.1. Taxable persons 25
6.2. Tax base 25
6.3. Exemptions 26
6.4. Special arrangements for small businesses (persons) and the agricultural sector 26
6.5. Tax rates 27
6.6. The new VAT system in the single European market 27
6.7. Tax returns and assessments 28
7. (Environmental Taxes) 28
7.1. Fuel tax 28
7.2. Tax on groundwater 29
7.3. Tax on tap water 29
7.4. Tax on tap water 29
7.5. Regulatory energy tax 30
8. , (Avoidance of Double Taxation for Taxes on Income, Profits and Wealth) 30
8.1. General 30
8.2. Methods 31
8.2.1. The exemption with progression method 31
8.2.2. The credit method 31
8.2.3. Deduction as costs 31
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2. , .v , (taxes on income, profits and net wealth)
Income tax.
Income tax is a tax on a person's natural annual income. It is levied at a progressive rate. Personal circumstances are taken into account when making the assessment of the amount of tax to be paid, and certain expenses are tax-deductible. The scheme provides for a personal allowance, the amount of which is dependent on the individual circumstances. There are four tax rates, 33.90%, 37.95%, 50% and 60%. The first two rates include both tax and social security contributions; the last two rates consist solely of tax.
Salaries tax
Income tax has two advance levies, which are a salaries tax, and a dividend tax. The salaries tax and the social security contributions are levied jointly on earned income or benefits. The employer or body paying the benefit deducts the tax and contributions directly from the salary or benefit, and pays these to the Tax Department. Many natural persons pay only salaries tax, and are not subject to income tax. For natural persons with a high income or many tax-deductible items, the salaries tax serves as an advance levy, and they are subsequently issued with an income tax return and an assessment.
Dividend tax
The other second advance levy for income tax is the dividend tax. The corporation paying the dividend withholds dividend tax at a rate of 25% and pays the tax to the Tax Department. Shareholders are liable for income tax on the gross dividend they receive. An amount of this dividend is exempted from income tax, NLG 1,000 for single persons and NLG 2,000 for married persons. For non-residents the dividend tax levied on a dividend is in principle a final levy. Tax conventions generally provide for a lower rate than the 25% mentioned above.
Corporation tax
Corporation tax is levied on the taxable profit of both private and public companies. Foundations (in Dutch 'stichtingen') may also be liable for corporation tax. An important feature of the corporation tax is the participation exemption, which ensures that corporation tax is levied only once on the profit obtained within a group. This means that a company receiving dividends does not have to pay corporation tax on these dividends since the tax has already been paid by the company distributing the dividends. Corporation tax is levied at a rate of 35%. The first NLG 50,000 taxable profit is levied at a rate of 30%.
Wealth tax
Wealth tax is levied on a natural person's total net wealth. The net wealth is the value of the assets less any liabilities. In principle the assets include all property and possessions, for example the person's own home, shares, bonds and savings, together with the capital invested in the person's own business. There are several personal allowances and exemptions. For instance the personal allowance for married couples is NLG 250,000. The tax rate is 0.7%.
Inheritance tax
The Inheritance Tax Act has two forms of tax, which are inheritance tax and gift tax. These taxes are, in general, to be paid by the recipient. There are substantial exemptions from both inheritance tax and gift tax. There are no exemptions from inheritance tax payable upon the inheritance or donation of specific assets, for example property. The rates are the same for these taxes, and depend on the value of the assets that have been received and the relationship between the giver and the recipient. There is a minimum and maximum rate.
Tax on games of chance
The tax on games of chance is levied on prizes that exceed NLG 1,000. The rate is 25%. The organisation awarding the prize generally pays the tax, and the winner receives a net prize.
v (taxes and duties on goods and services)
Import duty.
Import duty is levied on imported goods. This usually amounts to a percentage of the value of the goods being imported. Various rates are applicable, which are determined by the EU. The rates are usually lower for minerals or raw materials, and higher for finished products. Import duty is levied on goods, which are imported from countries outside the EU. The revenue is destined for the EU.
Value added tax
Value added tax (VAT) is a general consumer tax included in the price consumers pay for goods and services. Consumers pay this tax indirectly, and companies remit the tax to the Tax Department. All companies pay VAT, although there are a few exceptions. The VAT paid by one company to another may be reclaimed from the VAT to be paid to the Tax and Customs Administration. There are three rates for VAT:
a general rate of 17.5%;
a lower rate of 6%, applicable mainly to food and medicines;
a zero rate, applicable mainly to goods and services in international trade, so that goods can be exported free from VAT.
Excise duty
Excise duty is levied on certain consumer goods, i.e. petrol and other mineral oils, tobacco products, and alcohol and alcoholic beverages. A special consumer tax is levied on non-alcoholic beverages. Excise duty, like VAT, is included in the price consumers pay for these goods. The tax is remitted by the manufacturers and importers of the goods liable to excise duty.
Taxes on legal transactions
Three taxes on legal transactions are levied in the Netherlands. These are transfer tax, insurance tax and capital duty. Transfer tax is levied on the acquisition of property located in the Netherlands. The rate is 6% of the market value of the property. Insurance tax is levied on insurance premiums at a rate of 7%. The following insurances are exempted from insurance tax: life insurance, accident insurance, invalidity insurance, disablement insurance, medical insurance, unemployment insurance and transport insurance. Capital duty is levied when capital is contributed to companies located in the Netherlands when the capital is comprised of shares. The rate is 0.9% and the tax due is calculated on the value contributed (assets less liabilities), or on the nominal value of the shares, whichever is higher. In certain circumstances an exemption is made for mergers or reorganisations.
Motor vehicle tax
Motor vehicle tax is paid on vehicle ownership, except for buses, for which vehicles the tax is paid for the use of the roads. The amount depends on the type and weight (sometimes gross) of the vehicle and for private cars also on the type of fuel the vehicle uses. Furthermore, for private cars and motorcycles, the amount is dependent on the province in which the person/owner is resident or the company/owner is established.
Tax on heavy vehicles
The tax on heavy vehicles (also known as the eurovignette) is a tax on vehicles with a gross weight of maximum 12.000 kg or more. It is levied for the use of motorways in the Netherlands. The tax has to be paid before the vehicle uses the motorway. There are two rates of tax, which are based on the number of axles of the vehicle; one rate is for three axles or less, the other for four axles or more. The tax can be paid daily, weekly, monthly or annually. A similar tax, based on a directive of the European Union and a Treaty, is levied in Belgium, Denmark, Germany, Luxembourg and Sweden.
Tax on private cars and motorcycles
The tax is included in the price paid by the buyer on the purchase of a private car or motorcycle. It is usually paid by the manufacturer or importer. The tax is dependent on the net listed value of the private car or motorcycle. The minimum tax rate is 10% of the net listed value of the vehicle, unless it is 25 years of age or older.
Environmental taxes
There are several environmental taxes in the Netherlands. Fuel tax is to be paid by suppliers or users of mineral oil and other fuels. Since 1 January 1995 taxes are liable for the withdrawal of ground water and the disposal of waste. A regulatory energy tax came into force on 1 January 1996.
3. (Corporation Tax).Corporation tax is levied on companies established in the Netherlands (resident taxpayers) and by certain companies not established in the Netherlands, which receive income in the Netherlands (non-resident taxpayers). In this context the term 'company' includes corporations with a capital consisting of shares, co-operatives, and other legal entities conducting business. The main types of companies referred to in the Corporation Tax Act are the public company (NV) and the private company with limited liability (BV).
Whether a company is deemed to be established in the Netherlands depends on the individual circumstances. Factors of relevance include the location of the effective management, the location of the head office, and the location of the shareholders' general meeting. Under the Corporation Tax Act all companies incorporated under Dutch law are regarded as being established in the Netherlands.
Corporation tax is levied on the taxable amount, which is the taxable profits made by the company in a particular year less deductible losses. The taxable profits are the profits less tax-deductible donations. In principle the profits should be calculated in accordance with the provisions laid down in the Income Tax Act to determine the business profits of natural persons. In certain cases additional stipulations made in the Corporation Tax Act are also applicable. Under certain conditions it will be permitted to taxpayers to compute their taxable profit in currency other than the guilder (the functional currency) for a period of at least 10 years.
Corporation tax is levied at a rate of 30% of taxable profits.
The profits should be determined according to sound business practice and consistent accounting methods. The concept of sound business practice has mainly been developed in case law. For example unrealized losses may be taken into consideration, while unrealized profit may be ignored. The requirement of consistent accounting methods means that the method of determining profits may be changed only if this is compatible with sound business practice. Companies exploiting sea-going vessels may opt for a tonnage-based profit determination, providing that certain requirements are met. An important requirement is that the decision is binding for a period of ten years.
The depreciation of fixed assets for tax purposes is a statutory requirement. In principle taxpayers are free to choose a depreciation method. The method chosen must be in accordance with sound business practice. The linear method of depreciation is generally used. A less common method of calculating depreciation is the declining balance method. In case law, the latter method is accepted only for fixed assets with a steadily declining use with age. A combination of both methods, i.e. depreciation according to a declining percentage, may also be used.
Goodwill may only be depreciated if the goodwill has been purchased from a third party; goodwill generated by the company itself cannot be depreciated. An accelerated depreciation is permitted for certain fixed assets, of which the most important are:
energy-saving fixed assets and other environmentally-friendly fixed assets;
sea-going vessels;
intangible assets, providing these belong to a business that has been purchased which was not established in the Netherlands.
This is subject to restrictions.
The following stock valuation methods are permitted: valuation based on cost, valuation based on cost or market value (whichever is lower), or the base stock method. Valuation at cost is in accordance with sound business practice, unless the market value is significantly lower than the cost. In this system unrealized profit is ignored, while unrealized losses can be taken into account directly. The value of the stock can be determined by either the FIFO or LIFO method. Subject to certain conditions, case law also permits the use of the base stock system.
The basic principle of the determination of the profits is that all expenses associated with business operations are tax-deductible. If an expense can be regarded as commercially sound then its value is not of importance. However, the deductibility of certain business expenses is subject to restrictions. This concerns mixed expenses, which are business expenses with a private element. Non-deductible expenses include costs connected with pleasure craft used for entertainment purposes and fines.
The limitations on deductibility of expenses are more strict for companies with one or more natural persons holding a substantial interest in the company, who also work(s) for the company. Basically, a natural person has a substantial interest if he holds 5% or more (direct or indirect) of the share-capital of the company. In that case 10% of the company's costs in connection with food, drinks, tobacco, representation including receptions and entertainment, seminars, excursions etc., are not deductible. The company can opt for a fixed amount of NLG 3,200 per substantial interest holder, who also works for the company, to be treated as non-deductible.
The Corporation Tax Act gives an inexhaustive list of deductible and non-deductible expenses. The following expenses are always deductible:
profit shares paid to directors and other staff as remuneration for employment;
profit shares paid to creditors other than founders, shareholders or other persons entitled to shares in the corporation;
profit shares paid in connection with licences, patents, etc., to persons other than founders, shareholders or persons otherwise entitled to shares in the corporation;
profit shares paid by an insurance company to its policyholders;
the costs of incorporation and of alterations in the capital.
In the Netherlands no thin capitalization rules exist. Since January 1997 limitations on the deductibility of intercompany interest expenses have been introduced in the Corporate Income Tax Act. The (interest) expenses on intercompany loans are not deductible in basically two types of situations:
(interest) expenses arising from indebtness in the shareholder/susidiary relation, e.g. in connection with dividends, reduction of capital and capital contributions. However, (interest) expenses remain deductible, if the tax payer can demonstrate that both the transaction and the loan were entered into for sound business reasons;
(interest) expenses related to artificial conversion of equity into debt within the group. However, expenses related to these schemes remain deductible, if the tax payer can demonstrate that either both the transaction and the loan were entered into for sound business reasons or that the interest paid is effectively subject to a reasonable level of profits tax in the hands of the recipient.
The following expenses are never deductible:
profit distributions other than those specifically designated as deductible in the Corporation Tax Act (see above);
corporation tax, dividend tax and tax on games of chance.
Certain reserves may be formed by making a deduction from the profits. In order to qualify for this deduction the business must keep regular annual accounts. Three reserves are legally permitted, which are the cost equalisation reserve, the replacement reserve and since January 1997 the reserve for financial risks for multinational companies.
The cost equalisation reserve enables recurrent costs to be spread uniformly over a period of time.
A replacement reserve may be created if fixed assets are lost, damaged, or sold, when the payment received exceeds the book value. To be eligible for this reserve there must be plans to replace or repair the assets. The reserve should generally be terminated in the fourth year following the year in which it was formed.
Under certain conditions a reserve may be formed for the special risks involved in operating as an international group. The risks aimed at concern financing and holding activities. One of the main conditions to qualify is that the financing activities must comprise financing of group companies in at least four countries or on two continents. In principle, the entity that forms the reserve may charge to this reserve 80% of its income derived from financing activities before tax. The tax inspector will grant the regime for ten years upon a request filed by the tax payer, in wich the tax payer states the relevant factual circumstances. The Dutch tax inspector can impose additional conditions.
This scheme allows a certain percentage of the sum invested in fixed assets in a particular year to be deducted when calculating the taxable profits. Investments are divided into nine tranches, where the percentage of the allowance decreases with increase in investment. In 1999 the lowest tranche is applicable to investments between NLG 3,900 and NLG 65,000, and the highest tranche is applicable to investments between NLG 503,000 and NLG 566,000. The corresponding percentages are 27% and 3% respectively. Certain fixed assets are excluded from the investment allowance. If fixed assets for which an investment allowance was obtained in the past are sold within five years of being purchased then the investment allowance is withdrawn either wholly or in part.
Furthermore, there is an investment allowance in respect of investments in energy saving business assets, placed on an Energylist. For investments over NLG 3,900 up to NLG 65,000 the allowance is 52%. The percentage of the allowance declines as the amount of the investment increases. The maximum allowance is 40% of NLG 208 mln.
This scheme allows an additional percentage of the costs of education of employees to be deducted when calculating the taxable profits. The percentage of the allowance varies between 20% and 80%.
Within certain limits donations to religious, ideological, charitable, cultural or academic institutions or other bodies serving the public good are tax-deductible. The donations must be more than a total of NLG 500. The maximum deduction is 6% of the profits.
A loss may be
offset against the taxable income of the three preceding years (carry back) and
against taxable income of all years to come (carry forward).
If a corporation discontinues its business either wholly, or in part, then any
losses that have not been offset may be compensated with future profits,
provided that at least 70% of its shares continue to be held by the same
natural persons
The Corporation Tax Act has always provided for a participation exemption, which is applicable to both domestic and foreign shareholdings. This exemption is one of the main pillars of the Dutch Corporation Tax Act, and it is motivated by the desire to prevent double taxation when the profits of a subsidiary are distributed to its parent company which is also liable to corporation tax. The main features of this scheme are as follows: all gains from shareholdings are exempted, the costs associated with a shareholding are not deductible, and losses arising from liquidation of the corporation are deductible only under certain conditions. The corporation distributing dividends does not have to pay dividend tax if the distribution of profits falls under the participation exemption enjoyed by the company receiving the dividend.
The most important elements are as follows.
The participation exemption is applicable to both domestic and foreign shareholdings. A shareholding is deemed to exist if the taxpayer:
1. holds at least 5% of the nominal paid-up capital (a shareholding includes the related possession of 'jouissance' rights); or
2. holds less than 5%, but ownership of the shares is part of the normal business conducted by the taxpayer, or the acquisition of the shares served a general interest; or
3. is a member of a cooperative; or
4. holds at least 5% of the share certificates in a mutual fund based in the Netherlands.
The participation exemption is not applicable if the taxpayer or subsidiary company is a fiscal investment institution. The concept of an investment institution is explained in section 3.6. The participation exemption is not applicable when the shares are held as stock.
The participation exemption does not apply internationally when shares in the foreign corporation are held as a portfolio (passive) investment. Another requirement for the exemption to be granted is that the foreign company in which the shares are held is subject to a tax on profits levied by the central government in the country in which it is established (see also 3.3.7.). Furthermore, the participation exemption is not applicable for participations in foreign 'passive' finance companies.
In principle a Dutch company cannot credit any foreign withholding tax on dividends received from foreign subsidiaries to which the participation exemption is applicable. However, the Dutch dividend tax which has to be transferred by the Dutch company in the event of the redistribution of foreign dividends received can be partly reduced, subject to certain conditions. The reduction amounts to a maximum of 3% of the foreign dividends received.
Gains from shareholdings are ignored when calculating the profits. In principle the term 'gains' includes both profits and losses. Profits, of course, include both official and disguised dividends received. Exempted gains also include profits made by the sale of a participation (including exchange rate differences). Since January 1997, it is possible to opt for application of the participation exemption to currency results arising from financial instruments which are used to hedge the translation risks on investments in foreign subsidiaries. Accordingly losses from sales are not deductible. If the participation declines in value as a result of losses suffered, then a write-off by the parent company is in principle non-deductible. An important exception is losses resulting from liquidation (see 3.3.6.).
However, since January 1997 a company may claim a tax deduction for start-up losses of a subsidiary, in which it holds at least 25% of the share-capital. The rules allow the parent company to depreciate the book value of the subsidiary in the first 5 years after the acquisition if and to the extent that the value of the subsidiary has declined below cost price. When the subsidiary becomes profitable, a taxable appreciation has to be made up to the amount of the cost of the investment. To the extent the depreciation has not been reversed during the first 5 years, the balance will then have to be reversed in the next 5 years in equal steps.
If the depreciated debts of a subsidiary to a parent company are converted into share capital then a special provision prevents tax claims being lost. In such cases an amount equal to the depreciation of the debt is, in principle, again regarded as part of the profits of the parent company. This is also applicable when the debt is sold to an affiliated company or if it is discharged.
Shareholdings may give rise to costs as well as gains. In principle such costs are not deductible. However an exception is made when these are indirectly conducive to making profits taxed in the Netherlands. With foreign shareholdings this may occur if the foreign subsidiary has a permanent establishment in the Netherlands. In practice the main non-deductible costs are the costs of financing the participation. The taxpayer must also show that the costs are conducive to making domestic taxable profits.
As losses incurred by foreign subsidiaries cannot be offset against profits made by the Dutch parent company, foreign activities from which profits are not directly expected are often undertaken through a permanent establishment. Foreign losses can then be directly deducted from the profits of the Dutch company. To prevent losses being deducted from the profits in the Netherlands whilst later profits in this country are not taxed, it is stipulated that when a permanent establishment is converted into a subsidiary then the profit made by the subsidiary up to the amount of the losses deducted from the Dutch profit is not exempted from taxation. This obligation to compensate profits made by a subsidiary with earlier losses incurred by the permanent establishment is applicable to the eight years preceding the conversion, and is subject to the condition that the losses have not been offset against other foreign profits.
In principle losses from participations cannot be taken into account by the parent company. An exception is those losses resulting from liquidation. The liquidated subsidiary cannot be compensated for these losses in the future. For this reason these losses may be taken into account by the parent company, under certain conditions, in the year in which the liquidation of the subsidiary is completed. The loss resulting from liquidation is the difference between the liquidation payments and the sum paid to acquire the participation (the 'sacrificed amount'). Special rules apply if a tax deduction has been claimed for this participation (see 3.3.3.).
There are additional requirements for taking account of the losses resulting from the liquidation of foreign participations. One requirement is that the holding must be at least 25%, and that it must have been held during the five years preceding the discontinuation of the subsidiary's business, the year of discontinuation itself, and during subsequent years in which liquidation payments are received. In addition no loss resulting from liquidation can be taken into account if the participation was obtained from a foreign associated company when the operations concerned are discontinued within three years.
In 1992 Dutch legislation was amended in line with the EU directive on parent companies and subsidiaries. The relevant Act has a retroactive effect from 1 January 1992. The participation exemption has been extended in several respects. For example an investment in a company established in another EU member state can be regarded as a participation covered by the participation exemption. For this purpose a shareholding of at least 25% is required. The possession of at least 25% of the voting rights in a company can also be regarded as a participation under certain conditions, even if the shareholding is less than 5%. Under this Act dividend tax is not levied on dividend paid to a company established in another member state when the company has an interest of at least 25% in the company paying the dividend.
This act was further amended in 1994 in order to give the exemption of dividend tax a wider application than the EU directive. If certain conditions are met then the exemption now becomes applicable when the shareholder has an interest of at least 10% in the company's capital, or holds at least 10% of the voting shares.
Under certain conditions a parent company may form a fiscal unity with one or more subsidiaries. For corporation tax purposes this means that the subsidiaries are deemed to have been absorbed by the parent company. The main advantages of fiscal unity are that the losses of one company can be set off against profits from another company, and that fixed assets can be transferred at book value from one company to another.
This type of tax consolidation is possible only between a parent company and its wholly owned subsidiaries (in practice 99% is sufficient) when all the companies involved in the consolidation are established in the Netherlands. Other conditions are that the parent company and the subsidiaries have the same financial year, and are subject to the same taxes. A request to form a fiscal unity must be submitted to the Inspector on behalf of all the companies involved. The standard conditions drawn up by the Minister of Finance must be met. These conditions cover a large number of technical aspects involved in consolidation.
The fiscal unity can be terminated upon request, or will be terminated automatically if any of the conditions are not met.
Since January 1997 new regulations apply to leveraged acquisitions, in case a leveraged Dutch acquisition vehicle is used to acquire a Dutch operating company. The aim of these regulations is to prevent the acquisition vehicle to form a fiscal unity with the target company in order to offset its interest expenses against the profits of the operating (target) company. In principle, following to the new fiscal unity rules these (interest) expenses are disallowed (for a period of eight years) to be offset against the profits of the target company.
Subject to certain conditions Dutch-based public companies, private companies and mutual funds may apply for recognition as investment institutions for taxation purposes. An investment institution can request to pay corporation tax at 0%. The purpose of this system is to ensure that persons investing in an investment institution shall not receive a less favourable treatment than persons who invest directly. This would not be the case without a special scheme.
As stated in section 3.3.2. an investment institution does not qualify for the participation exemption, whether it be a parent company or a subsidiary.
Several conditions must be met before an organisation may be regarded as a fiscal investment institution. These conditions include the way in which the investments are financed, the distribution of the investment returns, and the ownership of shares in the investment institution. The main conditions are:
up to 60% of the book value of the immovable property may be financed with borrowed capital. For other investments the limit is 20% of the book value;
the profits must be distributed within eight months of the close of the financial year;
when the investment institution is listed on the Amsterdam Stock Exchange, less than 45% of the shares may be held by a corporation liable to corporation tax or several associated corporations (parent, subsidiary, or sister corporations with interests of a third or more in each Mother), unless the corporation is another listed investment institution;
when the investment institution is not listed on the Amsterdam Stock Exchange then at least 75% of the shares must be owned by individuals, corporations not liable to profits tax, or listed investment institutions which meet the above condition;
less than 25% of the shares in the investment institution may be held indirectly by Dutch shareholders via foreign-based corporations;
less than 25% of the shares in the investment institution may be held directly by a single foreign shareholder.
Institutions are allowed to form two special fiscal reserves, the reinvestment reserve and the rounding-off reserve. The reinvestment reserve is formed by non-distribution of capital gains. The level of the annual contribution to the reserve and its absolute size are both subject to restrictions. If, when establishing the amount of the profit to be distributed, an amount remains due to sums being rounded off then this amount may be added to the rounding-off reserve. The rounding-off reserve may not exceed 1% of the paid-up capital.
Under Dutch law and Dutch tax conventions withholding tax levied abroad may generally be set off against income or corporation tax payable by the taxpayer in the Netherlands. As an investment institution is liable for corporation tax at a rate of 0% it cannot make use of this facility. To ensure that persons who invest directly and persons who invest via an investment institute receive equal tax treatment, special arrangements are made for investment institutions allowing the former to offset foreign withholding taxes against income from securities and claims. Under these arrangements an investment institution may obtain an allowance from the Dutch tax authorities which amounts to no more than the withholding tax levied abroad. If not all the shareholders in the investment institution are resident or established in the Netherlands then the allowance is calculated according to the number of shareholders resident or established in the Netherlands.
4. (Income Tax)Under the present Income Tax Act residents are liable for income tax on their world-wide income. Non-residents are taxed only on the income from a limited number of sources in the Netherlands. The Netherlands has concluded a large number of double taxation conventions to prevent the double taxation of world-wide income. If no convention is applicable, tax relief may be obtained on the basis of the Unilateral Decree for the prevention of double taxation. (If certain requirements are met, foreign employees temporarily posted to the Netherlands may request the application of a special tax arrangement known as the 35% rule, see 4.4.)
The legal definition stipulates that a taxpayer's place of residence is determined 'according to circumstances'. Several factors are of relevance when deciding whether the taxpayer maintains personal and economic ties with the Netherlands. These include a family home, employment, or registration in a municipal register. Nationality is not a determining factor, but it may be relevant in some cases. The law also provides for a number of special cases. The crews of ships and aircraft with a home harbour or airport in the Netherlands are deemed to be residents of the Netherlands unless they have established residence abroad. Dutch diplomats and other civil servants serving abroad remain residents of the Netherlands. Foreign diplomats and the staff of certain international institutions are exempt from Dutch income tax.
If both spouses are resident in the Netherlands then married couples are taxed individually on their personal income (business profits, salary, pension, etc.) less certain deductions, allowances and premiums. Investment income and non-source related deductions such as certain personal obligations and exceptional expenses are attributed to the spouse with the highest personal income. If only one of the spouses is resident in the Netherlands then their incomes are regarded as completely separate.
The tax year for persons is the calendar year. Residents are taxed on their total gross income, which is the income from all domestic and foreign sources less the associated expenses. This income may be further reduced by certain deductions and allowances not directly related to a specific source of income. The balance is the total net income. This total net income is further reduced by the deduction of losses and a personal allowance before tax is levied. The result is the taxable amount, which is calculated as shown below. The various terms are explained in sections 4.2.3 and 4.2.4.
| GROSS INCOME (4.2.3): | ||
| profits from business or professional activities | ............ | |
| income from a substantial holding | ............ | |
| net income from employment and services rendered outside employment | ............ | |
| net income from capital | ............ | |
| net income in the form of periodic payments | ............ | |
|
______ |
||
| TOTAL GROSS INCOME | (A) |
............ |
| MINUS: DEDUCTIONS (4.2.4): | ............ | |
| contribution to the old-age reserve | ............ | |
| the self-employed persons' deduction | ............ | |
| business-assistance deduction | ............ | |
| personal obligations (special expenses) | ............ | |
| exceptional expenses | ............ | |
| tax deductible donations | ............ | |
|
______ |
||
| (B) | ............ | |
| TOTAL NET INCOME | (A-B) | |
| minus: deductible losses | (C) | |
| TAXABLE INCOME | (A-B-C) | |
| minus: personal allowances | (D) | |
| TAXABLE AMOUNT | (A-B-C-D) |
Income tax is levied on the taxable amount calculated as shown above. This is a progressive tax. The rates are:
| 33.90 | on the first | NLG 15,255 |
| 37.95% | on the next | NLG 33,739 |
| 50% | on the next | NLG 58,762 |
| 60% | on the remainder |
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.
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; |
| II. | income from a substantial holding; |
| III. | net income from employment and from services rendered outside employment; |
| IV. | net income from capital; |
| V. | income in the form of periodic payments. |
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.
In certain circumstances payments which are not related to the acquisition of income may be deducted from the total gross income. These non-source-related expenses can be divided into three categories, which are personal obligations (special expenses), exceptional expenses and tax-deductible donations.
I. Personal obligations
The most important expenses which may be regarded as personal obligations are the following:
premiums for several forms of life annuity payments, such as (temporary) disablement, old age and widows' annuities up to NLG 6.179 or, in certain circumstances, up to NLG 12,358 in the case of (married) couples. If certain conditions are met then this amount can be increased to NLG 86,480, if the provisions for the old age pension are inadequate in relation to current income.
certain maintenance payments or lump-sum payments which replace these;
interest on debts. Since 1997, the deduction of interest on debt is restricted. Insofar interest paid is not connected with a source of income, a maximum amount of NLG 5,291 is deductible. For married taxpayers, this amount is doubled. Certain exemptions are applicable.
losses on specific loans. Under certain conditions a loss on a subordinated loan granted to a starting entrepeneur can be deducted up to a maximum of NLG 50,000.
II. Exceptional expenses
Resident taxpayers may deduct certain exceptional expenses from their total gross income. There are a number of categories of exceptional expenses, each of which has its own specific non-deductible component based on the taxpayers' gross income. For married couples the non-deductible component is calculated on the basis of their joint income.
The following categories can be distinguished:
medical expenses and expenses related to disability and old age are tax-deductible when they exceed a certain percentage of the joint gross income, subject to specified upper and lower limits;
expenses involved in the maintenance of children younger than 27 years of age;
expenses involved in the support of certain relatives;
expenses which are made in connection with study or training for a profession. Studies as a hobby do not qualify;
expenses involved in child care, subject to certain conditions.
III. Tax-deductible donations
Donations to domestic religious, charitable, cultural and academic institutions or other bodies serving the public good in excess of 1% of the gross income may be deducted by resident taxpayers, with a lower limit of NLG 120. Donations in excess of 10% of the gross income are not tax-deductible. Provided certain conditions are met this restriction does not apply to donations in the form of annuities. Contributions to foreign institutions of the kinds indicated above may also qualify, if the institutions have been designated as such by the Ministry of Finance.
Employers and employees may agree to set up employee savings schemes in which a certain maximum amount of the salary is exempt from tax and social security contributions. Employers in the private sector can set up profit-sharing schemes to provide a tax advantage for both employers and employees.
Since January 1994 new rules apply which exempt employers from paying tax and social security contributions on each employee's salary to a maximum of NLG 2,894. This is applicable to salaries based on:
premium savings schemes, or
salary savings schemes (including blocked profit-sharing schemes and share option schemes in the private sector).
In premium savings schemes the employer withholds an agreed amount from the employee's net salary and deposits this in a premium savings account. The employer can then award the employee a savings premium of up to 100% of the amount withheld, to a maximum of NLG 1,158. Under certain conditions no tax and social security contributions need to be paid on this savings premium.
In salary savings
schemes the employer withholds an agreed amount not exceeding NLG 1,736 of the
employee's gross salary and deposits this in a savings account blocked for at
least four years. When the sum is paid out it is not liable to tax or social
security contributions.
However, the employer is required to pay 10% salaries tax on the exempted
amount.
Employers in the private sector can give their employees a share in the (fiscal or commercial) profits of the business or of one or more businesses associated with the business. If the profit payment is blocked in a salary savings account then the rules for salary savings schemes are applicable (the maximum amount on which tax or social security contributions are not due is NLG 1,736). However, in this case the employer does not need to pay 10% salaries tax on the exempted amount.
If the profit payment is not blocked, but is paid directly in cash or documents of value then the employer pays 10% salaries tax on a maximum amount of NLG 1,736. This amount is not liable for social security contributions. Any salary savings received must be deducted from this amount. If a profit payment minus salary savings exceeds NLG 1,736 then the normal rate of tax and social security contributions must be paid over the difference.
A special allowance is granted to certain foreign employees who are assigned to a post with a domestic employer (i.e. an employer established in the Netherlands, or an employer not established in the Netherlands who is obliged to withhold salaries tax on the salary paid to the employee).
If certain requirements are met, then Dutch employers may grant a special tax-exempt allowance of 35%, which is paid in addition to employees' salaries. The allowance is calculated on the basis of the salary as determined in accordance with the provisions of the Wage Tax Act. To obtain the basis for calculating the 35% allowance the salary is multiplied by a factor of 100/65. Employer reimbursements of school fees for the attendance of children at international primary or secondary schools are also exempt from tax. In addition to the 35% rule, expenses incurred in connection with employment are reimbursed tax free.
Foreign employees
have to be recruited by or seconded to a domestic employer in the Netherlands.
The employer and his employee must first agree, in writing, that the 35%
allowance will be applied. Their joint request for the application of this
allowance must then be submitted to the Private Individuals Tax Unit
(Non-resident Taxpayers) in Heerlen. Once the application has been approved the
35% allowance is applied from the outset. The 35% allowance is applicable for a
maximum period of 120 months. This period is reduced by any period of
employment with a domestic employer in the Netherlands, or by any time
previously spent by the employee in the Netherlands, unless more than ten years
have elapsed since the end of such employment, or time spent in the
Netherlands.
On the joint request of the domestic employer and the foreign employee the
foreign employee, with a few exceptions, is regarded as a fictitious foreign
taxpayer with regard to the levy of salaries tax, income tax, and wealth tax.
Under the present Wealth Tax Act resident natural persons (resident taxpayers) and non-resident natural persons owning property in the Netherlands (non-resident taxpayers) are subject to wealth tax if their net wealth exceeds a certain amount. The rules for the determination of the place of residence as laid down for income tax purposes are also applicable to wealth tax.
Resident taxpayers
The wealth tax is levied on the total net wealth, which is defined as the value of the assets less any liabilities. The tax is levied at the beginning of the calendar year. Assets and debts are taken into consideration at their market value. Although both husband and wife are liable for taxation the assets of both are added together. A child's assets are taxed under the child's name.
Non-resident taxpayers
Non-residents are liable for wealth tax only if they own certain assets in the Netherlands at the beginning of the calendar year. (In this case the net wealth is defined as the value of the assets less any liabilities in the Netherlands).
Assets in the Netherlands are:
assets belonging to a Netherlands permanent establishment and participations (other than through shares) in a domestic business. An example is the participation of a limited partner in a Netherlands limited partnership.
the following assets not belonging to a permanent establishment in the Netherlands:
immovable property (including immovable rights) within the Netherlands;
profit sharing rights based on the net profits (not the turnover) of a company managed in the Netherlands, excepting profit sharing bonds, etc., and bonus rights of employees.
Debts in the Netherlands are:
debts of a permanent establishment in the Netherlands;
debts secured by a mortgage on immovable property situated in the Netherlands.
Married non-resident taxpayers are required to state their personal net assets only; a married person's net assets are not added to those of his or her spouse.
The legal usufruct together with rights and obligations involving regular payments directly arising from family law, and payments attributed by parents to their minor children are not taken into account for the purposes of the wealth tax.
The following items are exempted from wealth tax for both resident and non-resident taxpayers:
a part of the business assets of the taxpayer, which is:
100% when the assets of the business do not exceed NLG 219,000 (1999: NLG 216,000);
68% of the assets in excess of NLG 219,000 plus the exemption of NLG 219,000 if the assets of the business exceed NLG 219,000 (1999: 68% of the assets in excess of NLG 216,000 plus the exemption of NLG 216,000 if the assets of the business exceed NLG 216,000).
This exemption also applies to:
amounts payable by the person to whom the taxpayer has transferred the ownership of his business;
the assets of a business which is to be converted into a limited liability company;
the value of "substantial interest" shares in a limited liability company established in the Netherlands;
specific subordinated loans granted to a starting entrepeneur.
Examples of other special exemptions:
entitlements ensuing from a pension scheme;
payments ensuing from life annuities that have not yet commenced; annuities that have already commenced are also exempted to a certain sum;
entitlements and benefits with regard to sickness, disability or accidents, accruing to those concerned or the surviving spouse or minors;
personal belongings such as items of artistic or scientific value, clothes, food, gold and silver, pearls and precious stones to a total value of NLG 8,500.
The rate is NLG 7 for every NLG 1,000 of net assets (0.7%). There are two categories, which are:
tax class I: single taxpayers;
tax class II: married taxpayers.
The taxable amount for resident taxpayers is the total net wealth less the personal allowance. The taxable amount for non-resident taxpayers is the total domestic net wealth without the deduction of a personal allowance.
The personal allowances for resident taxpayers in 2000 are:
tax class I : NLG 200,000
tax class II : NLG 250,000
The following amounts may be added to the above allowances:
I. Old-age allowance
The old-age allowance is intended for taxpayers who have little or no provision for pension arrangements, but who have assets, which were hitherto subject to wealth tax in their entirety. As a result of this allowance this category of taxpayers above the age of 35 will be in a position similar to those who have pension arrangements that are exempt from wealth tax.
The following amounts may be added to the above allowance:
single persons over 35: minimum NLG 8,000 and maximum NLG 205,000
married persons: minimum NLG 13,000 and maximum NLG 292,000
II. 68% rule (for resident taxpayers only)
If in any given year the total income tax and wealth tax due exceeds 68% of the taxable income for the year then the excess is refunded. For this purpose the taxable income or net salary of a married, but not permanently separated couple and the related income tax or salaries tax are attributed to the spouse with the highest personal income. This provision is not applicable to minors whose income from assets is taxed with that of their parents.
The wealth tax is to be paid annually on the total net wealth on 1 January of the relevant financial year. The tax is collected by means of an assessment. The regulations, which are applicable to income tax, are also applicable to wealth tax.
6. (Value Added Tax and Excise Duty)In the Netherlands value added tax (VAT, in Dutch 'BTW') is levied at each stage in the chain of production and distribution of goods and services. The tax base is the total amount charged for the transaction excluding VAT, with certain exceptions. Due to deductions in previous stages of the chain VAT is not cumulative. Every taxable person is liable for VAT on his or her turnover (the output tax), from which the VAT charged on expenses and investments (the input tax) may be deducted. If the balance is positive then tax must be paid to the tax authorities; if the balance is negative then a refund is received. The tax paid by the ultimate consumers of the goods or services is not tax-deductible. The tax is based on the VAT rate applicable to the price, exclusive VAT, of the goods or services received.
The taxable persons are the persons conducting a business, who are defined as those who conduct independent business, including natural persons, corporate bodies, partnerships, associations etc. Combinations of bodies forming a single financial, organisational, and economic entity can be considered as a fiscal unit for VAT purposes. In such cases the supply of goods and services within the unit is not subject to VAT. A public body can also act as a taxable person if its activities do not involve public duties.
There are four taxable activities:
| I. | the supplying of goods, |
| II. | the rendering of services, |
| III. | the acquisition of goods by businesses (since 1 January 1993), |
| IV. | the importation of goods. |
The supplying of goods and services
The term "supplying of goods" (goods are all physical objects, but also include electricity, heating, cooling, etc.) is given a broad interpretation. For example, for VAT purposes the following activities are considered as the supplying of goods:
the transfer of ownership of goods under an agreement;
the transfer of goods on the basis of a hire purchase agreement;
the delivery of goods by a manufacturer who has manufactured the goods from materials provided by the consumer;
the private use of goods by a business;
the self-supply of goods, if the goods are involved in exempt transactions for which prepaid tax cannot be deducted, or is only partly deductible.
Services are defined as all activities performed for a remuneration that are not classed as the supplying of goods.
Location of deliveries and services
Although the difference between the supplying of goods and the rendering of services is usually a purely theoretical one, there is a valid reason for distinguishing between them with regard to location. Transactions are subject to the conditions and rates applicable at the location concerned. The location at which the goods are supplied is defined as the location of the goods at the time of supply. An exception is made for goods transported in connection with the supply; in such cases the location of supply is the location at which the transportation began. Another exception is made for a series of supplies of imported goods; in such cases the location of all the supplies is the Netherlands.
The location at which services are rendered is generally deemed to be the place of residence or of establishment of the person supplying the services. However there is a separate regulation for certain services: for example for services involving copyrights and advertising, advice, information, banking, insurance and the services of employment agencies etc., the location at which the services are rendered is the place of establishment of the person to whom the services are rendered. Services involving immovable property are rendered at the location of the property.
Several types of transactions are exempt from VAT. An exemption means that tax for the transactions should not be charged, and that prepaid VAT attributable to those transactions cannot be deducted. Exemptions are applicable to transactions such as:
the transfer or rental of immovable property, with certain exceptions. For example, the delivery of newly-built property until two years after it is first used, and property when the supplier and recipient have opted for taxable delivery are taxable; however the possibility to opt for taxation is restricted to situations in which the property is used for (almost) wholly taxable purposes;
medical services;
services provided by educational establishments;
social-cultural services;
most services performed by banks;
insurance transactions;
non-commercial activities by public radio and television broadcasting organisations;
postal services;
burials/cremations;
sports (not entrance fees);
the services of composers, writers and journalists.
Small businesses run by persons enjoy a tax reduction. If the VAT to be paid after the deduction of prepaid VAT is less than NLG 4,150 then a reduction is granted of (NLG 4,150 minus the VAT due) x 2.5. If a small business consequently does not have to pay any VAT to the authorities then it can, on request, be relieved of the obligation to keep an administration.
For the agricultural sector, i.e. arable farming, cattle breeding, and horticulture, a special provision is applicable which is designed to exclude the agricultural sector from the VAT system entirely. Farmers do not charge VAT and do not have the right to deduct the prepaid VAT. The purchasers of agricultural products from these farmers receive a fixed prepaid VAT deduction of 4.8%. If the tax prepaid by the farmer is more than 4.8% of the value of his sales then this special provision would put him or his customers at a disadvantage; in such cases the farmer may then opt for the usual statutory regulation.
The general rate is 17.5%. A reduced rate of 6% is applicable to the supply, import, and acquisition of goods and services mentioned in Annex 1 to the VAT-act. The reduced rate is in the main applicable to foodstuffs and medicines. Other goods and services subject to the lower rate include water, art, books, newspapers and magazines, materials required by the visually handicapped, artificial limbs, certain goods and services for agricultural use, passenger transport, hotel accommodation and entrance fees for museums, cinemas, sport events, amusement-parks, zoos and circus and some labour intensive services. The zero rate is intended primarily for exported goods, seagoing vessels and aircraft used for international transport, gold destined for central banks, and any activities which may take place within bonded warehouses or their equivalent. There is also a zero rate for goods, which are transported to another EU member state on which VAT is levied, because of the acquisition in that member state.
The single European market was completed on 1 January 1993. From this date goods, persons, services and capital may be moved freely within the EU. The transitional arrangements applicable after this date, for which the 1968 Turnover Tax Act of the Netherlands has been amended, contain the following main points.
| I. | For private persons buying goods in another member state VAT is levied in the country in which the goods are bought (the principle of the country of origin). The exemption on exports from the member state and the obligation to pay VAT on the goods on arrival in the Netherlands are then not applicable. |
| II. | For trade in goods between businesses in member states VAT is levied in the member state to which the goods are transported (the principle of the country of destination) at the rates and under the conditions of that member state. The business supplying the goods applies the zero rate. The business receiving the goods submits a tax return with regard to the goods purchased in another member state. (This transitional arrangement is applicable until the date on which transactions became subject to the country of origin principle). |
| III. | The principle of the country of destination is also applicable to intracommunity deliveries to exempted parties, farmers falling under a lump-sum compensation scheme, and legal entities not liable for taxation (authorities), unless the total value of the goods purchased exceeds the threshold of NLG 23,000 (ECU 10,000) |
| IV. | For mail order transactions or teleshopping involving private persons, exempted businesses, legal entities not liable for taxation, and farmers entitled to a lump-sum compensation scheme a similar provision to that referred to in point III is applicable, but with a threshold of NLG 230,000 (ECU 100,000). |
| V. | The principle of the country of destination is always applicable to the purchase of new, or almost new, motor cars by private persons or businesses in another member state.. |
| VI. | Every business making intracommunity deliveries to another member state must submit regular notifications with regard the deliveries subject to taxation in that member state (known as the listing requirement). The business will be required to supply further details if this is necessary for intracommunity checks on the levying of VAT. |
| VII. | Since border controls within the EU for tax purposes have been discontinued the levying of VAT on imports and the zero rate for exports will be applicable only to goods outside the EU. |
Imports
Imports are confined to the bringing into free circulation in the Netherlands of goods from countries outside the EU. The rates to be applied are the same as those applicable to supplies of foods in the Netherlands. VAT will be levied either in the same way as import duties or, after the appropriate licence has been granted, in accordance with the deferred payment system.
In the first situation the customs procedure is applicable. This means that the tax due must be paid by the declarant when submitting an import declaration, or that security must be provided for this purpose. In the second situation the tax due is collected from the business for which the goods are destined. The time of payment is then deferred until the time at which the business must submit the periodic domestic VAT tax return. In such cases the time of payment is coincident with the right to deduct the same tax.
There are exemptions for imports, but these do not affect the right to the deduction of VAT on input.
The period to which returns relate may be monthly, quarterly, or annually, depending on the amount of VAT due. Almost all VAT returns are prepared and dispatched by a computerised system. The system checks that the forms are returned and the amounts in question are paid in good time. The return must be submitted within one month of the end of the period to which it relates. The tax owed must also be paid within this period. Returns for which no tax is due, or a refund is requested, should be submitted within one month.
A significant percentage of retrospective assessments is the result of returns being submitted too late, or the associated payment not being made in good time. As mentioned above these are monitored by a computer system, which automatically prepares a retrospective assessment if a payment is not made, or a return is not submitted in good time. The system uses information from returns relating to previous periods to determine the amount of the assessment for the period in question.
In addition to assessments resulting from the failure to file a return or pay the tax owed in good time, retrospective assessments are also issued if checks reveal that too little VAT has been paid. It is possible to object and appeal against retrospective assessments; however this does not suspend the obligation to pay the tax deemed to be payable.
7. (Environmental Taxes)Fuel tax is levied on mineral oils, coal, natural gas, blast furnace gas, cokes oven gas and coal gas. Mineral oils are petrol, diesel fuel, heating gas oil and heavy fuel oil. The tax revenue is estimated as approximately NLG 1,509 million in 2000.
Taxable persons
The fuel tax on mineral oils is levied together with excise duty on mineral oils. Fuel tax on the other fuels mentioned above is due by persons who extract, produce or import these fuels, and subsequently use them as fuels or transfer them to others for use as fuels. The number of taxable persons liable to fuel tax is restricted as the tax is levied primarily on the manufacturers and importers of fuel.
Tax rates
The rates for the most common fuels on 1 January 2000 are as follows:
| Petrol | per 1000 l | NLG 26.07 | ||
| Medium oils | per 1000 l | NLG 28.56 | ||
| Diesel oil and the like | per 1000 l | NLG 28.76 | ||
| Heavy fuel oil | per 1000 kg | NLG 33.57 | ||
| Coal | per 1000 kg | NLG 24.28 | ||
| LPG | per 1000 kg | NLG 34.34 | ||
| Natural gas | ||||
|
0 - 10 mln. m3 > 10 mln. m3 |
per 1000 m3 |
NLG 22.40 |
||
Exemptions
All usage other than as fuel is exempt.
Groundwater tax is levied on the extraction of sweet groundwater. This tax has been levied since 1 January 1995. The tax revenue is estimated at approximately NLG 360 million for 2000.
Taxable persons
The tax is levied on the proprietors of the establishments extracting groundwater. These are, for example, the manufacturers of drinking water, farmers, and industries that use groundwater.
Rates
For drinking water companies the rate is NLG 0.3530 per m³; for others the rate is NLG 0.2634 per m³. Rebates are applied for infiltrated water.
Exemptions
Exemptions are applicable under certain conditions, for example in case of extraction of groundwater for draining a building site, as well as test-extractions, extraction for use for sprinkling and irrigating land and extraction needed to clean groundwater.
The tax on tap water is levied on the deliverance of tap water to a maximum 300 cubic meters per year. The tax revenue is estimated at NLG 215 million for 2000.
Taxable persons
The tax is levied on the tap watercompanies.
Rates
The rate is NLG 0.285 per m³.
The tax on tap water is levied on the deliverance of tap water to a maximum 300 cubic meters per year. The tax revenue is estimated at NLG 215 million for 2000.
Taxable persons
The tax is levied on the tap watercompanies.
Rates
The rate is NLG 0.285 per m³.
The regulatory energy tax is levied on the consumption of natural gas, electricity and mineral oil products when used as substitutes for gas by domestic users or commercial establishments. The tax revenue is estimated at NLG 4,208 million for 2000. The revenues are returned to domestic users and business by way of reductions in other taxes.
Taxable persons
The tax is levied on the energy distribution companies and manufacturers and wholesalers of mineral oils. These companies pass on the tax to their customers.
Rates
Natural gas is taxed to a maximum of 1.000.000 cubic metres per year, with a tax-free allowance of 800 cubic metres per year. Electricity is taxed to a maximum of 10.000.000 kWh per year, with a tax-free allowance of 800 kWh. The rates for 2000 are as follows:
| fuel | unit | cents per unit | ||
| 2000 | ||||
| Natural gas | cubic metre | 20.82 | ||
| Electricity | kWh | 8.20 | ||
| Light fuel oil | litre | 17.43 | ||
| Heating oil | litre | 17.56 | ||
| LPG | kg | 20.78 | ||
A zero rate applies for fuels used for transport purposes.
Exemptions
Exemptions are for
instance applicable for all usage other than as fuel and for natural gas used
to produce electricity.
7.6. Tax on uranium
This tax is levied on uranium-235. The tax was introduced so that nuclear-generated electricity would be taxed in the same way as fuel-based electricity. The tax came into force on 1 january 1997. The tax revenue has been estimated initially at NLG 12 million for 2000.
Taxable persons
This tax is due by nuclear energy companies.
Rates
NLG 33.17 per gram of Uranium-235.
8. , (Avoidance of Double Taxation for Taxes on Income, Profits and Wealth)The Netherlands has two kinds of arrangements for the avoidance of double taxation for taxes on income, profits and net wealth, and for inheritance and gift tax. It has concluded conventions for the avoidance of double taxation with a large number of countries (see 8.3). If no convention is applicable then the unilateral provisions as laid down in the 1989 Double Taxation (Avoidance) Decree of the Netherlands are applicable (see 8.4.). The double taxation conventions apply for residents of the Netherlands and for residents of the treaty countries. The above mentioned Decree applies for residents of the Netherlands, and for residents of the treaty countries. The above mentioned Decree applies only for residents of the Netherlands.
The Dutch tax system provides for three different methods for avoiding double taxation on income from foreign sources. Double taxation is avoided by means of the exemption with progression method, the credit method, or deduction of foreign taxes as costs. These methods are used under the Decree and, with only a few exceptions, under the double taxation conventions.
The exemption with progression method is usually used for income tax, corporation tax and wealth tax. In principle relief is provided for positive and negative items of income from foreign sources, on a per country basis. The exemption method involves a reduction of the Dutch tax on total income. The reduction is calculated as follows:
| foreign income | x total Dutch tax due on total taxable income |
| Total income |
(foreign income divided by total income; multiply result by the total Dutch tax due on total taxable income)
If the income from foreign sources exceeds the total income then no full relief for foreign taxes is provided in the year concerned. In such cases relief is provided in the subsequent years.
Foreign losses reduce the Dutch tax base in the year in which they arise as they are offset against the domestic income. However any losses from abroad which are incurred in the preceding years are deducted from the foreign income before relief is granted.
The credit against tax method, or credit method, is usually used for foreign withholding taxes on investment income such as dividends, interest and royalties, on a per country basis (a ministerial order concerning the possibility of choosing between the credit method on a per country basis and the credit method on an overall basis is in preparation). The tax reduction amounts to the lower of the foreign withholding tax or the Dutch tax attributable to the foreign dividends, interest and royalties.
Since the foreign withholding taxes for which credit is allowed are usually levied on a gross basis, whilst Dutch income tax is levied on a net basis, it is quite possible that the Dutch tax attributable to the relevant items of income is not sufficient to provide full credit for the tax levied by the source country. In such cases the excess foreign taxes may be carried forward to subsequent years.
Since January 1, 1999 in a few conventions for the avoidance of double taxation the credit method is also applicable for income from passive investments derived through a permanent establishment (see 8.4.2).
In situations in which no exemption or credit is allowed then any foreign taxes paid may be deducted as costs related to the relevant income. In situations in which a tax credit would normally be used then the taxpayer may opt for non-recognition of the tax credit. This option is applicable to the year in which the income is received and to the total amount of all dividends, royalties and interest received in that year. The option will thus result in a deduction of foreign taxes as costs.
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