What is meant by income tax?
Income tax is money you pay to the government on the money you earn. Think of wages, profit from your business or savings and investments. In the Netherlands, we use a system of ‘boxes’ to determine how much tax you pay for different types of income. You pay tax every year by filing an online tax return. After deductible costs have been applied, the Tax Administration can levy tax.
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What is income tax based on?
Income tax in the Netherlands is levied on all your income from work, home and assets in a calendar year. The system works according to the ability-to-pay principle: the higher your income, the higher the tax percentage. In addition, personal circumstances, such as your family situation and specific deductible costs, play a role in the final level of your taxable income on which you therefore pay tax.
Why do I have to pay tax?
Income tax is a mandatory contribution you pay to finance public services. Just think of healthcare, education, infrastructure and social security. This is a collective system where the government uses the proceeds. It ensures that the burdens are fairly distributed based on the ability to pay, so that society can continue to function well and develop. Every Dutch person is therefore liable for tax.
The structure of income tax is divided into three categories, also known as ‘boxes’, each with its own rate. Box 1 taxes income from work and home, box 2 is about income from a ‘substantial interest’ and box 3 taxes the return on savings and investments.
1. Box 1: income from work and home
In box 1, you pay tax on the taxable income from work and home. This includes your salary, pension, annuity, foreign income, and income as a freelancer.
The three brackets
Box 1 is divided into three brackets. The more you earn, the higher the percentage of tax you pay. Does your income fall into two brackets? This means your income is divided over two tax brackets: one part falls into the lower bracket, the other part into the higher one.
Personal deductions
Before you pay tax, you may deduct costs from your income. This is called the ‘personal deduction’. You therefore pay tax on the amount that remains.
2. Box 2: substantial interest
In box 2, you pay tax on your income (whether or not with a tax partner) from a substantial interest if this is at least five per cent of the stocks, options or profit-sharing certificates of a company. This does not concern the investment products within your investment strategy.
3. Box 3: savings and investments (wealth tax)
Finally, there is box 3. This includes your wealth and other assets. Think of savings, stocks and a holiday home. You deduct debts from this wealth. Box 3 is also called ‘wealth tax’, ‘capital gains tax’, ‘savings tax’ or ‘box 3 levy’.
Tax-free allowance
You do not pay tax on part of your assets and investments, the tax-free part. This means you only have to pay tax if your total wealth exceeds this amount. How much income tax you pay varies per year. With a tax partner, the tax-free allowance is higher. It is best to check the website of the national government for current data.
Fictional return (notional return) vs. actual return
The Tax Administration calculates using a fictional return per asset category. You pay a fixed percentage of tax on this. It can therefore happen that the fictional return does not always correspond with the actual return.
Income tax and investing
Although box 1 is the most relevant for most Dutch people, box 3 is also important for investors. The actual return you achieve is only visible after you have paid tax on box 3. It may therefore be that you achieve a lower return than you initially thought.
Additionally, as an investor, you may have to deal with dividend tax, which is often withheld when the dividend is paid out.
Which investments must I report to the Tax Administration?
As an investor, you must report all investments to the Tax Administration. These include:
- stocks, bonds, profit-sharing certificates and options that do not belong to a substantial interest;
- shares in investment funds;
- the non-exempt part of your green investments.
If the investments are listed on Euronext in Amsterdam, you can report the closing values from the Official Price List of Euronext Amsterdam N.V. If the investments are not listed on the stock exchange, you can state the value in economic transactions on the reference date. For the exact conditions, always check the website of the national government or Tax Administration.
When do you pay tax on stocks?
You pay tax on stocks if these, together with your total wealth in box 3, exceed the tax-free allowance on 1 January.
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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
