Last updated on 7 de April de 2023
The Netherlands is one of the most prosperous countries in Europe, and one that enjoys a very high quality of life. We will analyze the most important Taxes in the Netherlands.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Real Estate Transfer Tax
- Public Finances in the Netherlands
The Netherlands, also known as Holland, is the fifth largest economy in the European Union, behind Germany, France, Italy and Spain. But on a GDP per capita basis, the Netherlands is the richest of these five countries.
At the same time, the Netherlands is also home to some of the largest companies in Europe, including Royal Dutch Shell, Unilever, ING, ABN AMRO or Philips. And many foreign multinationals are also based here, such as IKEA.
Some of its strengths are its level of economic freedom and high proficiency of the English language. As a result, it is one of the most desirable destinations in Europe for expats.
The Netherlands is also a member of the Eurozone. And, according to the comparison website WorldData.info, the cost of living there is about the same as in the United States and 8% lower than in the United Kingdom.
With regards to wages, the average gross salary in the Netherlands is 28% higher than in Francia, 24% higher than in the UK and 10% higher than in Germany.
Taxes on Earned Income
Income from work in the Netherlands is subject to social security contributions and income taxes.
Both the employer and the employee must make payments to the Dutch social security.
When it comes to employers, they must pay 2.7% of the worker’s gross salary in unemployment insurance (a percentage that increases to 7.7% for temporary workers). Additionally, they must pay 7.03% for disability insurance, and 0.5% for childcare.
The combined social security rate for employers is therefore 10.23% for permanent workers, and 15.23% for temporary workers.
This percentage is paid on the employee’s gross salary, up to a maximum base of €58,880. The amount above that figure will not be subject to payments to the social security. As a result, the maximum amount that the company will pay in social security contributions for a permanent employee will be €6,023 per year.
Regarding workers’ contributions, they will have to pay a higher percentage to the Dutch social security. However, they will do so based on a lower maximum base. And, thanks to various tax credits that we will see later, low and middle incomes will end up paying less.
Thus, workers in the Netherlands must pay 27.65% of their gross salary to social security. The maximum base for these payments is €37,149 annually. This percentage can be broken down into payments to the pension system (17.9%), old-age insurance (9.65%) and widowhood (0.1%).
Consequently, the maximum annual amount to be paid by an employee to the Dutch social security system will be €10,271.
If we add the contributions of both employer and employee, the maximum amount will be €16,294 per year.
Next we discuss income taxes in the Netherlands:
Income Tax (Box 1)
Earned income is also subject to income taxes. In the Netherlands, income tax is divided into three separate categories:
- Box 1: Labor income
- Box 2: Income from a company we control
- Box 3: Income from savings and investments
The tax rates for boxes 2 and 3 will be analyzed in the next section, when we discuss capital income taxes
Thus, earned income, in addition to paying social security contributions, will be subject to the progressive income tax rates of Box 1 income:
- €0 to €37.149: 19.03%
- €37.149 to €73.031: 36.93%
- More than €73.031: 49.5%
Although the system may not look very progressive, since low and middle incomes are already subject to high income tax rates, these rates are applied to the taxable base, which is lower than the gross salary.
The following deductions can be used in order to reduce the gross salary upon which income taxes will be calculated:
- Mortgage interest: If we have a mortgage for our primary residence, mortgage interest is deductible. This works indirectly, applying a deduction of 0.5% of the value of the property. Hence, for a house of €600,000, we can reduce the taxable amount by €3,000.
- Expenses associated with employment (e.g., commuting costs)
- Educational and university expenses.
- Own medical expenses and those of our dependents.
- Child support and/or ex-partner alimony.
- Contributions to life insurance policies.
- Donations to cultural entities and NGOs.
- Some venture capital investments.
Once we have taken into account all these deductions, the taxable amount will be used to calculate the income tax applicable. However, the final amount payable can be reduced thanks to several tax credits:
Tax credits directly reduce the amount payable in both income tax and social security contributions. As we will see, low-income workers can end up paying nothing.
The most important are the universal tax credit and the labor tax credit.
The universal tax credit applies to all those who have an income, regardless of whether it comes from labor or capital.
The universal tax credit depends on the individual’s income level:
- €0 to €22,661: €3,070
- €22,661 to €73,031: €3,070 – 6.095% x (Taxable Income – €22,661)
- More than €73,031: €0 (no universal tax credit)
The labor tax credit, which also depends on the worker’s taxable income, follow this structure:
- €0 to €10,741: 8.231% x Taxable Income
- From €10,741 to €23,201: €884 + 29.861% x (Taxable Income – €10,740)
- From €23,201 to €37,691: €4,605 + 3.085% x (Taxable Income – €23,200)
- From €37,691 to €115,295: €5,052 – 6.510% x (Taxable Income – €37,690)
- More than €115,295: €0 (no labor tax credit)
As you can see, most low and middle income people will benefit from generous tax credits. Those will lower the final amount payable substantially. However, high-income people will not be able to benefit from such tax credits.
30% Rule for Expats in the Netherlands
The Dutch government introduced a special tax regimen for some expats, known as the “30% rule”. The aim was to attract highly skilled immigrants.
Those who meet the criteria of the 30% rule will benefit by seeing a 30% reduction in the amount on which taxable income is calculated. Effectively, this means that 30% of their income can be earned tax-free.
To qualify for the 30% rule, you must have been hired from abroad (in fact, you must have lived at least 150 km away from the border prior to relocating to the Netherlands), and your salary after the 30% reduction must be at least €38,961 per year. This corresponds to €55,659 before the reduction.
For people under 30 who have a university degree, the salary requirements are lower. For them, the minimum salary needed to qualify after the 30% reduction must be at least €29,616. This corresponds to €42,309 before the reduction.
Keep in mind, however, that we can only benefit from the 30% rule for 5 years. After that period, 100% of our salary will be subject to taxation.
Total Tax Burden on Labor Income
In order to understand the total tax burden on labor income, the most useful thing is to compare the employer’s total labor costs with the worker’s net salary. This will allow us to see how much money goes to the various tax authorities and how much is ultimately paid to the employee.
Thus, we will take into account social security contributions paid by the employer, as well as what the worker pays in both social security contributions and income tax.
The analysis will be done for a worker who is single, has an indefinite contract, does not use any of the optional deductions, and does not benefit from the 30% rule for expats.
Let us see the total tax burden depending on the employee’s gross salary:
We can state that the Dutch tax system for labour income is really progressive. Low incomes are taxed at rates close to 15%. Middle incomes between 30 and 45%. And high incomes with rates that approach 50%.
Another way to analyze this data is by looking at how many cents the worker receives in net salary for Euro spent by the employer:
If you want to calculate what your net salary would be in the Netherlands, you can use the following link.
Capital Income Taxes
Capital income is treated differently depending on whether it comes from general savings and investments (Box 3) or from a company we may exercise control over (Box 2).
It should be noted that, if we do not have any income from work, the universal tax credit will be applied to capital income.
Dividends, Interest and Rental Income & Capital Gains (Box 3)
Capital income from savings and investments other than companies we control is taxed based on Box 3 income. This type of capital gains taxes work very differently in the Netherlands than they do in most other countries.
In fact, capital income taxes are not determined by how much income we have realized from our assets, but from the value of those assets. Effectively, they work like a wealth tax, which can be either good or bad.
It is a good thing if we have little wealth, or our investments are very profitable. However, it can be very detrimental if we have a significant amount of wealth invested in low-yielding assets.
We will have to pay taxes on our capital if our net wealth, excluding our main residence and a other tax-exempt assets, exceeds €50,650 or if, together with a spouse, our net wealth exceeds €101,300.
Assets considered to be tax-exempt are art and antiques, forest land, and the first €60,429 (or €120,858 for a couple) in financial investments classified as green or sustainable.
The rest of our net worth, including things like cash savings, stocks, bonds, gold, cryptocurrencies or real estate; minus our debts, including mortgages; will be used to calculate how much we owe in capital income taxes.
Thus, according to our net worth above the exempt amounts, in 2023 the Dutch treasury will assume these percentages of return based on the size of our wealth:
- First €50,650: 1.82%
- Between €50,000 and €962,350€: 4.37%
- Anything over €962,350: 5.53%
On the assumed return of our assets a tax rate of 32% will be applied.
The exception would be bank deposits and debts, for which yields of 0.01% and 2.46%, respectively, would be used.
If we multiply the assumed percentages of return by the applicable tax rate, we can see how much tax we have to pay depending on our wealth. This is similar to assessing the wealth tax we have to pay in lieu of an actual capital gains tax:
- First €50,650: 0.5824%
- Between €50,000 and €962,350€: 1,3984%
- Anything over €962,350: 1.7696%
This tax system is very favorable in periods of high inflation and high returns. But it is very negative in periods of asset price deflation and low returns.
Direct Business Investments (Box 2)
If we own or control at least 5% of a company, the Dutch tax authorities assume we have more than just an economic interest in that corporation. We are able to exercise control over it.
As a result, the income we actually receive from those companies will be classified as Box 2 income for income tax purposes. This income can be in the form of dividends or from selling a stake in one of our companies.
Box 2 income will be subject to a flat tax rate of 26.9%.
Value-added tax in the Netherlands is levied on the consumption of goods and services. It follows a very simple structure.
The general VAT rate in the Netherlands is 21% and used for all goods and services that are not subject to one of the two reduced rates.
For many products, a reduced rate of 9% is used. In this category we would many foods, restaurants, bars, clothes, footwear, water supply, medicines, national transport, press and books, culture and entertainment, sporting events and hairdressers.
As you can see, practically all goods and services considered essential are subject to a reduced rate.
Additionally, for international transport, including airline tickets, a rate of 0% will be used.
Corporate profits in the Netherlands are subject to corporate tax. The applicable rate depends on the level of profits achieved.
The first €200,000 in annual profits, which is used as a benchmark for small companies, is taxed at 19%. Anything in excess of that figure will be taxed at the standard corporate tax rate.
The standard corporate tax rate in the Netherlands is 25.8%. This percentage is quite similar to those in many Western European countries. However, it is slightly lower than in the Eurozone’s two largest economies, Germany and France.
Real Estate Transfer Tax
The purchase of a property in the Netherlands, regardless of whether it is a flat or a house, is usually subject to real estate transfer taxes. Though those are very moderate.
For most real estate transactions, a 2% transfer tax has to be paid to the Dutch tax authorities.
There is, nonetheless, an exception. Those buyers aged 18 to 35 years old who acquire a property worth €400,000 or less will not have to pay this tax.
Public Finances in the Netherlands
In this last section we will analyze the sustainability of the Netherlands public finances. This will allow us to determine whether the existing tax rates are enough to cover the level of public spending.
We will look at the historical level of public debt relative to the size of the Dutch economy. The graph below shows the relationship between public debt and gross domestic product in the Netherlands since 1980:
As we can see, the public debt in the Netherlands is moderate. In fact, it is even lower than Germany’s. As a result, the Netherlands is able to get financing from the market at interest rates that are generally as low as Germany’s.
As we have seen, the Netherlands is a country with high taxes rates, especially for those who earn high incomes.
However, it is less onerous for those situated lower on the income spectrum. This is due to an acceptable income tax, a reduced VAT on essential things, and low taxes on the purchase of a home. Similarly, the tax burden for small companies is very acceptable.
This makes the Netherlands one of the most economically liberal countries in the European Union. Especially when compared to other countries such as Germany, France or Belgium.
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And if you are interested in the taxes in a similar country, check out this other analysis:
Taxes in the United Kingdom – A Complete Guide