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This article is an introduction to Dutch taxation from the perspective of someone who is familiar with the American system of taxation. I will call out the similarities to American taxes and highlight the differences.

In order to ensure that we don't end up with an 80,000 word thesis we are going to restrict this article to:

1. Taxation of wages from employment
2. Taxation of wealth and
3. How the 30% Ruling affects taxation

May I suggest you grab a cup of coffee or perhaps something a bit stronger? Ready? Ok, here we go.

Tax Year and Deadlines

Like the USA, the Dutch tax year runs from the 1st of January to the 31st of December. Tax returns for year Y have to be filed in year Y+1. The deadlines for filing your tax returns are:

• USA deadline: 15th April
• USA deadline for expats: 15th June
• USA deadline after you apply for an extension: 15th October
• Dutch deadline: 1st May
• Dutch deadline after you apply for an extension: 1st September

As an expat, you should always file your Dutch taxes before you file your U.S. taxes. You need data from your Dutch tax return for your U.S. tax return.

Filing Status vs. Fiscal Partner

Depending on your marital status and a few other factors, there are five ways to file in the USA:

1. Married, Filing Jointly
2. Single
3. Married, Filing Seperately
4. Head of Household
5. Qualifying widow(er) with dependent child

Your filing status determines your tax brackets, the amount of your standard deduction, thresholds for phase-out of the child tax credit, and more.

The Dutch don't have the concept of a filing status. Instead, they have the concept of a fiscal partner. Unlike the USA, the presence or absence of a fiscal partner does not change your tax brackets. Each fiscal partner calculates their income tax and their tax credits independently. Having a fiscal partner does give you certain benefits though - in terms of tax credits, deductions and certain exemptions. We'll cover a few of these situations in the sections that follow.

Note that you don't get to choose whether or not you have a fiscal partner. If you meet any of a large set of conditions, it is automatically assumed that you have a fiscal partner.

The Box System

The Belastingdienst (the Dutch IRS) categorizes all income into one of three boxes. Each box has its own taxation rules. Though the IRS doesn't use 'box' terminology, the U.S. system is conceptually similar. Earned income in the USA has its own tax brackets, and those are different from the tax brackets applied to capital gains.

1. Box 1 is for income from work and home ownership.
2. Box 2 is for income resulting from financial interests in a company (and this is the last you are going to hear of this box today).
3. Box 3 covers investments and savings.

In the USA (in the simplified world of this article):

Total tax owed = Personal income tax + Capital gains tax

In the Dutch system, total tax owed:

Total tax owed = Box1 tax + Box2 tax + Box3 tax

Note that while in the USA you have to deal with both federal and state taxes, in the Netherlands there is only the equivalent of a 'federal' tax.

Let us follow in the footsteps of Pandora and peek into Box1 and Box3 (and hope that, unlike her, we don't live to regret it).

Box1 Taxation

Photo by Erda Estremera on Unsplash

Box1 tax owed = (taxable box1 income * tax rate) - tax credits
Taxable box1 income = (earned income + imaginary income) - deductions

Yes, you read that right: imaginary income in involved.

To help us understand box1 taxation, we will help our imaginary friend, Priya, compute her taxes. Priya earns €60,000 a year. To make this easier let's start by assuming that Priya has no imaginary income and no deductions. How much will her box1 taxes be?

Like the USA, the Netherlands has a progressive taxation system. Where the USA has an impressive seven tax brackets (and that is at the federal level. State taxes are a whole different story - Hawaii, for example, has 12 tax brackets!), the Dutch have a modest two:

For income from €0 - €69,399, the tax rate is 37.07%
For income from €69,399 upwards, the tax rate is 49.5%

Does that mean that Priya's owes taxes of €22,242 on her €60,000 income?

.3707 * €60,000 = €22,242

Not quite. There are various tax credits available in the Netherlands, all of which are multi-syllabic Dutch tongue twisters, and so much fun to say. Most credits are income-dependent and phase out at certain income levels.

The tax credits:

• Arbeidskorting or employees tax credit.
  • The maximum amount of this credit is €4,260. The arbeidskorting increases up to an income of €36,650, and then reduces. At incomes of €109.347 and higher, it is 0.
  • Based on her income Priya gets a credit of €2891.69.
  • This credit is similar to the Earned Income Tax Credit in the USA.
• Algemene Heffingskorting or the general tax credit.
  • The maximum amount of this credit is €2888. The amount of the credit reduces starting at incomes of €21,318 and becomes 0 at incomes higher than €69,399.
  • Based on her income Priya gets a credit of €564.4.
  • In the USA we have the concept of a standard deduction. It allows everyone to reduce their taxable income by a certain fixed amount ($25,900 in 2022 for a married couple filing jointly), and therefore reduce their tax liability. The Dutch general tax credit serves a similar purpose.
• Kinderbijslag or the child benefit. For every child that you have you receive the child benefit payment once every quarter. Technically this is not a tax credit, but in effect it acts as one, so we include it here. The amount of the benefit depends on the age of the child.
  • If Priya has one child aged 6 years old she would receive €1120.52 a year.
  • This benefit is similar to the child tax credit in the USA, except that unlike the USA there are no income phase outs for the Dutch child benefit.

So how much did Priya end up owing in box1 taxes?

€22,242 - €2891.69 - €565.4 = €18,784.9

With an income of €60,000 and box1 taxes of €18,784.9, Priya's effective tax rate is 31.3%. Her tax rate could be even lower if she has a fiscal partner or if she qualifies for certain deductions and we will talk about those in a bit.

The Effective Tax Rate Calculator is a tool that allows you to compare, for a given income, the effective tax rate of the USA with that of the Netherlands.

Fiscal partner

How would things change if Priya had a fiscal partner who made €25,000 a year?

Applying box1 tax brackets to the partner's income:

Box1 tax owed = .3707 * €25,000 = €9267.5

Their partner would also get the same tax credits.

Arbeidskorting of €3956.
Algemene Heffingskorting of €2666.8. Note that the partner gets a higher general tax credit because they make less money than Priya.

So far, we have calculated Priya's partner's income tax and tax credits independently - the existance of the fiscal partnership has made no difference. Enter the Inkomensafhankelijke combinatiekorting aka the income-dependent combination tax credit. You need a fiscal partner and a child under the age of twelve to qualify for this credit.

Assuming that Priya and her partner have a child under the age of twelve, the partner, being the lower income earner would qualify for a credit of €2264.8.

How much box1 tax does Priya's fiscal partner owe?

Credits: €3956 + €2666.8 + €2264.8 = €8887.6
Tax owed: €9267.5 - €8887.6 = €379.9

So, on a combined income of €85,000 a year Priya and her partner pay €19,164.8 in taxes, bringing their effective tax rate to reasonable 22.5% - and this is without any deductions. We take it as gospel that Dutch taxes are high and the number 50% is often bandied about. Only 1.8% of households in the Netherlands make an income of more than €80,000 a year, so for most people the effective tax rate is a fair bit lower than 50%.

As far as tax credits go, there is one more way in which having a fiscal partner can be helpful. If you make zero income, or very low income, you can't take advantage of certain tax credits unless you have a fiscal partner. This Belastingdienst page explains with an example of how having a higher earning fiscal partner allows you to qualify for certain credits.

30% Ruling

If you, as an American expat, qualify for the 30% Ruling, then for a period of 5 years your taxable income is 70% of your earned income.

If Priya had the 30% ruling on an income of €60,000, her taxable income would be €42,000.
So (assuming no deductions), her box1 tax would be .3707 * €42,000 = €15,569.4
Remember that without the 30% ruling she owed €22,242, so she has saved a nice chunk of change.

That is not all though. The effect on the 30% ruling on your effective tax rate can be higher than you would expect.

Priya's reduced income in turn affects her various tax credits.

Priya's arbeidskorting was €2891.69 and is now €3946.49 Priya's algemene heffingskorting was €564.4 and is now €1645.6.

So the 30% ruling not only reduces your taxable income; it may also cause your tax credits to increase.

Priya's box1 tax burden is now

€15,569.4 - €3946.49 - €1645.6 = €9977.31

Without the 30% ruling Priya's effective tax rate was 31.3%. With the ruling it is

€9977.31/€60,000 = 16.62%!!

The 30% ruling resulted in a 47% reduction in the effective tax rate!

Taxation of bonuses

In the USA it is a common misconception that bonuses are taxed at a different rate than other employment income. They are not. They are simply withheld at a different rate and the difference, if any, is reconciled at the time you file your taxes.

I have found that a similar myth exists about bonuses in the Netherlands, and again, it isn't true. Bonuses are like any other income - they are added to your salary and subject to the same two tax brackets described above. The Belastingdienst publishes various payroll witholding tables that employers must use to determine how much of your income they need to withhold as part of payroll taxes. This is the 2022 withholding table for bonuses. Logisal (a payroll company) explains how the witholding table is to be interpreted and also says "Let op: de loonheffing is een voorheffing op de inkomstenbelasting. Indien er achteraf blijkt dat er teveel is ingehouden dan wordt dit terugbetaald in de aangifte inkomstenbelasting." This translates to "Please note: the payroll tax is a withholding tax on income tax. If it turns out afterwards that too much has been withheld, this will be refunded in the income tax return."

Imputed income

Now we move on to the taxation of imaginary or imputed income in box1. This section is only applicable to folks who own the homes that they live in.

The imaginary income is called the eigenwoningforfait or notional rental value of your owner-occupied home. If you own your home you don't pay rent, so in an attempt to somewhat level the playing field the Belastingdienst calculates an imaginary rental value for your home and that is added to your earned income for the purposes of tax calculations.

Notional rental value = WOZ value of your house on the 1st of January * a rate that is based on the value of your house.

What is the WOZ value?

WOZ stands for Waardering Onroerende Zaken. It is the value of your home determined by the municipality. You can lookup the WOZ value on the https://www.wozwaardeloket.nl/ website. The WOZ value typically trails the actual market value of the house by a couple of years.

What is the notional rental value rate?

The rate depends on the value of your house. For example, in 2022, for houses valued between €75,000 and €1,130,000 the rate is .45%. The full list of rates can be found on the Belastingdienst website.

So, if you own a house with a WOZ value of €700,000

Notional rental value = €700,000 * .45% = €3150.
So if your annual salary is €70,000, then with the addition of the imaginary income, your taxable income is €73,150.

Typically your mortgage interest deduction (we'll talk about that next) will be more than the notional rental value of your house.

Deductions

I've mentioned earlier that there is no standard deduction in the Netherlands. What deductions do exist?

The most common deduction is similar to the USA: interest paid on a mortgage for your primary home is deductible from your income.

A fiscal partnership can be beneficial while claiming a mortgage interest deduction.

Priya and Paul own a home together. They have a mortgage of €400,000 and they paid €12,000 in mortgage interest last year. Priya makes an income of €80,000 while Paul makes €30,000. Priya's marginal tax rate is 49.5% while Paul's is 37.07%.
If Priya and Paul were not fiscal partners, they would each claim half of the mortgage interest on their tax return.

Priya's mortgage interest deduction = €6000 * 49.5% = €2970
Paul's mortgage interest deduction = €6000 * 37.07% = €2224.2
Their total mortgage interest deduction = €5194.2

Since Priya and Paul are fiscal partners, they can choose to allocate the entire mortgage deduction in the way that is most beneficial to them. They allocate the entire deduction to Priya, the partner with the higher marginal tax bracket.

Their total mortgage interest deduction = €12,000 * 49.5% = €5940

Note that your actual mortgage interest deduction rate would depend on your earned income. For incomes above a certain threshold the rate is reduced by 9.5%.

Other common deductions include:

1. The cost of commuting to work.
2. In the year that you buy your home certain costs associated with the purchase are deductible.
3. Many homes in the Netherlands are built on land that is leased from the municipality. Annual lease payments (erfpacht) are deductible.
4. Interest on a loan taken to renovate an owner occupied home.
5. Donations to charities. This isn't as simple as deducting charitable donations in the USA. Certain conditions must be met. For example, different rules apply for 'periodic' donations and 'one-off' donations and there are thresholds and limits that apply to calculate the deductible amount.

Box3 Taxation aka The Wealth Tax

Priya, as diligent as the fabled ant, has amassed €150,000 in savings. Of this, she has €110,000 invested in some ETFs and the remaining €40,000 in a savings account at her bank.

Under the U.S. system of taxation, Priya owes no tax on her nest egg of €150,000 until she realizes capital gains by selling her assets.

Under the Dutch system of taxation, Priya will owe Box 3 taxes on her nest egg.

Note that the current box 3 tax regime is in the process of undergoing an overhaul. In December 2021 the Dutch supreme court ruled that the way returns are currently taxed in box 3 violates property rights. The Dutch government is working on a replacement, but nothing has been finalized yet. The new plan is due in 2026, and in the interim the Dutch government has implemented bridging legislation. Under the briding legislation 'savings' (i.e. bank balances) are taxed at a lower rate than investments (in stocks, mutual funds, bonds, housing etc.).

Box3 tax rates and exemptions

In 2023 the box 3 tax rate is 32%. What is taxed at 32%? The 'imaginary' returns generated by your wealth. The Belastingdiesnt calculates an imaginary return (what's not to love about a tax department with an active imagination?) on your savings and investments, and then taxes this return.

How is the imaginary return calculated?

For 2023 the Belastingdiesnt has decreed that

• bank balances and cash return 0.36%
• investments return 6.17% and
• return on debt is 2.57%

Let's use Priya as an example of how to calculate box 3 taxes.

1. Calculate the imaginary return for 2023.

Return on savings = 0.36% * €40,000 = €144
Return on investments = 6.17% * €110,000 = €6787
Total return = €144 + €6787 = €6931

2. If Priya had debt that belonged in box 3, she would calculate the return on debt and subtract that from the return calculated in step 1. She does not, so move to step 3.

3. Not all of your wealth is taxable. The belastingdiesnt gives you a tax free allowance of €57000 (double that if you are filing with a fiscal partner). How does one apportion the tax free allowance between savings and investments?

First, we calculate the basis for taxation = assets - debts - exemption
For Priya, the basis for taxation = €150,000 - €57,000 = €93,000
Then we calculate the basis on which your return was computed, the yield basis = assets - debts
For Priya, the yield basis = €150,000
Then we calculate the ratio between the basis for taxation and the yield basis. This gives us the percentage of our total return that is subject to taxation. Taxable return % = basis for taxation / yield basis
For Priya, taxable return % = €93,000/€150,000 = 62%

4. Now we compute our taxable return = total return * taxable return %

For Priya, taxable return = €6931 * 62% = €4297.22

5. Finally, we are able to calculate box 3 taxes = box 3 rate * taxable return

For Priya, box 3 taxes = 32% * €4297.22 = €1375.11

We assumed that Priya has not invested in any of the designated 'green investments'. If she had, then she would have paid less box 3 tax because these investments are subject to certain exemptions and tax credits.

On assets of €150,000, Priya paid €1375.11 in taxes. Her effective box 3 tax rate is 0.92%.

With a fiscal partner, the effective box 3 tax rate on assets of €150,000 would be 0.35%.

As an American expat is it is possible that you can shield more than just the exemption amount of your assets from box 3 taxation. Read on to discover how.

Box3 tax means no capital gains tax

In the USA you owe taxes when you sell your investments. The profit you make on a sale is your capital gain and you owe short-term or long-term capital gain taxes on this profit.

Since the Dutch have a wealth tax where your investments are taxed every year, as explained above, they don't have a capital gains tax. In other words, when you do finally sell any of your investments, you owe no Dutch taxes on the sale.

Box3 taxes: a more detailed look

Now that we have an idea of how box 3 taxation works, lets take a look at just a few more details.

What are considered assets for box 3?

Here are examples of common assets that must be included in box 3:

1. Current and savings accounts in any bank worldwide.
2. Investments - mutual funds, ETFs, individual stocks, bonds etc.
3. If you have a Roth IRA, the balance of that account is to be included in the list of assets that will be taxed in box 3. Note that there may be an exception here for any REITs held in your Roth account. This is something that I am still investigating and I will make an update when I know more.
4. If you have a Health Savings Account (HSA), the balance of that account must be included in the list of assets that will be taxed in box 3.
5. A second home (for example, a vacation home).
6. Rental property. If certain conditions are met rental properties can be claimed as assets in box3 and in these cases rental income is not taxed in box 1.

What are not considered assets for box 3?

A non-exhaustive list of exempt assets:

1. The value of your primary home (the one that you live in).
2. The value of your car.
3. If you have a 401k account, the balance of that account is not included in the assets for box 3.
4. If you have a traditional IRA account, the balance of that account is not included in the assets for box 3.

What are examples of liabilites for box 3?

1. If you have a rental property or a second home in box3, then any mortgage on that property is considered a liability for box 3.
2. Debts incurred for reasons of personal consumption (for a car or a vacation).
3. Certain student loans (schulden volgens de Wet studiefinanciering).

Here is the list of liabilities on the belastingdienst site.

Box3 and the 30% Ruling

If you have the 30% ruling - valid for 5 years - then for those 5 years not only do you only pay box 1 taxes on 70% of your income, you are also exempt from box 3 taxation. This is a huge tax break!

For example, if you and your spouse move to the Netherlands with $500,000 in savings/investments and your investments grow at 5% a year, how much would the 30% ruling save you over the course of 5 years?

You not only save on the actual box 3 taxes owed, but your portfolio also ends up larger because you aren't selling off portions of it to pay box 3 taxes.

Savings due to the 30% ruling = €638,140.78 - €612,612.60 + €29,066.00 = €54,594.18.