Dutch income tax in 2024

As we step into the new year, it's crucial for taxpayers in the Netherlands to be aware of the recent changes in the income tax system that came into effect on January 1, 2024. The modifications primarily revolve around the three income tax boxes - Box 1, Box 2, and Box 3 - each playing a distinctive role in determining the taxable income of an individual. Let's delve into some of the key alterations and their implications for taxpayers. 

Changes in the Dutch tax regime 

The Dutch income tax is divided in three boxes. Let’s explain briefly what each boxes taxes, and what changes have been made in 2024.  

General:

In Box 1 income from (self) employment, (primary) home ownership, periodic payments and other personal  income is taxed. There are various deductibles that can be applied to reduce the taxable income in Box 1. A couple common deductions are: mortgage interest on the mortgage for a primary residency, uncovered medical expenses, paid partner alimony and entrepreneurial deductions such as the general self-employment deduction, the starters deduction, the middle and small business profit exemption.  

Box 2 taxes income from substantial shareholdings in a company(in Dutch: inkomen uit aanmerkelijk belang). In the Dutch tax system, an individual is considered to have a substantial shareholding if they, personally or with their fiscal partner, directly or indirectly hold at least 5% of a certain class of shares in the share capital of a limited liability company. 

Dividends paid from a substantial shareholding are the most common taxed Box 2 income. The other is capital gains arising from the sale of shares of a substantial shareholding. 

In Box 3, income from savings and investments is taxed (weath). The taxable income is not calculated based on the actual realized returns. Instead, it is calculated over a fictional presumed return on investment determined by a fixed forfeit. The tax is calculated over the fictional returns from various assets, including savings accounts, investments, and second homes. 

For the year 2024, the prescribed fictional income percentages used for the three categories in which Box 3 income is taxed are as follows: 1,03% fictional return on  bank accounts, 6,04% for investments and other assets, and 2,47% (negative return) for debts. The fictional income is calculated over the value of the asset per January 1^st of the applicable tax year. 

Box 3 income from savings and investments is only taxable if the net difference between assets and debts exceed the tax free thresholds, which for the tax year is € 57.000 per person (or € 114.000 for fiscal partners). 

Changes per 2024: 

One of the significant adjustments in Box 1 is the alteration in the tax brackets and rates. Taxpayers earning income from employment, home ownership, and other sources will be confronted with an adjustment in how their income is taxed. 

The government has aimed to create a fairer system by adjusting the brackets to better align with the current economic landscape. Therefore in 2024, the combined rate in the 1st bracket is 36,97% (was 36,03% in 2023) for income up to € 75.518 (€ 73.031 in 2023). The rate in the 2nd tax bracket in 2024 is 49.50%, which is the same as in 2023 and applies to income above the € 75.518 (€ 73.031 in 2023). 

In 2023, taxpayers with income from substantial shareholdings (>5%) in Box 2 were subject to a flat tax rate of 26,9%. However, the landscape has evolved in 2024, introducing a different approach with two tax brackets – 24,5% and 33%. For individuals with Box 2 income up to € 67.000, a reduced tax rate of 24,5% applies. However, for those surpassing this threshold, the tax rate increases to 33%. This means that higher-income individuals with substantial dividend payments will experience a heavier tax burden compared to the previous uniform rate of 26,9%. A closer look reveals that the adjustment brings both challenges and opportunities. For fiscal partners, a dividend distribution of up to € 134.000 can benefit from the lower tax rate of 24,5%, provided they evenly distribute the income. This provision presents an opportunity for strategic income distribution planning among fiscal partners. 

The Box 3 tax rate will increase from 32% in 2023 to 36% as of January 1st, 2024. The tax-free income in Box 3 will not be indexed per January 1st, 2024. This will remain € 57.000 and € 114.000 for fiscal partners. 

Changes in the 30% ruling 

On Friday October 27^th of 2023, the Dutch Parliament adopted two disruptive amendments to the 2024 Tax Plan with regard to the 30% ruling. On December 19th, the Tax Plan 2024 including these amendments was approved by the Senate and is now final. What are the changes?   

Background information on the 30% ruling:

The 30% tax ruling (or 30% facility) is the main tax advantage for expats coming to The Netherlands. It provides for a tax-free allowance to an extent of (up to a maximum of) 30% of the salary. Having the 30% ruling also allows the expat for an exemption on the Dutch wealth tax on worldwide assets and Dutch tax on substantial interest income from foreign entities: this is called the partial foreign taxpayer scheme. The term of the 30% ruling is 5 years. Expats will need to meet certain criteria to be entitled to the 30% ruling. 

Scaling back the 30% ruling

Last year it was announced that, as from January 1^st of 2024, the salary to which the 30% ruling can be applied will be capped at the so-called Balkenende-norm (named after a former prime minister): this is the maximum salary for public servants. The Balkenende norm salary is indexed each year and will amount to € 233.000 gross in 2024. A transitional arrangement applies for employees who had an active 30% ruling in December 2022: the cap will only apply to them as from January 1^st of 2026. 

As said, additional amendments were announced on October 27^th. and will also enter into force as per January 1^st of 2024. 

Firstly, the 30% ruling will get a graduated scheme: A 30% tax-free allowance applies in the first 20 months, a 20% tax-free allowance for the next 20 months and a 10% tax-free allowance for the last 20 months of the five year term. A transitional arrangement applies to employees to whose salary the 30% ruling is applied in December 2023; these employees will not be confronted with these adjustments during the term of their ruling. 

Secondly, the amendment will terminate the aforementioned partial foreign taxpayer scheme for 30% ruling holders as of 2025. This means that the exemption on foreign-based Box 2 income (tax on income from more than 5% shareholding) and Box 3 income (tax on the deemed income of worldwide assets) will end. Here too a transitional arrangement applies to employees to whose salary the 30% ruling is applied in December 2023: they will only be confronted with this change as per 2027. 

It's important to know that - if an employee that has the 30% ruling changes employers during the term of the ruling – he/she can still use the abovementioned transitional arrangement if he/she enters into a new qualifying employment with a Dutch employer within 3 months. 

Written by mr. E.J. Peffer. founder of taxt.