Recently the Dutch tax authorities have shared documents which give some detailed information on how they determine whether a person qualifies as a Dutch tax resident. The first important insight is that the tax office only focusses on the facts within the Netherlands.

The importance of the determination whether a person can be seen as a Dutch tax resident is that such Dutch tax resident is taxable for his/her worldwide earned income and held equity. Furthermore Dutch tax residency is crucial for gift and inheritance tax.

In some cases there is no doubt about the tax residency of a taxpayer. But there are also situations where more than one State claims to be the country of residence.

If two States say that a private individual is their tax resident, usually the tax treaty between these States determines of which state that person is a resident. A tax treaty goes beyond any (Dutch) tax residency fiction. For the treaty, the factual circumstances are decisive for determining the tax residency.

Because factual circumstances determine where a natural person is located, a tax residency survey of the Tax authorities must be of a very factual nature. It is also important to note that the inspector has the burden of proof that a person is a tax resident of the Netherlands.

The extend of such tax residency survey can be far reaching. Recently the Museum Card foundation, after a long process, was ordered in a Court case to share information on a Card holder with the tax office to this effect.

Only in case of a change in the living situation, the taxpayer is the person who bears the burden of proof of this change.

The Tax office will first check whether a private individual lives in the Netherlands on the basis of provisions in National laws and regulations. If a person is not a Dutch tax resident based upon Dutch laws, there is no need to rely on a tax treaty or other double taxation scheme.

The documents made public show that the Tax Authorities,
during a tax residency survey, check whether a person has a durable personal relationship with the Netherlands. According to the documents, it is not necessary that the center of social life of the person is in the Netherlands.

Facts that indicate a durable relationship with a state include:
• the person actually has a permanent home;
• the whereabouts of the family;
• the residence of the person himself;
• the presence of social ties;
• the presence of professional or business connections;
• the presence of financial interests;
• spending pattern;
• intention in so far as this is apparent from the facts;
• registration in the basic personal data registration (BRP);
• nationality.
The tax authorities do not apply a fixed ranking for these circumstances, but attach great importance to the sustainable housing and the residence of the partner and / or children. But no fact is in itself decisive.

The inspector must also distinguish between formal and material circumstances. The whereabouts of the family and the actual residence of the taxpayer are material circumstances. Examples of formal circumstances are nationality and registration in the municipality register. The inspector must attribute higher value to material circumstances than to formal circumstances.

Certain published documents state that the Tax office do not have to weigh domestic and foreign facts. Foreign facts and circumstances do not play a role. Only what binds the person as investigated within the Netherlands is important for the inspector.

A private individual is obliged to provide the Tax office with information that may be important for determining this individual’s tax liability. This means that the inspector can also ask to provide information that gives insight into the place of residence. Incidentally, the obligation to provide information also applies to foreign taxpayers. However, this obligation to provide information does not go so far that the Tax office may start a fishing expedition for information.

We often advise on tax residency issues. Please be aware that even if you are not a tax resident of the Netherlands, you may still have a Dutch tax liability as a foreign tax payer. For example when you as a foreigner own real estate located in the Netherlands. In that case an annual personal income tax return for foreign tax payers is to be filed.

The personal income (flat) tax rate for income from equity is 30% and is calculated over a (progressive) deemed interest made on equity (equity tax is also referred to as: “box 3”). In brief equity can be summarized as (worldwide held) assets minus (worldwide held) debts. The point of departure is the value of the equity per beginning (January 1st) of the relevant tax year to be taken up in your personal income tax return. Based upon this value the deemed taxable income (benefit from savings and investments) is calculated.

The benefit from savings and investments is set at 0.13% of the part of the basis for savings and investments that belongs to yield class I, plus 5.60% of the part of that basis that belongs to yield class II. The height of the part of the basis for saving and investing that belongs to yield class I or yield class II, is determined on the basis of the following (2019 rates) table*:

An example of the above equity tax table: A single individual has an equity of € 130,360 per January 1st 2019. After applying the threshold a taxable equity remains of € 100,000. The actual income made on this equity is not relevant, nor is relevant how this equity has been invested, e.g. as bank savings and/or (partially) invested in stock. Both the taxable interest as well as the kind of investment is fictitious. The first € 71,650 is effectively deemed to have made an interest income of 1.935% (67% x 0.13% plus 33% x 5,6%) is € 1,386. The second part € 100,000 -/- € 71,650 = € 28,350 is effectively deemed to have made an interest income of 4.451% (21% x 0.13% plus 79% x 5,6%) is € 1,261. Total deemed interest is 2,647 x 30% tax = total amount on equity tax is € 794.

The idea behind the two different yield classes is that individuals with more equity are deemed to take more risk by investing in stock, yield class I is the low interest bank savings account and yield class II are the higher interest giving stocks. There is however no counter proof possibility within the law for individuals with a high amount on equity put in low interest bank saving accounts. Based upon case law dealing with double interest fictions, there may be a counter proof possibility in case the actual interest is at least 10% lower than the deemed interest. Court procedures are expected regarding the above explained equity deemed interest income system. Be sure to object on time.

For foreign tax residents the scope of Dutch taxable equity is limited to 1.
(rights related to) real estate held in The Netherlands, and 2. a (passive) profit share held in a Dutch company. Especially (rights related to) real estate held in The Netherlands will often be allocated for taxation to The Netherlands under most tax treaties.

It is therefore crucial (to avoid fines and interest) to do a timely annual personal income tax return filing. To this purpose TaxAble – as part of our tax return service – can serve as your representative at the Dutch tax office. Also our office can be held as your correspondence addres with the tax office, so we can be on top of any correspondence the tax office may send, such as assessments on which strict objection deadlines apply.

As an alternative to being taxed on deemed income from your equity, you could consider to incorporate your own company and be taxed on the actual interest you make on your equity.

Individual objections to income equity tax assessments 2017 will be treated as one ‘mass’ objection. As of the tax year 2017 the calculation method of the deemed interest has changed. This new method has lead to criticism.

This new deemed interest method is a fiction based upon a fiction. Deemed are both the sort of investments made as well as the interest made on these investments.

If you have objected, or if you are planning to object to the personal income tax assessment 2017,  the following will be of importance. The State Secretary of Finance has decided that all individual objections to income equity tax assessments 2017 will be treated as one ‘mass’ objection. This will save individual tax payers from a lot of work and court / advisory fees.

Already objections against the 2017 equity tax deemed interest method have been processed by the tax office and will come before tax court. the final outcome of these procedures will be leading for the outcome of all individual objections against the 2017 income tax assessments.

However there are some conditions for your objection to fall under this ‘mass’ objection procedure. Your objection should contain the following legal question:
In the fiscal year 2017, are the flat-rate elements of the system, in conjunction with the tax exempted threshold and the tax rate of 30%, in violation of:
1. Article 1 of the First Protocol to the European Convention for the Protection of Human Rights and Fundamental Freedoms (hereinafter: ECHR), without assessing the violation of the “fair balance” at the level of the individual taxpayer; or
2. the prohibition of discrimination under Article 14 ECHR?

The Dutch legal language version you can find in the link below to the actual Decision of the State Secretary of Finance.

If in the end of the test procedures, the deemed interest system is indeed in breach with EU law, it is expected that counterproof is most likely allowed on individual basis.

If following this counterproof that deemed interest is e.g. at least 10% higher than the actual realised result in 2017, this lower actual interest will be the taxable value. Tax court will develop such a method in case there is a breach with EU law.

Please be aware that despite this ‘mass’ objection procedure, individual tax payers are still held to object on time (within six weeks after the date of the final personal income tax assessment 2017).

Till date, although many procedures have been before tax court, still the deemed interest method (applicable till 2017) active since the year 2001 is not in breach with the legal freedom the Dutch legislator has to impose tax law.

It is difficult to predict the outcome of these test procedures although regarding another valuation method (value of rented out real estate) containing fiction upon fiction, counterproof was allowed by tax court.

In case the test case leads to the conclusion that there is no breach with EU law, you could still consider the following solution: Hold your equity through your own personal limited liability company!

Decision State Secretary of Finance: Mass objection equity tax 2017