On Budget Day, September 15, 2015, the Cabinet presented the 2016 Tax Plan to the Lower House. In this memorandum we address the most important changes proposed for payroll tax and social security contributions, the R&D remittance reduction and the Box 3 taxation of foreign taxpayers as set out in the 2016 Tax Plan, the Other Tax Measures Act 2016 and the Salary Costs (Incentive Allowances) Act. The proposals are intended to take effect on January 1, 2016, unless another date is explicitly stated. We will also discuss a number of other relevant developments.

 

Tax rates in the 2016 Tax Plan 

In 2015, the tax rate in the second and third brackets for payroll tax and personal income tax purposes is 42%. As of January 1, 2016, the tax rate in both brackets will be reduced by 1.85 percentage points to 40.15%. The third bracket will also be extended, which means that in 2016 the fourth bracket will start at a taxable income from work and home of more than EUR 66,421. As of January 1, 2016 the combined tax rate in the first bracket will be 36.55% (compared to 36.5% in 2015).

As of January 1, 2016, the tax rates for employees born after January 1, 1946 will be:

Taxable salary more than

but not more than

Tax rate

National Insurance Contributions

-

EUR 19,922

   

EUR 19,922

EUR 33,715 

12%

 

EUR 33,715 

EUR 66,421

 

-

EUR 66,421

-

52%

-

 

The general tax credit

The general tax credit will be increased to EUR 2,203. The amount of the general tax credit is dependent on a person’s income. The higher the income, the lower the general tax credit. For incomes of EUR 66,421 and above, the general tax credit will be nil.

The labor tax credit

The labor tax credit will be increased to EUR 3,103. The amount of the labor tax credit is dependent on a person’s income. The higher the income, the lower the labor tax credit. For incomes of EUR 111,600 and above, the labor tax credit will be nil.

Income-related contributions for health insurance under the Health Insurance Act 

As of January 1, 2016, the income-related contributions for health insurance under the Health Insurance Act payable by the employer will be reduced from 6.95% to 6.75%.

Prorated allocation of the tax component of tax credits as of 2016

According to the 2015 Tax Plan, taxpayers who do not have a domestic or qualifying taxpayer status for the entire year, are entitled to a prorated part of the tax component of tax credits. In 2015 taxpayers who are only subject to tax for part of the year can however also be allocated the full tax component of tax credits. This is due to the fact that to allocate a prorated part of the tax component of tax credits, the Dutch tax authorities had to make changes to their IT system. As of January 1, 2016, this transitional measure will be canceled and taxpayers who do not have a domestic or qualifying taxpayer status for the entire year will be allocated a prorated part of the tax component of tax credits.

Changes to the special remuneration table

The accrual of the labor tax credit is included in the special remuneration table

At present, employees with an annual income up to EUR 20,000 may have a cashflow disadvantage, because the accrual of the labor tax credit is not included in the special remuneration table. The part of the labor tax credit that is allocated to special remuneration can therefore only be recouped via the personal income tax return in the year after the special remuneration was received. In order to reduce the number of people affected by this, the accrual of the labor tax credit will be included in the special remuneration table. Given roughness of the tables, there is a drawback to this, in that there are also employees for whom not enough payroll tax and social security contributions will be withheld and they will consequently have to show an additional tax liability in their personal income tax return.

The concession for special remuneration will be canceled

The payroll tax table for special remuneration is applied to remuneration that is, as a rule, only paid once or once a year. Under current legislation, it is possible to deviate from the general rule and add these one-off payments to the salary period in which they are paid as long as this does not lead to a higher taxable amount. It has been proposed to cancel the concession in order to better reconcile payroll tax with personal income tax.

Research and development remittance reduction

As of January 1, 2016 the research and development reduction (research- & developmentaftrek; RDA) will be absorbed into the remittance reduction for research and development work, also referred to as the R&D remittance reduction (S&O-afdrachtvermindering; WBSO). The government is of the opinion that the current RDA has a number of drawbacks for profit tax purposes, which make the scheme less effective. By setting off the RDA benefit against payroll tax instead of profit tax, the government hopes to improve the effectiveness of the RDA.

The current R&D remittance reduction will continue in a similar form. Under the integrated scheme, in addition to R&D payroll costs, now also R&D costs and R&D expenditure (which currently fall under the RDA) will be deductible. However, fewer types of activities will qualify for the remittance reduction.

The main features of the new regime are:

  • The integrated scheme will have two brackets.
  • In the first bracket, the percentage for the remittance reduction will be 32% (40% for starters) of the R&D costs up to EUR 350,000 (R&D payroll, R&D costs and R&D expenditure).
  • In the second bracket, the percentage for the remittance reduction will be 16% of the R&D costs exceeding EUR 350,000.
  • The EUR 14 million ceiling for the R&D remittance reduction will be abolished as of January 1, 2016, which means that there will no longer be a maximum for the remittance reduction to be taken into account in respect of the payroll tax and social security contributions payable.
  • The request procedure for the integrated scheme at the Netherlands Enterprise Agency (Rijksdienst voor Ondernemend Nederland; RVO) has been simplified as much as possible. By integrating the R&D remittance reduction with the RDA only one decision will be necessary.
  • As of January 1, 2016, requests will only be able to be filed electronically.

Work-related costs rules

As of January 1, 2015 the work-related costs rules are mandatory for all employers. The bill on the Other Tax Measures Act 2016 tightens the standard practice criterion.

Under the as of January 1, 2016 tightened standard practice criterion the amount of the reimbursements and provisions that are designated as part of the final levy must not significantly (30% or more) deviate from the amount of the reimbursements and provisions that are generally designated as part of the final levy in similar circumstances. The point of the standard practice criterion is that it is standard practice for employers to pay any payroll tax and social security contributions on the reimbursements and provisions via the final levy.

A number of factors play a role in determining whether the standard practice criterion is met:

  • The type of reimbursement or provision

It is, for example, not standard practice to designate as part of the final levy the monthly salary of an employee, the vacation allowance, a large bonus or compensation for pecuniary loss at the commencement of their employment.

  • The amount of the reimbursement or the value of a provision

While it may be standard practice to designate an anniversary bonus, designating an anniversary bonus of EUR 1 million is not.

  • All the reimbursements and provisions of an employee in one year combined

In general, it is not customary for an employer to designate as part of the final levy reimbursements paid to an individual employee during the course of year that amount to more than EUR 100,000.

  • Assessing whether rate shopping plays a role in the decision to designate an item as part of the final levy

To assess this, reference can be made to the course of action that has consistently been taken in the past. If, for example, an employer in the past paid the tax payable on frequent reimbursements and provisions by way of individual grossing up, it will, depending on the amount of the designated reimbursements or provisions, also be more common for these items to be designated as part of the final levy. In this case, it is plausible rate shopping is not a decisive factor in the designation process and the Dutch tax authorities will not quickly see cause for disputing this standard practice.

  • Comparison with other employees

It is possible to make a comparison here between:

1)     different employees of the same employer;

2)     different employees of the employer that are in the same job category;

3)     employees employed in the same sector at another company.

If the amount of the designated reimbursements and provisions is customary in comparison to colleagues and similar employees at other employers, then the standard practice criterion has been met for that employee. If it is not possible to make a comparison within the own employer or with another employer in the same sector, then instead of making a comparison, the designation as part of the final levy will be assessed on the basis of what is reasonable. If the amount is not customary, then the extent that this deviates from what is customary must be examined. The amount must not significantly exceed the amount of the reimbursements and provisions that are generally designated as part of the final levy in similar circumstances.

Cancellation of nil valuation interest reduction on staff loans for own home

The nil valuation of the interest reduction that employers offer on staff loans for the purchase or renovation of the own home will be canceled as of 2016: in future the interest reduction will be taxable salary. The reason for the nil valuation was that taxing this benefit did not, on balance, affect the tax payable. If the interest deduction given would be taxed as salary, then a comparable deduction was available for personal income tax purposes. As of 2014 however, the rate at which mortgage interest can be deducted in the highest personal income tax bracket has been reduced annually by 0.5%. This means that the tax rate at which mortgage interest can be deducted in the highest tax bracket is no longer the same as the rate at which the benefit is taxed for payroll tax purposes. The nil valuation of the interest reduction is therefore no longer appropriate. Furthermore, the employer cannot designate the interest benefit as part of the final levy and therefore cannot deduct it from the fixed exemption.

Addition to income percentages for private use of company cars

The CO2 emission standards (indicated in grams per kilometer) for the addition to income for the use of a company car will be tightened in 2016:

Addition to income for fuel/diesel cars 2016

Year

0

gram/km

1-50 gram/km

51-82

gram/km

51-106 gram/km

83-110

gram/km

> 106 gram/km

> 110 gram/km

2015

4%

7%

14%

n/a

20%

n/a

25%

2016

4%

15%

n/a

21%

n/a

25%

n/a

 

The 4% addition to income for zero emission cars and the 7% addition to income for cars emitting more than 0 grams per kilometer but less than 50 grams per kilometer of CO2 will only apply to cars that were first taken into use before the end of 2015 and were registered in the motor vehicle registration system for the first time.

Addition to income as of 2017: intention

It has now been announced that, as of 2017, the addition to income for all lease cars will gradually be reduced to 22%. Only fully electric cars will receive an added incentive of an addition to income of 4%. The Lower and Upper Houses of Parliament however still need to approve these proposals.

Addition to income for fuel/diesel cars 2017-2020 (intention)

Year

0

gram/km

1-50 gram/km

51-106 gram/km

> 106 gram/km

2016

4%

15%

21%

25%

2017

4%

17%

22%

22%

2018

4%

19%

22%

22%

2019

4%*

22%

22%

22%

2020

4%*

22%

22%

22%

*As of 2019, the reduced addition to income percentage of 4% for fully electric cars will apply up to the part of the list price up to EUR 50,000. If the list price exceeds EUR 50,000, an addition to income of 22% will be calculated over the excess. This limitation does not apply to electric cars fueled by hydrogen.

For cars already registered in the vehicle registration system, the addition to income remains unchanged. For example, for cars that are subject to the addition to income for the first time in 2015, the regime for 2015 will continue to apply.

Salary Costs (Incentive Allowances) Act (Wet tegemoetkomingen loondomein; Wtl)

The current contribution reduction schemes will be modified. This is because the current contribution reduction schemes are inadequate (redemption problems), complicated, difficult to monitor, susceptible to fraud and not very robust. Under the current methodology used by these schemes, the contribution reductions are periodically set off against the payment of the contributions for the employee insurance schemes in the payroll return. Under the new methodology, the Dutch tax authorities will pay out the discounted amount in the year following the calendar year to which the discount relates.

The bill on the Salary Costs (Incentive Allowances) Act introduces two benefits: the wage cost benefit (loonkostenvoordeel; LKV), intended to take effect as of January 1, 2018, and the low incomes benefit (lage-inkomensvoordeel; LIV), intended to take effect as of January 1, 2017. The LIV is a generic tax subsidy provided to encourage the employment and retention of people whose salary does not exceed 120% of the statutory minimum wage. Furthermore, the contribution reduction for older employees and the existing contribution reduction for occupationally disabled employees will be converted into the LKV.

The wage cost benefit (LKV)

A request for the concession for older employees, occupationally disabled employees, redeployed occupationally disabled employees and employees who fall under the quota target group can be made in the payroll return. An overview of the wage costs benefits and their duration is set out below.

 

Wage cost benefit per remunerated hour

Maximum duration of the benefit

Older employees

EUR 3.05 and maximum of EUR 6,000 per employee per calendar year

three years

Occupationally disabled employees

EUR 3.05 and maximum of EUR 6,000 per employee per calendar year

three years

Employees who fall under the quota target group

EUR 1.01 and maximum of EUR 2,000 per employee per calendar year

three years

Redeployed occupationally disabled employees

EUR 3.05 and maximum of EUR 6,000 per employee per calendar year

one year

 

The low income benefit (LIV)

The qualifying average hourly wage on an annual basis and the low income benefits are listed in the following table. The low income benefits can only be applied to employees for whom at least 1,248 remunerated hours were reported in the payroll return.

Average hourly wage during the calendar year

Low income benefit per remunerated hour

More than EUR 9.89 but not more than EUR 10.88

EUR 1.01 and maximum of EUR 2,000 per employee per year

More than EUR 10.88 but not more than EUR 11.87

EUR 0.51 and maximum of EUR 1,000 per employee per year

 

Application

It must be apparent from the payroll return that a request for application of the LKV and/or the LIV has been made. After the end of the relevant year (before March 15), the Employee Insurance Agency (Uitvoeringsinstituut Werknemersverzekeringen; UWV) will provide an overview of the employees for whom the LKV has been requested, as well as informing the employers about which employees meet the conditions of the LIV. This is done on the basis of the payroll returns that were filed no later than January 31 of the following calendar year. The employer then has until May 1 of the that year to either amend the information or supplement it. To calculate the tax credit, the UWV uses the information recorded in the policy administration as at May 1 of that year.

Overlap between the LKV and LIV

If an employer is entitled to both the LKV and LIV for an employee, the total concession will be limited to a maximum of the amount of the highest concession. If both concessions are the same, then the employer will only be entitled to the LKV.

Transitional rules

The current contribution reduction for older employees and the existing contribution reduction for occupationally disabled employees will be converted into the LKV for the remaining period (of the contribution deduction).

The contribution waiver for inconsequential (seasonal) work will be canceled with effect from 2018.

The Employment Relationships (Deregulation) Act

There has been an ongoing discussion about replacing the Declaration of Independent Contractor Status (Verklaring arbeidsrelatie; VAR). The alternative put forward by the Deputy Minister of Finance was approved by the Lower House on July 2, 2015: the Employment Relationships (Deregulation) Act. If the Upper House also approves it, the VAR regime will be abolished as of January 1, 2016. Under the alternative, the contracting and/or contracted party can send their agreements to the Dutch tax authorities in advance. The Dutch tax authorities will then assess whether there is a withholding obligation for the purposes of payroll tax and social security contributions. The decision by the Dutch tax authorities will provide certainty for the payroll tax and social security contributions if the activities factually agree with what is laid down in the approved agreement.No assessment for personal income tax purposes will take place (i.e. whether or not there is a business). The Dutch tax authorities will assess different types of agreements: individual agreements, agreements that are specifically used in certain sectors and more generic agreements. The agreements on the basis of which a contracting party does not have to withhold and remit payroll tax and social security contributions will be published by the Dutch tax authorities as model agreements. Interested parties can then use these model agreements as a basis for their employment relationships. Interest groups representing contracting and contracted parties, individual contracting and contracted parties or their intermediaries can send their existing agreements to the Dutch tax authorities for assessment. The Dutch tax authorities will try to assess an agreement within six weeks.

Box 3, foreign taxpayers

Foreign taxpayers are taxed in Box 3 on real estate located in the Netherlands and any rights related thereto. For the sake of completeness, we note that foreign taxpayers are also taxed in Box 3 on rights to a share of the profit of a business in which the management is resident in the Netherlands insofar as these rights do not arise from the ownership of securities or employment and are not taxed as income from work or home or income from a substantial interest.

It has been proposed to modify the tax on deemed investment income in Box 3 as of January 1, 2017. The tax rate will stay at 30% but the deemed return will be determined on the basis of market returns. As of January 1, 2017 an annual return of 1.63% will apply to savings and 5.5% to investments. On the basis of the total capital in Box 3, a deemed split will be made between the amount of savings and the amount of investments. For foreign taxpayers with capital up to EUR 100,000, this split will be 67% savings and 33% investments (capital mix). For capital between EUR 100,000 and EUR 1,000,000, the split will be 21% savings and 79% investments (capital mix). Capital exceeding EUR 1,000,000 will be regarded as comprising 100% investments.

An example to illustrate the above

A foreign taxpayer – who is not entitled to apply the tax-free capital of EUR 25,000 – owns real estate located in the Netherlands valued at EUR 125,000 as at January 1, 2017. The capital yield tax base in the Netherlands is therefore EUR 125,000.

The benefit from savings and investment is determined as follows:

Value of the Dutch real estate EUR 125,000

Capital mix savings (rate of return category I):

  • Capital income bracket 1 (savings: 67% of EUR 100,000) =         EUR 67,000
  • Capital income bracket 2 (savings 21% of EUR 25,000) =            EUR   5,250

Total                                                                                                     EUR 72,250

Benefit 1.63% x EUR 72,250 = EUR 1,177

Capital mix investments (rate of return category II):

  • Capital income bracket 1 (investments: 33% of EUR 100,000) =   EUR 33,000
  • Capital income bracket 2 (investments 79% of EUR 25,000) =      EUR 19,750

Total                                                                                                      EUR 52,750

Benefit 5.5% x EUR 52,750 = EUR 2,901

The total benefit from savings and investment is EUR 4,078 and the tax payable in Box 3 is then EUR 1,223.

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