The Court of Appeal of Amsterdam recently issued a court ruling clarifying the interaction between the partial non-resident taxpayer regime and the lucrative interest regime in the Netherlands. The Court of Appeal concluded that a partial non-resident taxpayer who indirectly holds a lucrative interest (for example sweet equity and carried interest) through a foreign company cannot opt for taxation of lucrative interest income in Box 2 and is therefore subject to taxation in Box 1 instead.
Partial non-resident taxpayer regime
Up to and including 2024, Dutch tax residents benefiting from the 30% ruling could opt to be treated as partial non-resident taxpayers for Dutch personal income tax purposes. Based on this special tax regime, they were subject to taxation on their worldwide Box 1 income however they are subject to limited taxation in Box 2 and Box 3 since they are treated as non-resident taxpayers for these two Boxes .
From 1 January 2025, the partial non-resident taxpayer regime is abolished. However, transitional rules apply: employees who applied the 30% ruling in the December 2023 wage tax return may continue to opt for the partial non-resident taxpayer status in 2025 and 2026. The regime will be fully phased out as of 1 January 2027.
Lucrative interest rules
Under Dutch tax law, specific tax rules exist for investment plans in highly leveraged capital structures. These rules are referred to as the lucrative interest rules. In principle,any return realized on a lucrative interest is taxed in Box 1 at the progressive personal income tax rate of maximum 49.5% (in 2025).
However, under certain conditions, taxation could be shifted to Box 2 (progressive rates up to 31% in 2025). This shift could be applied if the lucrative interest is held indirectly through a (holding) company and at least 95% of the benefits received by that (holding) company are distributed to – and received by – the shareholder in the same calendar year.
Case law
The case before the court concerned an employee who had been granted the 30% ruling. Through a management participation plan implemented by his employer, the employee participated in his employer via a non-Dutch (holding) company, in which he held an interest of more than 5%. Due to a leveraged capital structure, an agreement was concluded with the Dutch tax authorities that the participation qualified as an (indirect) lucrative interest for Dutch tax purposes, with taxation in Box 2.
Whereas an interest of more than 5% in a non-Dutch (holding) company would normally qualify as a Box 2 substantial interest for Dutch tax residents, this was not the case for this employee. Since the employee opted for the partial non-resident taxpayer status in his personal income tax return, he was not subject to taxation in the Netherlands on substantial interests held in non-Dutch companies.
The question that arose, first at the court and then at the Court of Appeal, was whether the Box 2 facility under the lucrative interest rules could be applied, given that no Box 2 taxation actually occurs as a result of opting for the partial non-resident taxpayer status, despite that more than 95% of the lucrative interest proceeds were disbursed to the employee by the non-Dutch holding company.
The lower court initially ruled in favor of the employee, stating that the term ‘received’ by the shareholder should be interpreted broadly, as the law provides no statutory definition. The court ruled that such income is received when it comes to the taxpayer’s possession, irrespective of whether it was effectively taxed in Box 2 or not.
The Court of Appeal took a different position and ruled against the employee. The Court of Appeal ruled that the conditions for taxing the lucrative interest income in Box 2 were not met, as the income did not meet the statutory requirements to qualify as Box 2 income. In order to apply the Box 2 facility in the lucrative interest rules, the Court of Appeal stated that it is required that the proceeds are effectively taxed in Box 2. Since this is not the case in the court case at hand due to opting for the partial non-resident taxpayer status, the facility cannot be used.
As a result, the Court of Appeal confirms the position of the Dutch tax authorities: the income is taxable in Box 1 as income from a lucrative interest.
Practical implications
The case has been appealed to the Dutch Supreme Court (Hoge Raad). For expats participating in an equity based incentive plan and have opted for the partial non-resident taxpayer status in recent years, this development is important to monitor closely.
We are curious to see how the Supreme Court will rule on this point. Once the Supreme Court delivers its ruling, we will inform you further.
Questions about this case or the implications for your tax position? Feel free to contact us.