Taxation of carried interest in the Netherlands
You can be rewarded for your work in various ways. The most common rewards are salary, bonus, or profit-sharing. But maybe you have been rewarded through a carried interest (in Dutch: lucratief belang)? But what is carried interest, and what about its taxation? In this article, we will highlight that.
When are we talking about a carried interest?
Carried interest is actually an outstanding reward for work. Often to specific people within a company, such as management. It usually concerns shares that can yield a very high return. Here are a few examples of a carried interest:
- You get the opportunity to buy shares in the company where you work for a low purchase price (acquisition price lower than the market value).
- The company has different types of shares, and you are rewarded with a special share of a company. These have more advantages than the ‘ordinary’ shares. Also, the proportion of the other types of shares must be less than 10% of the total share capital.
- You will receive preference shares with a minimum return of 15% per year.
Carried interest and the Dutch tax authorities
How is the gain from carried interest taxed in the Netherlands? Usually, shares are taxed in box 2 or box 3. If the shares fall into box 2, you pay 26.9% tax on the dividend. For box 3, the Dutch tax authorities calculate a deemed profit, with the result that you pay approximately between 0.5% and 1.7% income tax on the value of your assets (so no capital gains tax). However, for carries interest, it works a little bit differently.
Carried interest is included in box 1 (result from other activities). The levy only takes place upon sale or realization, which means that dividends or other results will be taxed in box 1. In 2022, the highest rate is 49.50%, which is a lot higher than the tax rate of box 2 and box 3. The carried interest is simply seen as income; that is why it is taxed at the progressive rate of box 1. Not very attractive from a tax point of view.
Loss from carried interest
The profit obtained from a carried interest is taxed the same as profit from a business. Luckily, if you lose money on carried interest, you may deduct this loss from your taxable income in box 1.
Carried interest or substantial interest?
A carried interest should not be confused with a substantial interest. You have a substantial interest (box 2) when you have at least 5% of the shares in a company (bv/nv). There is a loophole so that carried interest can be taxed in box 2 (income from a substantial interest). It is only possible if the carried interest is indirectly held through a holding company. The levy may take place in box 2 if at least 95% of this benefit is paid to the shareholder.
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