Taxation of a lucrative interest
Certain types of management investment plans (including sweet equity and carried interest) may qualify as lucrative interest. A lucrative interest is considered granted with the intention to also form a remuneration for services rendered by that individual (e.g., employment or management services). To qualify as a lucrative interest, the interest should in general offer potentially a disproportional high return (compared to other investors).
As a principal rule, proceeds derived from a lucrative interest are taxed in Box 1 (progressive income tax rates up to 49.5%). However, under certain conditions, it is possible to elect for taxation in Box 2 (31% rate, with a reduced rate of 24.5% for the first EUR 67,804 in income). Needless to say, the Box 2 regime is more beneficial. However, three cumulative conditions must then be met: (a) the lucrative interest is held through an intermediate holding company; (b) the taxpayer holds a substantial interest (in short, 5% or more) in the intermediate company; and (c) at least 95% of the net lucrative interest proceeds are distributed by the intermediate company to the individual within the same calendar year (so that these proceeds can be taxed in Box 2). For the avoidance of doubt, it is noted that this regime only applies to the return on investment. Any underpayment of the ‘fair value’ upon grant may already be taxed as employment/services remuneration in kind (taxable in Box 1).
Partial non-resident taxpayer regime
Under the so-called ‘30%-ruling’, taxpayers used to have the possibility to elect for taxation as a partial non-resident. The 30%-ruling (or, the Dutch expatriate regime) is a tax facility for foreign employees working in the Netherlands. Under this scheme, employers can pay part of the employee’s salary as a tax-free compensation for deemed costs incurred. The facility has been scaled back during the past years, and the partial non-resident taxpayer election was abolished per 1 January 2025 (with limited grandfathering rules for existing cases).
Under the partial non-resident taxpayer regime, taxpayers were taxed in Box 2 as if they were a non-resident. This means that Box 2 taxation was only incurred to the extent income was derived directly from a Dutch tax resident entity, as non-resident taxpayers do not pay Dutch tax over income derived from shares in a non-resident entity. Since the abolition of the partial non-resident taxpayer regime, beneficiaries of a 30%-ruling are for Box 2 purposes treated equally to ‘ordinary’ taxpayers.
Court case at hand
The relevant court case deals with a private individual that participated in a management investment plan which qualified as a lucrative interest. The lucrative interest was held indirectly, via a non-resident holding company in which the individual held a substantial interest. During the years under review, at least 95% of the net lucrative interest proceeds had been timely distributed. This individual also made use of a 30%-ruling and opted to be treated as a partial non-resident taxpayer in the years at hand.
As noted above, income from a lucrative interest is in principle taxed in Box 1, but this individual took the position that all conditions for Box 2 taxation were met. The Dutch Tax Authorities disagreed and argued that because of the partial non-resident taxpayer regime, the income had not been subject to Box 2 taxation (as it was received from a non-resident company). As this would effectively result in no taxation being incurred by this individual, the Court of Appeal concluded that such outcome would be against the spirit and intention of the law and was also not in accordance with the wording of the law. Thus, in the case at hand, the individual could not opt for Box 2 taxation, causing the income to shift back to Box 1. For the avoidance of doubt, it is noted that this decision from the Court should not affect taxpayers that own a lucrative interest directly, as they already do not have the option to be taxed in Box 2.
With its ruling, the Court of Appeal has decided against the position taken by the Court of North Holland, which dealt with the case in first instance. This Court, shortly put, considered that it should be possible to meet the conditions for Box 2 taxation, if the income was in fact ‘received’ or ‘realised’ by the taxpayer, irrespective of whether it was effectively taxed or not. So, this Court took a more material approach, arguing that: (i) it should not be relevant whether an election as partial non-resident taxpayer causes the income not to be subject to tax in Box 2; and (ii) that this outcome does not go against the wording, the spirit and purpose of the law.
Taxpayers that own lucrative interests and that relied on the partial non-resident taxpayer regime should carefully monitor this development. Although the regime has been abolished per 1 January 2025, final tax assessments for preceding years may not have been issued yet by the Dutch Tax Authorities, leaving these years open for review. In the meantime, it is understood that the Court of Appeal’s decision will be put in front of the Dutch Supreme Court, which will have a final say in the matter.
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