2023 Tax plan - Outline of wage and income tax measures

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Outline of wage and income tax measures

2023 Tax Plan - Budget Day (Prinsjesdag)

The following lists the measures proposed in the 2023 Tax Plan in respect of the wage and income tax.

29 November 2022

Outline of wage and income tax measures

Back to outline 2023 Tax Plan

Dutch version

Income policy

High inflation levels, especially following the sharp rise in energy prices, have compelled the government to support households and cushion the resulting decline in purchasing power. The measures proposed for the most vulnerable households include a hike in healthcare and housing benefits and a 10% minimum wage increase. From a tax perspective, energy and fuel taxes will be reduced, while working will be made more attractive through a reduction of the tax burden on labour for both employees and employers. The maximum employed person's tax credit will be up from EUR 4,260 to EUR 5,052 and the rate of the first income tax bracket will be reduced from 37.07% to 36.93%. This will be offset by a lower tax bracket limit in box 1 (after inflation adjustment) and a higher phase-out rate for the employed person’s tax credit. The latter measure significantly adds to the marginal tax pressure for middle-income earners.

The new rates and tax credits are shown in the table below:

Tax bracket limits 2022 2023
End of first bracket (born after 1 January 1946) EUR 35,472 EUR 37,149
End of first bracket (born before 1 January 1946) EUR 36,409 EUR 38,703
End of second bracket EUR 69,398 EUR 73,031

 

Combined IB/PVV rates 2022 2023
Rate first bracket (below state pension age) 37.07% 36.93%
Rate first bracket 19.17% 19.03%
Rate second bracket 37.07% 36.93%
Rate third bracket 49.50% 49.50%

 

Tax credits Position 2022 Position 2023
Maximum general tax credit (below state pension age) EUR 2,888 EUR 3,070
Maximum general tax credit (above state pension age) EUR 1,494 EUR 1,583
Phase-out point general tax credit EUR 21,317 EUR 22,660
Phase-out rate general tax credit (below state pension age) 6.007% 6.095%
Phase-out rate general tax credit (above state pension age) 3.106% 3.141%
Maximum employed person’s tax credit EUR 4,260 EUR 5,052
Phase-out point EUR 36,649 EUR 37,626
Phase-out rate of employed person’s tax credit 5.86% 6.51%

 

Webcast Tax Plan

Corina van Lindonk, Aart Nolten and Eddo Hageman discussed Tax Plan 2023.

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General tax credit phase-out based on aggregate income

The general tax credit is an income tax credit to which every taxpayer is entitled. The amount of the general tax credit decreases as a taxpayer’s income increases. The government now proposes to base the tax credit phase-out on the amount of the entire aggregate income (box 1, box 2 and box 3 together) rather than on the sum of the income from work and home (box 1). By so doing, the source and composition of income will no longer be relevant for the amount of the general tax credit.

Phasing out income-dependent combination credit

In short, the income-related combination tax credit is meant for single parents or least-earning partners who combine work and care for young children. In line with the coalition agreement, the government now proposes to abolish the scheme. The main consideration is that the proposed introduction of the income-dependent childcare allowance already achieves the aim of the scheme: to promote parents’ labour participation. On top of that, abolition of the tax credit contributes to simplification of the tax system and reduces the differences in the tax burden between one- and two-income earners, while the (eventual) budget revenue of almost EUR 1.8 billion per year can be used for other purchasing power measures.

The tax credit will be phased out gradually under a generous transitional regime. The old regime will continue to apply for parents with children born or to be born before 1 January 2025. Parents with children born after this date will no longer be eligible for income-dependent combination tax credit. Since both groups of parents will be entitled to the increased childcare allowance, there will be a financial difference - depending on the child’s date of birth - that could amount to as much as EUR 30,000. However, the government argues that drawing a hard line is inevitable in order to abolish the scheme without negative income effects. From 2037, there will be no more parents who can claim the income-dependent combination tax credit.

Phasing out of retirement reserve

The retirement reserve is a tax facility for entrepreneurs subject to income tax rules enabling them to each year set aside part of their profits for a future old-age provision. Although this part of the profit is not taxed, the reserved amount does not have to be set aside and can still be used for investments or consumption. In about half of the cases, the retirement reserve is not ultimately used for a retirement provision. This means that these entrepreneurs were granted a tax deferral during the years in which the reserve was accumulated. The government believes this effect to be contrary to the original intention of the scheme, also considering the aim to encourage real retirement provisions to be placed externally. To this end, the opportunities for entrepreneurs to save for old age will be increased. The existing rules will continue to apply for retirement reserves already accrued at the end of 2022, but further accrual will no longer be possible.

Reduction of self-employed person's tax deduction

The self-employed person's tax deduction will be phased-out more rapidly and reduced further than previously proposed, down to EUR 5,030 in 2023 and EUR 900 in 2027. The aim of the measure is to reduce the difference in tax treatment between employees and the self-employed. An evaluation scheduled next year may give reason to also adjust the relief for new businesses, i.e., the increased self-employed person's tax deduction for starting entrepreneurs.

Efficiency margin for customary salary to be abolished

Taxpayers who perform work for a company in which they or their tax partner hold a substantial interest (director-major shareholders, DMSs) must take into account a customary salary. As a starting point, this must now be at least 75% of the salary from the most comparable employment (efficiency margin of 25%). The government proposes to set this percentage at 100% of the salary from the most comparable employment. This will abolish the efficiency margin.

Customary salary for DMSs of innovative start-ups

The government proposes to cancel the relaxation for DMSs of innovative start-ups, which are certain employers with an R&D statement. Under this relaxation, the customary salary of these DMSs did not have to be set higher than the statutory minimum wage. Under transitional law, the relaxation will still apply to DMSs who already used it before 1 January 2023.

Tightening of 30% facility

Employees recruited from abroad to work for a withholding agent in the Netherlands can, under certain conditions, apply the so-called 30% facility, under which part of the agreed wage is considered a tax-free reimbursement for extraterritorial costs for a maximum of five years. The qualifying salary for the 30% facility is currently not capped. The government now proposes to cap the basis for the 30% facility at the so-called WNT standard (2022: EUR 216,000) under the Senior Executives in the Public and Semi-Public Sector (Standards for Remuneration) Act as from 1 January 2024. The flat-rate tax free reimbursement will thus be capped at EUR 64,800. This maximum amount applies to all employment relationships of an employee at affiliated companies. In addition to this flat-rate tax-free reimbursement, costs for international schools (primary and secondary education) can be reimbursed untaxed.

Apart from the flat-rate tax-free reimbursement, a withholding agent may also reimburse actually incurred extraterritorial expenses free of tax. It is proposed that with effect from 2023, the withholding agent must make a choice between reimbursing the extraterritorial costs actually incurred on the one hand and providing a flat-rate tax-free reimbursement on the other. This choice must be made in the first payroll period of the calendar year and the choice will remain valid for the entire calendar year as long as the employee continues to meet the conditions for the 30% facility. With a new request for application of the 30% facility, this choice must be made no later than in the fifth month after the start of employment.

For employees to whom the 30% facility applies in the last payroll period of 2022 the cap on the 30% facility base will not apply until 31 December 2025 , as long as they remain employed by the same withholding agent.

Increase in untaxed travel allowance

The maximum untaxed travel allowance for business kilometres driven (commuting and business trips) will be up from EUR 0.19 per km to EUR 0.21 per km from 1 January 2023. A further increase to EUR 0.22 per km will apply from 1 January 2024.

Increase of discretionary margin in work-related expenses scheme

The discretionary margin under the work-related costs scheme (werkkostenregeling, WKR) allows employers to provide their employees with tax-free reimbursements, allowances and provisions, as long as no targeted exemption applies. The discretionary margin per employer amounts to 1.7% of the aggregate wage bill for tax purposes of all employees, as long as it does not exceed EUR 400,000 plus 1.18% of the remainder of the wage bill. A memorandum of amendment has been introduced, proposing to structurally increase the discretionary margin over the wage bill up to EUR 400,000 to 1.92%, as part of a tax reduction for SMEs. For the year 2023, the discretionary margin is even 3% up to a wage bill of EUR 400,000. Part of this is due to the sharply increased inflation.

Using compulsory old-age provision to acquire an annuity

With effect from 1 July 2017, the Act on the phase-out of self-administered pensions (Wet uitfasering pensioen in eigen beheer) rules out the accrual of self-administered pensions. Until 31 December 2019, the entire self-administered part of an accrued pension entitlement could be converted into an entitlement from a compulsory old-age provision (oudedagsverplichting, ODV). Such a compulsory old-age provision must start no later than two months after reaching the state pension age and must be paid out over a 20-year period. Under certain conditions, taxpayers can also choose to settle the compulsory old-age provision by using the amount reserved to acquire an annuity. This must be done no later than the effective date of the compulsory old-age provision benefits.

The Pensions Collective Decree (Verzamelbesluit pensioenen) stipulates that, under certain conditions, the compulsory old-age provision may still be used in the benefit phase to obtain an annuity product, provided this is done before the end of the calendar year in which the age that is five years higher than the state pension age is reached. In practice, however, this relaxation does not always appear to provide sufficient relief for DMSs who want to liquidate their private limited companies and therefore settle the compulsory old-age provision. In response to those signals, the government proposes that a compulsory old-age provision can also be used to acquire an annuity product after the calendar year in which the age is reached that is five years higher than the state pension age. With this, the government further relaxes the previous decision. The proposal has retroactive effect up to and including 1 April 2017.

Two brackets in box 2

Due to the restoration of rights to be provided to taxpayers in box 3, a rate increase will take place in box 2. From 2024, two rate brackets will be introduced. A rate of 24.5% will apply on the first EUR 67,000 of income from substantial interest. For partners, this rate applies up to an income of EUR 134,000. Above that, a rate of 31% applies. The introduction of two brackets serves as an incentive for taxpayers to annually have all or part of the company's profits distributed, in order to make maximum use of the low rate. Encouraging dividend distributions should counteract prolonged deferral in box 2. This measure is also part of the pursuit of more equal treatment for tax purposes of entrepreneurs, employees and DMSs.

Restoration of rights and bridging legislation box 3

On 24 December 2021, the Dutch Supreme Court ruled that the way in which the box 3 taxation has been designed since 2017 violates both the prohibition of discrimination (art. 14 ECHR) and the right to the peaceful enjoyment of property (art. 1 FP ECHR). At the end of April 2022, the State Secretary of Finance provided clarity on how restoration of rights would be provided. The Box 3 Restoration of Rights Bill legally enshrines the basic principles.

The government's basic principle is that compensation will be offered to taxpayers who have participated in the collective objection proceedings, and to taxpayers whose income tax assessment for (one of) the years 2017, 2018, 2019 or 2020 had not yet been determined, or had not yet been irrevocably established, on 24 December 2021. Taxpayers do not have to do anything: restoration of rights will be effected automatically by the Tax Administration. The government has refrained from also compensating non-objectors whose assessments for the aforementioned years were already irrevocably established.

The Box 3 Restoration of Rights Act (Wet Rechtsherstel Box 3) includes a new calculation method for income from savings and investments. It is based on the actual composition of assets, dividing taxpayers' assets into three categories: bank balances, other assets and debts. For each asset category, a separate flat rate applies by which the assets within that category are multiplied. This results in an average effective rate of return, which is applied to the basis for savings and investments (the balance of assets and liabilities less the tax-free assets).

The flat rate of return for bank deposits will be based on the average monthly interest rate on deposits. The rate of return on debt is based on the average monthly interest rate on the total outstanding amount of residential mortgages of households. Both rates of return are determined after the end of the tax year to obtain the best possible approximation of the return actually realised in that calendar year. The rate of return for other assets is in line with the current rate of return for class II, which is based on the long-term return of real estate, shares and bonds.

Table 1. Rates of return for the new calculation of the three categories
  Bank balances (I) Other assets (II) Debts (III)
2017 0,25% 5,39% 3,43%
2018 0,12% 5,38% 3,20%
2019 0,08% 5,59% 3,00%
2020 0,04% 5,28% 2,74%
2021 0,01% 5,69% 2,46%
2022 0,01% 5,53% 2,46%

 

The bill also provides for a scheme for partners who wish to change the mutual distribution of their joint income components following the recalculation of box 3 income, and for a double taxation avoidance scheme.
The system mentioned above, based on the actual composition of taxpayers' assets and a revised flat-rate return table, will also be used to determine box 3 income in the 2021 and 2022 income tax assessments in situations where this leads to a lower assessment than under the current box 3 legislation. Bridging legislation will be introduced for the years 2023 to 2025, using the same basic principles. A bill to this effect was also tabled on Budget Day.

A notable point is the exemption for green investments. The system applicable to this exemption differs slightly from the other investments in the bill. Green investments are divided into green bank deposits and green other assets. If a taxpayer invests in both categories, the exemption is first applied to the part qualifying as other assets and then allocated to the part held as bank deposits. As such, the green investments first reduce the base by the highest flat rate of return.

The value on 1 January of the relevant calendar year (the reference date) will be used to determine the value of the various asset categories. To prevent taxpayers from temporarily converting assets with the aim of obtaining a lower rate of return, the government proposes a three-month arbitrage period. This arrangement ensures that transactions made three months before and three months after the reference date of 1 January will not result in lower taxation.


Related article:

Box 3 - restoration of rights and bridging legislation

Box 3 rate increase

In addition to the separate bills to remedy box 3 taxation following the Christmas ruling, the government proposes to increase the box 3 rate by 1 percentage point per year. This would bring the rate to 32% next year, 33% in 2024 and 34% in 2025. In 2026, a new, non-flat rate system of taxation on capital income should then take effect. Besides the rate increase, the tax-free assets will be raised from EUR 50,650 to EUR 57,000 (for partners to EUR 114,000). The aim of this measure is to tax assets more heavily and thus finance the reduction in the tax burden in box 1. In particular, the measure should more heavily tax taxpayers who could have had many investments and therefore benefited the most from the old system.

Update value with vacant possession ratio

When determining the value of homes in box 3 and for gift and inheritance tax purposes, the rented state of the home is taken into account. If the tenant of the property enjoys security of tenure, a percentage is deducted from the value under the Valuation of Immovable Property Act (WOZ value) depending on the ratio of the rent to the WOZ value. Following research, it is now proposed to update the percentages used so that the value reduction is smaller and more in line with the fair market value. As a result, if the annual rent exceeds 5% of the WOZ value, a value reduction will no longer be taken into account. For situations involving a temporary rental contract, the value with vacant possession ratio will be abolished, as the value-decreasing effect of the rent will soon disappear in such cases. Likewise, a value-decreasing effect may no longer be taken into account for rentals to related persons. The previous plan to abolish the value with vacant possession ratio altogether will not go ahead, as the government fears that this would conflict with the principle of equality.

Cap on periodic deduction for gifts

The periodic deduction for gifts is capped at EUR 250,000 per calendar year. If a taxpayer had a partner throughout the calendar year, the periodic gifts will be aggregated, so that the cap amount referred to above can be used only once. While the legislative amendment will take effect from 1 January 2023, a transitional regime applies to obligations to make periodic gifts that had already been entered into on 4 October 2022, at 16:00 (time of publication of the memorandum of amendment). Such donations will still be fully deductible up to and including 31 December 2026.

Adjustment of cultural multiplier for partners

When making a donation to a cultural Dutch PBO (ANBI), the deductible amount may be increased by 25%, up to a maximum of EUR 1,250. The Tax Administration recently discovered that they incorrectly applied the maximum of EUR 1,250 to partners as well, while the maximum should be EUR 2,500. Due to the enormous costs and time involved in addressing the Tax Administration's systems on this point, a proposal is made to legislate that the multiplier is capped at EUR 1,250 for partners as well. A separate solution will be devised for the very small group of partners for whom the deduction taken into account in recent years was erroneously too low.

Abolition of averaging scheme

The averaging scheme, which provides relief to taxpayers who have had widely varying incomes over a three-year period, will be abolished. As a result, they may pay more tax due to the progression in box 1 than when the income had been equally distributed over the years. An evaluation shows that the scheme is hardly used by those who are entitled to it. Moreover, the scheme is unbalanced: it takes into account varying rates, but ignores the income-dependent reduction of tax credits. Also considering the costs involved in implementing the scheme and the government’s aim to simplify the tax system, it was decided to abolish it. The period 2022 to 2024 is the last period over which varying incomes can be averaged.

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