Tax Advisory: Boxes, Deductions and the Advisory Mindset
What you must understand
Dutch income tax for individuals is built on three boxes. Box 1 covers employment and owner-occupied housing: progressive rates apply to taxable income from work and home, with the mortgage-interest deduction (hypotheekrenteaftrek) limited to the bracket rate and subject to the Hillen deduction for low incomes. Box 2 taxes substantial shareholdings (roughly 5% or more) with a flat rate on dividends and capital gains. Box 3 taxes savings and investments under a deemed-return system based on assumed returns on bank balances, other assets and debts, rather than actual returns.
For businesses, the advisory core is the choice of legal form. A sole trader (eenmanszaak) enjoys the self-employed deduction and SME profit exemption; a private limited company (bv) pays corporate income tax (a lower rate on the first profit tranche, a higher rate above it) and pays out dividends taxed in box 2. Also know: VAT (btw) rates and the distinction between VAT and income tax; loss carry-back and carry-forward rules; and the deductibility conditions for business costs (business purpose, no private benefit).
Traps in questions
- Box mixing. A question describes a saving account and a share portfolio; both are box 3, but a substantial holding is box 2.
- Deemed versus actual return. Box 3 does not tax what you actually earned; it taxes an assumed return split across asset categories.
- Deduction value. A deduction is worth the marginal rate, not the amount itself.
- Legal-form arithmetic. Compare net-after-tax outcomes for sole trader versus BV, including both corporate tax and dividend tax.
- VAT is not a cost for a VAT-registered business; it is a pass-through.
Worked example
Profit before tax of 80,000. As a sole trader, assume taxable profit after deductions is 70,000; at a marginal rate of 37%, tax is 25,900. As a BV, corporate tax at 19% on the first 80,000 is 15,200, leaving 64,800; paying it all as dividend at 26.9% box 2 gives 17,431, total 32,631. The sole trader is better off here - but the answer flips with lower profits or retained earnings.
Rule of thumb
Always compute net-after-tax euros for each option, never compare pre-tax figures.