Deduction for tax paid elsewhere in the context of the Box 3 tax relief scheme

State Secretary van Rij has a decision published, which sets out three rulings concerning domestic taxpayers with foreign assets and liabilities.

For whom.

To whom do the approvals set out in the decision apply? This concerns:

• natural persons residing in the Netherlands;
• involving property situated abroad;
• or rights that relate directly or indirectly to the area in which the property is situated;
• or rights to a share in the profits of a company whose management is based abroad (insofar as these do not arise from the holding of securities or from employment);
• who, under a tax treaty or unilateral arrangement, are entitled to relief from double taxation (deduction for tax paid elsewhere).

Furthermore, it is required that the application of the Box 3 Redress Decree to these taxpayers results in a reduction in the benefit derived from savings and investments. As regards the content and consequences of the Box 3 Legal Remedy Decree (also known as the ‘Christmas ruling’), please refer to our previous article Decision on the restoration of tax rights under Box 3.

Deviations from the system and approvals

In order to ensure that the method for calculating the ‘taxed elsewhere’ deduction is consistent with the treaties and the unilateral scheme, the State Secretary has approved the use of a calculation method for the avoidance of double taxation that differs from that set out in the Box 3 Legal Remedies Decree.

The following three approvals are concerned.

• When multiplying the fraction used to prevent double taxation, the calculation is based on the tax due after application of the Box 3 Redress Decree.
• The term ‘flat-rate return’ refers (to the numerator in the fraction) to the return on foreign assets, less the return on foreign liabilities.
• The denominator (in the fraction) is defined as: the taxable income from savings and investments after application of the Box 3 Redress Decree.

To clarify the above, an example of the old and new calculation methods is provided below.

Examples

As a general rule, property situated abroad is deemed to be subject to taxation in that foreign country. Under tax treaties or a unilateral arrangement, the Netherlands grants a reduction. Below is an example of a taxpayer without a tax partner who, in 2021, has €500,000 in bank balances in the Netherlands, property situated in the Netherlands with a value of €900,000 and property situated abroad with a value of €300,000. The taxpayer has no debts.

1. Calculation using the old method

The rate of return is: €68,330 / €1,700,000 = 4.02%.

The flat-rate income for the purposes of legal redress is therefore: 4.02% * €1,650,000 = €66,330.

The tax on the flat-rate income (31%) amounts to €20,562.

The double taxation relief was previously calculated by the Tax and Customs Administration as follows:

€ 300.000 / € 1.650.000 * € 20.562 = € 3.738.

2. The new calculation method results in the following

The flat-rate return on the overseas property is: 5.69% * €300,000 = € 17.070.
The ‘taxed elsewhere’ deduction is calculated as follows: €17,070 / €66,330 * €20,562 = € 5.292. This is therefore €1,554 higher than under the old calculation method.

Action required?

It is not necessary to submit an application to make use of the new approval. Taxpayers who are eligible for the approval will be notified by the Tax and Customs Administration inspector.