The Netherlands - Tax

On 13 February 2025, the Dutch government published the findings of a study on the lucrative interest regime (lucratief belang), which primarily affects managers of private equity funds and their portfolio companies through structures such as carried interest and sweet equity. The main conclusion is that there is no short-term necessity to modify the current regime. The report does, however, recommend the launch of an online (public) consultation to explore potential alternatives, allowing industry experts to provide input. Such public consultation was open for input between 5 March and 2 April 2025.

Certain types of management incentive plans, such as carried interest, may qualify as lucrative interest. A lucrative interest is generally granted with the intent to serve as remuneration for labour. If the investment meets the potential for disproportionately high returns, the criteria for lucrative interest may be satisfied.

The first requirement for a lucrative interest to exist is if shares, receivables or other property rights (either held directly or indirectly) are considered in whole or in part as remuneration for labour and/or knowledge.

The second requirement for a lucrative interest is that the shares must have such favourable conditions that there should be an excessive (lucrative) remuneration of the manager compared to the main investor(s). Based on the wording of the law, a share class is lucrative if there are multiple share classes and:

1. it concerns a subordinated class of shares and the nominal value of such subordinated shares is less than 10% of the total nominal value of all shares; or

2. it concerns preference shares and the annual preference interest rate is at least 15%.

To counter potential abuse of the abovementioned (formal) ratios of shares, a lucrative interest is also considered present if the total investment (i.e., nominal value + share premium) on the subordinated shares is less than 10% of the total investment on the shares and the company and considering shareholder loans .

As a general rule, income derived from a lucrative interest is taxed with Dutch personal income tax in Box 1 at progressive rates of up to 49.5%. However, under specific conditions, taxpayers may opt for taxation under Box 2, which applies a 31% rate (reduced to 24.5% on the first EUR 67,804 of income).

The Box 2 regime is only available if three cumulative conditions are met:

1. The lucrative interest is held through an intermediate holding company;

2. The taxpayer holds a substantial interest (generally 5% or more) in this intermediate company;

3. At least 95% of the net proceeds from the lucrative interest are distributed by the intermediate company to the individual within the same calendar year and declared as Box 2 income in the personal income tax return.

The report highlights the benefits of the current Dutch lucrative interest regime, including legal certainty for both taxpayers and the Dutch Tax Authorities. Since its introduction, disputes over valuation and wage tax aspects have significantly decreased. Abolishing the Box 2 option would disrupt this stability and increase the administrative burden on the Dutch Tax Authorities, potentially leading to more disputes and legal uncertainty. Additionally, the regime plays a crucial role in maintaining a competitive investment climate in the Netherlands and (significantly) changing it would likely disrupt the prosperous cooperation between the taxpayers and the Dutch Tax Authorities.

Despite the advantages of the current system, the study explores two possible alternatives:

1. Abolishing the Box 2 option entirely: Under this approach, all income from lucrative interests would be taxed in Box 1, either as wages or as income from other activities. This would require significant legislative and administrative efforts to implement.

2. Increasing the tax rate in Box 2: Income from lucrative interests would still be taxed in Box 2, but at a higher rate than the standard Box 2 rate. The applicable tax rate would be set between the highest Box 1 rate (49.5%) and the regular Box 2 rate (31%). This approach would be administratively straightforward to implement compared to completely abolishing Box 2 taxation for lucrative interests. However, its effects – absent of nuances – may reach far beyond the lucrative interest regime.

Under the public consultation, interested parties could provide their view on the current regime and provide suggestions for improvement. Specific input was also being requested on the two alternatives that the report proposes. The consultation closed on 2 April 2025.

For now, it is expected that the current lucrative interest regime should remain unchanged, because any future changes would need to be aligned with the new Box 3 taxation system, which is not expected before 2028. Following the consultation, the State Secretary will present the findings to the Dutch Parliament for further discussion.