Real estate investment in The Netherlands – Dutch income tax

Amsterdam is a wonderful place to visit, real estate value keeps rising and the market for short term rentals, including Airbnb, is booming.

Clients often ask us whether they should invest privately or through a limited liability company (for instance, an American LLC or a Dutch BV). Well, here are some things to consider:

If you are a foreign resident individual owning real estate in The Netherlands, you have so-called ‘box 3 capital’. This capital is taxed. You have to pay 30% tax over a fixed fictional 4% profit. So, an apartment worth EUR 500,000 would entail a EUR 6,000 income tax assessment. Rental income is included in the fixed 4%, as is profit made when the real estate is sold (realized capital gain). If the real estate is financed with, say, a EUR 400,000 debt, this is deductible from your taxable capital. In that case, the yearly income tax would only be EUR (500,000 – 400,000) * 0.3 * 0.04 = 1200. Which is in fact less than a week’s rental income. So if you own an apartment in Amsterdam and you rent it out for just one week a year, you can cover the income tax. Just make sure you stay sufficiently ‘passive’ – remain an investor, do not become an entrepreneur. Also, bear in mind that costs are not deductible: you will have to pay the maintenance guy out of your own pocket.

If you invest through a legal entity, taxation would be a bit different. The investment will be treated as an enterprise. The big upside of this is that renovation and refurbishment costs are deductible. No fixed fictional profit applies. If you have EUR 10,000 rental income per year, and EUR 2,000 costs, EUR 8,000 profit remains, which is taxed at a 20% corporate income tax rate (EUR 1,600). If your investment is financed with debt, interest is due. These costs are deductible as well. The lender could be you, privately, as long as the contract terms are legally real. If the company sells the real estate with a profit – as is to be expected in The Netherlands in 2016 – this profit will be taxed 20%, or 25% if it surpasses EUR 200,000. If it is sold at a loss, this could compensate the previous or the next nine year’s profit and might entitle you to a tax refund.

Profit distribution and consequences for dividend withholding tax and VAT will be discussed in another blog. Interested in more detailed information about the tax consequences of real estate investment in The Netherlands? Get in touch with one of our specialists.