Navigating carried interest in Netherlands

Yes.

The Netherlands operates a specific “lucrative interest” regime for carried interest. Directly held lucrative interests are, in principle, subject to personal income tax in Box 1 at progressive rates of up to 49.5%.  Where the lucrative interest is held indirectly, Dutch tax law provides for an alternative Box 2 treatment at a rate of 31% in 2026, with a reduced rate of 24.5% applying to the first € 68.843. For this Box 2 treatment to apply and to secure effective taxation at 31%, the participant must hold, through a holding company or pooling vehicle, a qualifying interest of at least 5%, and that vehicle must itself hold at least 5% of the paid-in share capital of the relevant company so that the Dutch participation exemption applies.  In addition, at least 95% of the lucrative interest benefits must be distributed by the holding company in the year of receipt and taxed as Box 2 income at the level of the participant in that same fiscal year.

The lucrative interest regime applies where a participation is granted to compensate the participant for work performed. Its distinguishing feature is a leverage effect, meaning that, by reason of special terms, the holder may obtain a disproportionately high return as compared with ordinary investors.  Under the statutory criteria, this includes, in particular, a subordinated class of shares representing less than 10% of the total issued share capital and preference shares carrying a preference in excess of 15%. Economically comparable arrangements may also qualify under the statutory catch-all provision. With effect from 1 January 2024, shareholder loans contributing to a remuneration element are treated as a separate class of share capital.  Where a loan is treated as such, it is aggregated with the total issued share capital for the purpose of assessing the 10% threshold.

The lucrative interest regime applies to individuals who hold assets the returns on which serve, at least in part, as remuneration for their professional activities.  In practice, this principally concerns managers and executives of private equity funds and portfolio companies participating in management incentive arrangements and receiving carried interest in addition to their ordinary remuneration. The regime is not aimed at high earners as such, but rather at remuneration components subject to special conditions that are not available to ordinary investors. To prevent avoidance, the scope of the regime also extends to connected persons, including partners and relatives in the direct line. 

The regime is not limited to specific fund types but applies generally to structures in which a management participation is held and satisfies the conditions of the lucrative interest regime. In practice, it principally concerns private equity funds and venture capital structures. Other funds featuring comparable carried interest arrangements may also fall within its scope. By contrast, regular employee participation schemes, business successions and management buy-outs implemented on arm’s length terms should, in principle, fall outside the regime.  It should also be noted that, with effect from 1 January 2025, new Dutch tax classification rules may cause certain limited partnerships to become fiscally transparent, with the result that income is attributed directly to the partners rather than taxed at fund level.  This development may have implications for the structuring of carried interest arrangements.

Partially. Income from a lucrative interest is treated as income from miscellaneous activities, which is taxed by reference to rates equivalent to those applicable to employment income, but it is not treated as employment income as such. Accordingly, it is not subject to employee insurance contributions, such as unemployment insurance and disability insurance contributions. National insurance contributions, including contributions for old-age pension, survivors’ benefits and long-term care, are, however, due on such income up to the applicable maximum contribution income threshold.  Where the favourable Box 2 route is used, no social security contributions are payable, as the income is then treated as investment income rather than earned income.  Employer levies, such as the excessive severance payment levy, do not apply to lucrative interests.

Dutch legislation has adopted a 36/31 multiplier for Box 2 income derived from lucrative interests, which would result in an effective tax rate of approximately 36%. The entry into force of these provisions has, however, been postponed from 2026 to 2028.  From a double tax treaty perspective, the Dutch tax authorities take the view that the employment income article should apply. Dutch lower courts have, however, applied the dividend and capital gains articles instead. This issue remains subject to ongoing judicial consideration.