How to avoid the hidden cost of interest on your Dutch income tax

Broadstreet has been advising professionals, entrepreneurs and expats on reaching their personal and financial goals for over 25 years. In this article, they explain how tax works on your worldwide assets.

It is interesting to note that there are some surprising hidden costs in Dutch taxes that are not always apparent. For example, did you know that the Dutch tax authorities charge interest on unpaid tax? This extra charge applies from July 1 of the following financial year.

Here we take a look at what you need to be aware of and what you can do to avoid paying more than necessary.

Simple vs complicated taxes

When you have been in employment for the full year and you do not own a house for which you can deduct mortgage interest payments, filing your tax return is fairly straightforward and will, in most cases, result in a tax assessment of zero euros.

However, for those who run their own business, earn freelance income or receive an advance tax rebate for mortgage interest payments, the result of their tax return may be a payable or refundable amount.

Interest charges on unpaid tax

The tax authorities charge interest on income tax assessments from previous years. This, as such, sounds logical, as you should have paid already, or the tax office received too little, meaning the government receives it late. Therefore they should be compensated.

However, the way interest is calculated, and the interest percentage charged, make less sense. Interest earnt on unpaid tax is now considered part of the government’s total revenue rather than as an interest compensation for late payment.

If you think you owe taxes for previous years then it is important to read the following information carefully as you may need to cover some additional interest charges.

An interest rate of four percent

The Dutch tax authorities charge four percent interest on unpaid tax. That is “a bit” higher than any bank will give you on your savings account.

With such a comparably high interest rate it therefore makes no sense (in most cases) to defer paying your tax. In fact, to avoid this additional expense your expected income tax due should be settled as soon as possible.

No interest compensation for over-payments

In contrast to amounts owed to the tax authorities, if you are owed an income tax refund for previous years then there is no interest compensation. The only exceptions are if the tax authorities were negligent or too slow in handling your income tax return or your request for a preliminary assessment.

This means that there is no interest compensation unless the tax authorities have taken more than 13 weeks to handle your request, even if the request is concerning an assessment from a few years ago.

The interest meter starts running on July 1st after the calendar year

Even If you pay any taxes as soon as you receive your assessment, you will still need to pay interest on the period following July 1 after the relevant tax year - roughly six weeks after your assessment date.

The only way to avoid paying interest is to file your income taxes before April 1, or to request a preliminary assessment before May 1 of the following year.

The above rule can lead to very illogical interest charges: for example, in one case a mistake was made by the taxpayer when filing a return in December of the following year, quickly followed by an amended return (in February) when the mistake was discovered.

Since the tax inspector had already prepared a preliminary refund by the time the amended return was sent in, interest was charged on a full year, even though the cash was held in the taxpayer’s account for only a short period.

Higher interest if you have a B.V.

Be aware that if you run a business through a B.V. - even if it’s small - the interest charge for corporate income tax assessments goes up to eight percent! So make sure you file your request for a preliminary assessment for corporate income tax on time!

Keep track of your taxes, keep your taxes on track!

So for those who have not yet filed their tax returns for previous years, and expect that they will need to pay additional income tax, it is important to take action sooner rather than later, as interest can add up substantially.
 

Looking for guidance on how to file your taxes in the Netherlands? Contact Patricia van der Hut, a partner at Broadstreet, providing specialist tax and accountancy services to expats.

Previously under the name Finsens, the tax, accountancy and payroll divisions were renamed Broadstreet in 2016.