Findings published from study into Dutch lucrative interest scheme – carried interest / sweet equity

Background

The Lower House of Parliament adopted the Motion in April 2024, calling upon the Dutch Government to investigate the Dutch lucrative interest scheme and to amend this scheme in such a way that managers who are active in the private equity sector are taxed on their carried interest against the progressive personal income tax rate of Box 1 (49,5% in 2025). 

Currently, any income and capital gains from qualifying lucrative instruments are in principle already taxed as ordinary income in Box 1. However, the Dutch lucrative interest scheme now provides for the possibility to structure the lucrative interest in such a way that the income and capital gains derived from the (indirectly held) lucrative instruments are taxed under the substantial shareholding regime of Box 2 against a personal income tax rate of up to 31% (2025) (the "Box 2 Option"). For the Box 2 Option to apply, it is, among others, required that the lucrative interest is held indirectly via a substantial shareholding (i.e. an interest of at least 5% of the shares (or a class of the shares) in an entity holding the lucrative interest). 

The Motion essentially called upon the Dutch Government to abolish the Box 2 Option for carried interest arrangements of managers working in the private equity sector. In response to the Motion, the Ministry of Finance initiated a study into the current scheme. Its findings were published in the report ‘Research Lucrative Interest’ (Onderzoek Lucratiefbelangregeling) (the "Report") on 13 February 2025. Although the Motion specifically targeted the taxation of carried interest arrangements for managers working in the private equity sector, the Report acknowledges that lucrative interests come in many different shapes and sizes (e.g. also including management incentive schemes outside the private equity sector), and therefore assesses the Box 2 Option more broadly.

We refer to our earlier Tax Alerts of 20 April 2023 (regarding a Dutch Supreme Court ruling on lucrative interest) and of 21 September 2023 (on Budget Day 2023) for a more detailed explanation of the different requirements of the lucrative interest scheme. 

The Report in a nutshell

In this Tax Alert we focus on the chapters of the Report which discuss the potential consequences of abolishing the Box 2 Option (chapter 4) and in which the two alternative set-ups of the lucrative interest scheme are set out (chapter 5).

Consequences of abolishing the Box 2 Option 

The Report acknowledges that the current Dutch lucrative interest scheme, including the Box 2 Option, has certain important benefits. It has provided legal certainty for both taxpayers and the Dutch Tax Authorities, and has ended a large part of the extensive discussions that took place prior to its introduction between taxpayers and the Dutch Tax Authorities on the taxation of carried interest and management participation structures, for instance on the valuation of the instruments at acquisition and the wage tax aspects thereof. Abolishing the Box 2 Option would disrupt this well-functioning, collaboration-oriented administrative practice, potentially leading to significant operational consequences for the Dutch Tax Authorities (including increased discussions with taxpayers, potentially more disputes and a less beneficial information position of the Dutch Tax Authorities).

Furthermore, the Report acknowledges the importance of the Box 2 Option for the Dutch investment climate (vestigingsklimaat). The overall tax burden in the Box 2 Option is considered in line with the tax burden imposed on carried interest- and certain management participation arrangements by jurisdictions surrounding the Netherlands. According to the Report, private equity funds may factor in a heavier tax burden on carried interest or management participations when considering investments in Dutch entities if the Box 2 Option would be abolished. 

The Report also indicates that if the Box 2 Option would be abolished, it is currently uncertain whether the Netherlands would be able to impose Dutch personal income tax on income and capital gains from lucrative interests under the Box 1 regime under applicable double tax treaties. A legal procedure regarding the taxation of benefits from lucrative interest under the double tax treaty between the Netherlands and Germany is currently ongoing. Whether the goal of the Motion (i.e. taxing managers who are active in the private equity sector on their carried interest against the progressive tax rate of Box 1) would be met by abolishing the Box 2 Option is therefore uncertain in cross-border situations. 

In short, the Report advises not to change the Dutch lucrative interest scheme for all these reasons.

Alternatives for potential future amendments

Despite the above listed advantages of the current scheme, further investigation was conducted to determine whether an alternative set-up of the Dutch lucrative interest scheme would be possible and preferrable. The following two alternatives have been examined: 

• taxation of income and capital gains from lucrative interests in Box 1 through either income from employment or income from other activities (resultaat uit overige werkzaamheden) (i.e. the current 'main rule' and effectively an abolishment of the Box 2 Option); and

• taxation in Box 2 remains possible, but the income and capital gains from lucrative interests would be subject to a specific (higher) personal income tax rate. 

The first alternative would involve a fundamental overhaul of the current Dutch lucrative interest scheme and would require significant legislative and administrative capacity. The second alternative requires a less extensive adjustment to the current scheme and could be effectuated pursuant to an increase in the Box 2 personal income tax rate that specifically applies to taxpayers holding a lucrative interest through a substantial shareholding. The applicable personal income tax rate should fall between the highest rate currently applicable in Box 1 (49,5% in 2025) and Box 2 (31% in 2025). The Report indicates that a general increase of the personal income tax rate in Box 2 is not preferred. 

Concluding remarks and next steps

The Report advises not to change the current Dutch lucrative interest scheme in the short term. In any case, it advises not to do so before the introduction of the new regime for income from savings and investments (Box 3), to avoid misalignment between both regimes. The new regime for income from savings and investments is not expected to become effective prior to 2028. 

Nevertheless, the public consultation procedures during which industry experts can provide their input on the potential alternative set-ups of the Dutch lucrative interest scheme, are expected to be initiated in the spring of this year. The Under-Minister for Finance has indicated that he would like to further discuss the Dutch lucrative interest scheme with the members of the Lower House of Parliament after the public consultation procedures to discuss the outcome thereof.