The Dutch tax system is based three types of income. The first is income from labour, the second is income from owning a company, the third is income from wealth. A lot has been written on the Dutch wealth tax, but how bad is it really?
Wealth Tax Problems
A lot has been written by fellow personal finance bloggers about the Dutch wealth tax. It would make The Netherlands impossible to live in if you’re aiming for financial independence and early retirement.
I don’t think this is actually the case. In this post I will show you exactly how our wealth tax system works and then compare it to taxes on capital gains and income.
How the Wealth Tax Works
Officially, this system doesn’t tax your wealth. However, it assumes you make a certain return on your wealth every year, and then taxes that return.
If the system wasn’t made complex it wouldn’t be a Dutch tax system. I will try to dumb it down for you guys. In short, your total wealth excluding your primary residence counts towards this tax. You must add all financial assets such as bank accounts, investments, and such, but for example not cars. From these assets, you may deduct liabilities such as personal loans (but not your primary mortgage).
Then there are four tiers on which the wealth tax is calculated. Note that these numbers are the 2019 numbers.
|Tier||Upper Limit||Theoretical Return||Tax as % of Wealth|
|0||30,360||-||- (first ˜30K is free of tax)|
Note that couples filing jointly can benefit from this by doubling the thresholds.
Also note that the tax percentages are the taxes within the tier. Bumping 1 euro over a tier doesn’t mean your entire wealth it taxed according to the new percentage.
Let’s have a look at how a few scenarios would play out, and how much taxes you actually pay within this system.
Person A has 50k in a savings account yielding 0.3% per year. His taxable wealth is 50,000 – 30,360 or 19,640. He pays 0.58% of this, or 114 euros. His returns are a measly 150 euros. Person A really should start investing…
Person B also has 50k, but invested 40k of that in a low cost index fund. On average, he makes 6% per year (savings and investments combined). His returns are 3,000 euros of which he pays 114 euros in taxes. Now that’s more like it! He pays only 3.8% of his investment returns in wealth tax.
Couple C, have a total wealth of 150k invested in stocks yielding 7%. As a couple owning 150k, you are still in the first tier. They can deduct 60,720 from their wealth and pay 0.58% over the remaining 89,280. Their return is 10,500 and their total tax bill is 518 euros or 4.9%.
Couple D is almost retired early, they are FIRE people and have saved up a cool 700k. It is invested across stocks, bonds, real estate and crowdfunding. They earn on average 5% since they invest less aggressively. Their returns are 35,000 per year. The tax bill is 0.58% of their wealth between 60,640 and 204,020 and 1.34% of the remaining 500k. The total taxes are 7,477 euros or 21.4% of their returns.
Person E is single, has a very high income, and has 2 million euros spread across cash, stocks, and real estate. He makes an average of 4% on his money because he’s not that efficient in investing it. His returns are a cool 80k per year and his taxes amount to 29,180 or 36.4% of his returns.
Capital Gains Tax vs Wealth Tax
Now when we compare the wealth tax with the capital gains tax system there are some differences.
In years where the stock markets are performing well, you pay more taxes each year in either system. In years with a flat or declining stock market you pay no capital gains tax, however you keep paying the wealth tax.
Depending on the tax system, the capital gains tax might be more efficient. Because if you only pay the capital gains tax upon selling your investments, like you would in the USA, then you can postpone paying taxes for decades! In that case the Dutch wealth tax is definitely not a great system.
But if you were to pay capital gains every year on your actual investment returns, I’d say either system is fine.
I’d also like to note that we do have dividend taxes in The Netherlands, however we can deduct those from the wealth tax we have to pay. So there’s no double taxation there.
Income Tax vs Wealth Tax
If we compare income taxes against wealth taxes we see that our wealth tax is way cheaper. Depending on your income, we could tax you as much as 52% of it.
As you see, even a single person making 80,000 per year from his inefficient investments would only pay around 29,000 in taxes. If the same person would earn a gross 80k salary, he would end up paying slightly over 31,000 in taxes.
If the person would be more efficient in his investments, and make 6% instead of 4% he would earn 120k on his portfolio, still paying only 29k in taxes. A 120k salary in The Netherlands would incur a tax bill of 52k euros.
The Dutch wealth tax really isn’t that bad after all. Yes, it could be better, but it surely is possible to FIRE in The Netherlands.
Effectively, we don’t pay a dividend tax since we can deduct it from the wealth tax, and if you would earn this much money in gross salary then you will end up giving way more to the government.
I’m all about generating a large investment portfolio spitting out large returns. Although I am concerned about our government’s ability to tax anything they like, it’s not impossible to FIRE in The Netherlands. Our wealth tax system is just a little different than what other countries do.