Taxation of excessive remunerations for top executives in The Netherlands

21 October 2008

In May 2008, the Dutch Ministery of Finance presented a bill relating to the taxation of excessive remuneration payments for top executives which also focuses on the taxation of "lucrative stakes".

In essence the bill, which was approved by the Lower House, includes three concrete measures regarding excessive qualifying severance payment plans and pension plans and carried-interest payments.

1. Severance payments

For employees earning over EUR 500,000, an employer’s tax, in the form of a deemed final levy of 30%, will be imposed on the portion of a severance payment that exceeds one year’s salary. The employee will be normally taxed on the severance payment (i.e. wage tax levy at the progressive rates up to 52%).

2. Pension entitlements

For employees earning over EUR 500,000, in situations where pension entitlements are still being accrued based on a final salary plan, an employer’s tax, in the form of a deemed final levy of 15%, will be imposed on a fixed back service premium.

3. Carried interest structures

According to the bill, carried interest structures will be taxed differently in the future. Carried interest structures are considered "lucrative stakes" - which are disproportionate related to the amount of capital invested - and include shares, receivables, and rights (broadly put) with certain conditions as employment remuneration that could potentially yield returns. The full return will be taxed as income from other employment (box 1) at the progressive rates (up to 52%).

The Severance payment and carried interest payment measures are expected to enter into force per 1 January 2009. The pension measure will apply as of 1 January 2010.