The Dutch Cryptocurrency Tax System and its involvement in the International Taxation Regulatory system

Dutch Tax System and Benefits

The Netherlands offers one of the most favorable tax systems in Europe. In the 2022 International Tax Competitiveness Index, the Netherlands ranked 14th, indicating that its tax framework is reasonable, easy for businesses to comply with, and promotes economic development. The Dutch Tax and Customs Administration is responsible for implementing tax regulations, conducting inspections, and collecting taxes, as well as implementing various tax exemptions and schemes for both tax residents and non-residents.

Currently, the Netherlands has a dual-level taxation system consisting of central and local taxes. It adopts a composite tax structure with income tax and turnover tax as the "dual entities," with individual income tax, corporate income tax, value-added tax (VAT), and excise tax playing important roles in the tax system structure. Associated with other direct and indirect taxes, they constitute the Dutch tax system. Overall, the Netherlands implements a personal tax system, whereby resident taxpayers are obligated to pay taxes on their global income, while non-resident taxpayers are only taxed on income derived from the Netherlands. In principle, all companies established according to Dutch civil law are considered Dutch tax residents.

Types of taxes levied on income and profits: Mainly include personal income tax and corporate income tax. Personal income tax is levied on annual income of natural persons and is divided into wage tax and dividend tax. Corporate income tax is levied on corporate profits. In principle, all profits derived from business activities are subject to income tax, but all expenses, depreciation, losses, and other related business expenses can be deducted.

Types of taxes levied on goods and services: Mainly include value-added tax (VAT), excise tax, and customs duties. The standard VAT rate is generally 21%. Excise tax is levied on special products such as gasoline, other mineral fuels, tobacco products, and alcoholic beverages. Customs duties are determined uniformly by the European Union.

Types of taxes levied on property, specific purposes, and activities: Mainly include wealth tax, inheritance and gift tax, transaction tax, and motor vehicle tax. Wealth tax is levied on the net assets of individuals.

Main characteristics of the Dutch tax system:

1. The Netherlands' membership in the European Union ensures that it benefits from existing and future EU directives.

2. The Netherlands does not impose withholding tax on interest and royalties. It levies a withholding tax of 15% on dividends, which can be reduced through tax treaties.

3. Companies can negotiate in advance with tax authorities (advanced ruling) to determine the amount of tax payable and reach agreements on the tax amount and payment method for future years.

4. The calculation of taxable basis adheres to the principle of "good business practice." For example, unrealized losses can be offset, and unrealized profits can be deferred for taxation. Losses can be carried forward for 1 year and carried back for 9 years, but there are special restrictions on losses for companies mainly engaged in financial activities.

5. Compared to other EU countries such as the UK, France, Germany, and Belgium, the Dutch corporate income tax is relatively low. The Netherlands has a two-tier corporate income tax rate; since 2019, the tax rate is 19% for taxable profits up to 200,000 euros and 25.8% for taxable profits exceeding 200,000 euros.

6. The Netherlands has signed bilateral tax treaties with nearly 100 countries, allowing companies to avoid double taxation. Among them, the Netherlands has a tax treaty with China, and the withholding tax rates for dividends, interest, and royalties are 10%. The Netherlands also has a tax treaty with the Hong Kong Special Administrative Region of China, and the withholding tax rates for dividends, interest, and royalties are 0%. The tax treaties between the Netherlands and most countries offer favorable tax rates, with withholding tax rates for dividends, interest, and royalties mostly ranging from 0% to 5%. The extensive network of tax treaties in the Netherlands can help businesses reduce withholding taxes and avoid double taxation.

Dutch Cryptocurrency Tax System

In recent years, the use of cryptocurrencies in the Netherlands has experienced explosive growth. This European nation, although small in size, achieved a position among the top 40 countries worldwide in terms of cryptocurrency usage according to Chainalysis in 2022, solidifying its status as one of the leading countries in Europe in this regard. The Netherlands has established extensive legislation regarding cryptocurrency taxation. Unlike many other countries, the Netherlands does not tax cryptocurrencies using the typical capital gains or income methods.

The Dutch Tax and Customs Administration (Belastingdienst) does not directly tax cryptocurrency transactions but calculates taxes based on the assumed growth of the asset's value held on January 1st over the course of a year. Belastingdienst assumes that the investment value of taxpayers increases each year, meaning that even holding cryptocurrencies without selling them is subject to taxation.

For individual taxpayers in the Netherlands, taxable income is based on the total income within three different boxes, and profits or positive income in one box cannot be offset by losses in another box.

Box 1: Income from profit, employment, and home ownership

Box 2: Income from substantial interests

Box 3: Income from assets, savings, and investments

Belastingdienst categorizes cryptocurrencies as assets, usually classified under Box 3. Taxpayers are required to include the value of their held cryptocurrencies in their overall asset valuation as of January 1st. Belastingdienst determines a hypothetical return, referred to as a "virtual return," based on the value of the assets held, representing the assumed growth of the asset throughout the year. Certain activities related to cryptocurrencies may fall under Box 1, including receiving cryptocurrency salaries, operating mining businesses, receiving staking rewards, liquidity pool rewards, earning interest from DeFi activities, and gifting cryptocurrencies in the Netherlands. Airdrops, mining, and staking cryptocurrencies generally fall under Box 3 unless the Dutch taxpayer is a professional trader, in which case they fall under Box 1.

For taxed companies in the Netherlands, all income (investments, trading, staking, mining, and/or rewards) is included in the calculation of taxable profits. Tokens received through staking or mining by Dutch corporate taxpayers are subject to corporate income tax based on their market value at the time of receipt. Cryptocurrency lending is not considered a taxable disposal.

The Dutch tax year runs from January 1st to December 31st. Taxpayers can file their tax returns starting from March 1st, with the deadline being May 1st. Since cryptocurrencies are considered investments, taxpayers may convert their cryptocurrencies into fiat currencies at the end of the year to minimize tax obligations. However, it is important to note the high volatility of the cryptocurrency market, which carries the risk of missing out on upward trends in the market.

Dutch involvement in International Taxation Regulatory System

As a member of the European Union (EU) and the Organization for Economic Co-operation and Development (OECD), the Netherlands must comply with relevant international tax transparency regulations. In June 2021, the EU issued the Sixth Anti-Money Laundering Directive (AMLD6), which requires companies providing financial services to clients or other businesses to adhere to stricter regulations regarding customer identification. The directive also allows for the sharing of data between EU member states. Therefore, even if registered in another EU country, the Dutch Tax and Customs Administration can access the data. On October 10, 2022, the OECD released the Crypto Assets Reporting Framework (CARF), aimed at raising cryptocurrency tax and reporting standards. According to CARF, the Dutch Tax and Customs Administration is obligated to automatically share cryptocurrency tax-related information with international tax authorities.

On December 8, 2022, the European Commission proposed a revision to Directive on Administrative Cooperation in the Field of Taxation (DAC8), introducing new tax transparency rules for service providers facilitating cryptocurrency asset transactions for EU resident customers. The proposal aligns with the initiatives of CARF, amendments to the Common Reporting Standard (CRS), and complements the Markets in Crypto-assets Regulation (MiCA) and anti-money laundering rules. The main focus of DAC8 revolves around the reporting and automated sharing of information regarding income from cryptocurrency transactions, as well as pre-tax ruling details concerning high net worth individuals. The regulation necessitates the compulsory automatic exchange of information among tax authorities, with the responsibility falling on cryptocurrency asset service providers to provide this information. DAC8 also proposes the introduction of minimum penalty levels, with potential penalties of up to €500,000 for non-compliance with reporting requirements in each country. DAC8 represents a step towards stricter regulation of cryptocurrency ownership and transactions, increasing the availability of data on cryptocurrency owners to financial institutions in EU member states to address tax evasion or fraud. Once in effect, DAC8 may allow the Dutch Tax and Customs Administration to specifically search whether an individual holds cryptocurrency and access other information such as the amount held, transaction history, and withdrawal addresses.

On May 16, 2023, the European Council unanimously approved the "Regulation on Markets in Crypto-assets," making the EU the first major jurisdiction with a licensing system for cryptocurrencies. It aims to make cryptocurrency transactions more traceable to combat tax evasion and money laundering activities. Under the regulation, companies engaged in the issuance and trading of crypto-assets, tokenized assets, and stablecoins within the 27 EU member states must acquire the relevant licenses. In particular, stablecoin issuers are obligated to maintain adequate reserves. The regulation is expected to be implemented starting in 2024. From January 2026 onwards, the regulation requires service providers to identify the sender and recipient of cryptocurrency transactions, regardless of the transfer amount. As a regulation enacted by the EU Parliament, the "Regulation on Markets in Crypto-assets" will supersede existing cryptocurrency regulations in Europe. These rules will place the EU at the forefront of the cryptocurrency economy, enabling governments like the Netherlands to tax more effectively and keep up with evolving technology as Europe advances its digital transformation.