The Dutch Carried Interest Scheme: Changes On The Horizon?

Background and Legislative Context
Currently, the Dutch carried interest scheme may be applicable if, in short, the investment may result in a return which is not available for regular investors. The investment generally includes some type of leverage mechanism which yields a disproportional return compared to the amount of the investment (for example certain "Ratchet" and "Strip" investments (commonly referred to as "Sweet Equity")). If an investment qualifies as a carried interest, a return from such investment is not taxed at the (usually lower) box 3 rate (investment income), but in box 1 (employment income, up to 49.5% in 2025), unless the taxpayer opts for a tax treatment in box 2 (substantial interest, up to 31%).   

The Dutch carried interest scheme has become a topic of significant public debate. Dutch Parliament passed a motion calling for the taxation of carried interest in the private equity sector at the progressive personal income tax rates of box 1, rather than the current box 2 rates. The motion also requested an investigation into whether this taxation could be enforced under international tax treaties.

Purpose of the Report
Following the motion, the Dutch Ministry of Finance initiated an investigation to understand the practical workings of the current carried interest scheme, particularly the application of the substantial interest variant in box 2 and its interaction with the partial foreign tax liability. The report also explores whether alternative forms of the scheme are feasible and desirable (spoiler-alert, this is not the case according to the Dutch Ministry of Finance, who are quite happy with the current scheme).

Historical and Current Implementation
Pre-2009 Situation
Before the introduction of the carried interest scheme in 2009, private equity managers often received high returns on their carried interest, which were sometimes taxed as capital gains in box 3 (at a relatively low rate) rather than as income from employment. This led to complicated disputes between taxpayers and the Dutch tax authorities regarding the appropriate tax treatment and applicable valuation.

Post-2009 Implementation
The current scheme allows for taxation in box 2 (which is usually higher than box 3, but lower than box 1) under certain conditions, providing clarity and reducing disputes. Managers can opt to have their carried interests taxed in box 2 by holding these interests through a personal holding company, subject to a distribution obligation to avoid tax postponement.  

Implications of Abolishing the Box 2 Variant
International and Treaty Aspects
The Report highlights that abolishing the box 2 variant could negatively impact the investment climate and create uncertainty regarding the enforcement of tax treaties (due to the difference in allocation of taxing rights between jurisdictions when it comes to employment versus investment income). The report highlights the importance of maintaining a balanced approach to taxation that aligns with international standards.

Legislative History
Previous attempts to abolish the box 2 variant in 2008 and again in 2024, were rejected due to concerns about the impact on the investment climate and the hybrid nature of carried interest (as carried interest investments contain both employment and investment elements). The box 2 treatment was deemed to be an appropriate balance between the box 1 and box 3 treatment. In addition, this approach was (and still is) in line with the tax regime in neighbouring jurisdiction (the Report also mentions the recent overhaul of the UK carried interest regime in this respect). Finally, the argument was raised that abolishment of the box 2 treatment could lead to a revival of the complicated pre-2009 disputes between taxpayers and the Dutch tax authorities. The Report underlines that these historic concerns are still relevant and applicable today. 

Alternative Approaches
Although the Report states a clear preference to maintain the current carried interest scheme, various alternative approaches are proposed to respond to the public debate. 

Box 1 Taxation
One proposed alternative is to tax carried interests entirely in box 1, either as wages (in case of employees) or income from miscellaneous activities (for contractors). This approach aligns with the motion but the Report warns that this would require significant legislative changes and could lead to increased disputes and administrative burdens. Therefore, this option cannot be implemented on short notice. 

Enhanced Box 2 Taxation
Another alternative is to retain the current box 2 treatment but apply a higher effective tax rate specifically for carried interests (somewhere between the box 2 and box 1 rate). This approach would be easier to implement and maintains the current administrative framework while increasing the tax burden on carried interests. This seems to be a more viable option from a legislative and implementation perspective. 

Conclusion and Recommendations from the Report
Conclusion
The current carried interest scheme provides clarity and stability, both for taxpayers and the tax authorities. Abrupt changes could disrupt this balance and create significant administrative challenges. Therefore, any modifications should be carefully considered and aligned with broader tax reforms (such as the upcoming box 3 reform).

Recommendations 
The Report pleads for the following:

• Maintain the current carried interest scheme: In the short term, it is advisable to retain the current carried interest scheme to avoid disrupting the well-functioning administrative practice.
• Consultation on Alternatives: Initiate a public consultation on the proposed alternatives to gather feedback from industry experts and stakeholders. OC, as a member of the tax committee of the Dutch private equity association (NVP), will be involved in the consultation process.
• Align with Box 3 Reforms: Any changes to the carried interest scheme should coincide with the introduction of the new box 3 system to ensure coherence and minimise administrative burdens. 

In respect of the last recommendation, note that the upcoming overhaul of the Dutch tax on savings and investments (box 3) is currently a hot topic in the Netherlands. Especially in private equity (where participants may receive a significant ROI), it is currently particularly favourable to structure non-carried interest investments in box 3 due to the notional return which form the basis for the current box 3 system. However, this notional system in box 3 has become legally untenable following rulings by the Dutch Supreme Court. Therefore, the draft bill "Actual Return Box 3 Act (Wet werkelijk rendement box 3)" has been announced. This new proposed box 3 system aims to tax the actual return, consisting of a direct return (such as interest and dividends) and indirect return (such as the increase in value of shares). The value increase of shares would, in principle, be taxed annually. However, for shares in start-ups, a capital gains tax would be applied (i.e. not taxed annually but at the end of the holding period, for example, upon sale of the shares). The draft bill is still in its early stages and would be implemented in 2028 at the earliest. However, due to significant objections in terms of complexity, implementation and technical abilities of the Dutch tax authorities, the future of this box 3 proposal is still uncertain. 

Final remarks
To summarise this article, if the alternative approaches from the Report or the new box 3 system would be implemented, this could spark the necessity to restructure current (employee) investments. 

For further information or specific advice on how these potential changes might impact your business, please contact Osborne Clarke. We are here to help you navigate the complexities of tax legislation and ensure compliance with the latest regulations.

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