Negative income from residence for non-residents in the Netherlands
On february 9th 2017 the European court judged the Dutch tax legislation regarding the deduction of negative income arising from a dwelling owned by non-residents to be contrary to European laws.
Non-residents and deductable expenses
Non-residents who derive income from Dutch sources, such as income from work in the Netherlands, are taxable in the Netherlands. Based on Dutch tax legislation, non-resident individuals are, in principle, not entitled to the same deductable expenses as resident indivuals. According to past jurisprudence of the European Court this difference in treatment between residents and non-residents is permitted, unless the European Member state in which the non-resident is resided can not take his personal situation into account. For example, if a resident indivual of Germany derives all his income from the Netherlands, he can not deduct his expenses in Germany due to a lack of income in Germany. In such cases, the European Court ruled that the German non-resident can deduct certain expenses (such as negative income from redisence) from his Dutch income in the Netherlands. The explanation of the aforementioned jurisprudence was that a non-resident with income from Dutch sources could only deduct the expenses, in cases where 90% or more of their income was earned in the Netherlands. This “90%-criterium” was turned into Dutch legislation from 1 january 2015.
Judgment of the European Court
The case of the European Court concerned a Spanish resident individual who derived 60% of his income from the Netherlands and 40% of his income from Switzerland. He did not receive any income from Spanish sources. The question is whether or not this individual is entitled to deduct the expenses from his residency in Spain from his Dutch income. Based on the Dutch legislation this is not the case, since the Spanish individual earned less than 90% of his income from Dutch sources. The European Court decided however, contrary to most expectations, that the Spanish individual is entitled to deduct 60% of the negative income from the Spanish dwelling from the Dutch income.
Consequences for the Netherlands
The aforementioned judgment leads to the conclusion that the Dutch legislation regarding the deductable expences for non-residents is too narrow. It is likely that the legislation will be adjusted accordingly in the near future.