The tax credit under Dutch tax treaties

In general, Dutch tax treaties provide for a limited right to tax outbound interest, royalties and dividends (withholding taxes) by the source state.

For the withholding tax rates applicable under Dutch tax treaties we refer to the interest, royalties and dividend section of the Online Dutch tax treaty database.     

Depending on the applicable tax treaty, also certain other sources of foreign income may be eligible for a tax credit. 

To the extent an applicable treaty allocates the right to levy a withholding tax to the source state the tax treaty also prescribes that in most cases the Netherlands (resident state) must provide for a tax credit for the foreign withholding tax paid/ withheld.   

This tax credit is generally calculated as the lower amount of either the withholding tax actually paid in the source state and the Dutch income tax calculated on that foreign income (limited tax credit).

Certain Dutch tax treaties provide for a tax credit for a higher amount than the withholding tax actually paid, generally referred to as tax sparing credits. Although strongly reduced over the last couple of years, certain Dutch tax treaties with 'developing countries' still contain such tax sparing credit provisions.   

A technical formula is provided for calculating the exact amount of the tax credit.

The amount of the tax credit can be deducted from the Dutch income tax due over the (grossed up) worldwide income of the Dutch resident taxpayer and must be claimed and reported in the annual Dutch personal income tax return.