Income is divided into three taxable classes or 'boxes', with bond investments falling under "Box 3", taxed at a flat rate of 32%, expected to rise to 36% in 2024.
Dutch investment taxation relies on fictitious yield rates, treating bonds similarly to higher-yield assets, making bank deposits more tax-efficient for residents.
The Netherlands lacks tax credits for government, municipal, or green bonds, only offering incentives for green investments.
In the Netherlands, an individual's income is categorized into three distinct taxable classes, each taxed under its unique schedule, commonly known as a 'box'. Specifically, income from savings and investments is allocated to Box 3 and is subject to a flat tax rate of 32%, which is slated to increase to 36% in 2024.
A notable aspect of Dutch investment taxation is its reliance on fictitious yield rates for tax calculation, as determined by the tax authorities, instead of actual investment returns. Investments within Box 3 are further subdivided into two groups: bank deposits and other investments, which encompass bonds, stocks, cryptocurrencies, and investment real estate. For 2024, it is assumed that bank deposits will yield a return of 1.03%, whereas other assets are expected to yield 6.04%.
This approach raises questions, especially regarding bonds. Bonds, typically known for their lower yields and volatility, are not differentiated from higher-yield assets like stocks and cryptocurrencies in the Dutch tax code. Consequently, investing in bank deposits is more tax-efficient for Dutch residents compared to bonds.
Consider an individual with a bank deposit and a government bond, both maturing in one year, with respective yields of 2.75% and 3.5%.
The tax on the deposit would be 0.37% (1.03% * 36%), while the tax on the bond would be 2.17% (6.04% * 36%).
As a result, the after-tax return in 2024 would be 2.38% for the bank deposit and 1.33% for the government bond. This scenario highlights the disproportionate tax treatment between these two assets, making bonds less attractive despite their higher nominal yield.
For a bond investment to be more appealing, it needs a gross yield that is at least 1.80% higher than that of a bank deposit. At current interest rates, this implies a bond yield of at least 4.6% in Euro terms, which significantly narrows the pool of viable bond opportunities.
Contrary to common international tax practices, the Netherlands does not offer tax credits for investments in government, municipal, or green bonds. While there are tax incentives for green investments, bonds do not qualify for these benefits.
Given the unfavorable tax treatment of bonds, Bondfish offers guidance in navigating this complex landscape. Here are some strategies to maximize returns from bond investments:
1. Invest within the tax-free threshold: If your assets don't exceed €57,000 (or €114,000 with your tax partner), consider investing in high-quality government and corporate bonds. This portion is tax-exempt in Box 3, allowing for a higher net return than deposits. Note that the tax-free amount indicated is for 2023 and would change in 2024, which is likely to be higher.
2. Switch to short-term bonds after the start of the year: Start the year with cash and move to short-term bonds with maturities of less than 1 year later. This strategy avoids the higher tax rate at the beginning of the year because taxes are based on financial assets held on January 1.
3. Seek high-yield bonds: Bonds must yield at least 1.8% more than bank deposits to be more profitable as was indicated earlier. Use our tools to find suitable bonds, but be mindful of their credit quality.
4. Speculative trades on longer-tenor bonds: Invest in longer-term bonds anticipating interest rate cuts by the European Central Bank. For example, a Dutch government bond with a 10-year maturity yielding 2.6% now could, if its yield falls by 1% within a year, potentially offer over 10% return mainly due to price appreciation.
Always consult with your tax advisor for personalized advice.
At Bondfish, we're dedicated to helping you navigate the complex world of bond investments, maximizing returns while managing risks. Contact us to explore tailored investment strategies.