Expert Group opinion: allocation of joint income elements to a partial foreign taxpayer

The Tax and Customs Administration has published a surprising opinion concerning the allocation of joint income elements between partners in income tax  where one qualifies as a "partial foreign taxpayer". 

A partial foreign taxpayer is a resident of the Netherlands with a valid expat scheme who has opted to be designated as a foreign taxpayer for the levy of tax in Boxes 2 and 3. This option had long been available to employees that had been granted the expat scheme, but it was announced in the Tax Plan 2024 that this option would lapse from 2025. Transition arrangements were put in place but only for those who had already been using the expat scheme before December 2023, so they can still opt for a partial foreign tax liability in 2025 and 2026. Making it all the more surprising that now - in the final quarter of 2025 - an Expert Group opinion has been issued which deviates from standard practice. 

The Expert Group opinion was published further to the following case:

A came to the Netherlands to live and to work here and has used the expat scheme (30% facility). Partner B and their underage child C have also come to the Netherlands. On 1 January 2024 their joint property included income from a substantial interest in a foreign business of €100,000 and a bank balance of €800,000. In addition to which on 1 January 2024 C had a bank balance of €100,000.

When filing his income tax return for 2024 A opted for the application of a partial foreign tax liability under Section 2.6 of the Income Tax Act 2001 (hereafter: IB 2001) in conjunction with Article 11 of the Income Tax (Implementation) Decree 2001 (hereafter: UBIB 2001) as these stood until 31 December 2024. Under these provisions people with a partial foreign tax liability are taxed in Boxes 2 and 3 in accordance with the rules on foreign tax liability as set out in Chapter 7 of IB 2001. The joint income from a substantial interest and the joint savings and investments base are allocated in full to A in the tax returns of A and B.

Question

How should the allocation to the taxpayer with a partial foreign tax liability be carried out for:

• The joint base for savings and investment
• A joint income element, and
• The capital yield base of the underage child,

where these consist partly of assets or income elements that are not included in the tax base of a foreign taxpayer?

The tax authorities then state that this allocation should take place in two steps:

1. Individual determination: First, the savings and investment base and the income elements are determined individually for both partners, in accordance with the tax rules that apply to the individual taxpayer.
2. Allocation: Then the joint savings and investment base and the joint income elements are calculated and allocated in full to the taxpayer with the partial foreign tax liability. 

According to the Tax and Customs Administration this allocation does not result in a lower taxable income than if it had been allocated to a partner who is a domestic taxpayer.  This also applies to the capital yield base of the underage child which is allocated to the parents on the basis of parental authority.

EY does not agree with this new Expert Group opinion. In line with the tax literature on this subject, we believe that the joint savings and investment base should first be allocated between tax partners before the tax is calculated for the individuals. Fiscal partners are free to determine the allocation between themselves (provided that they are both resident for the whole year or emigrated or immigrated at the same time during the calendar year). In our view, the tax due is only calculated after this allocation has been made, whereby the rules for foreign taxpayers are applied to the entire assets allocated to the individual with a partial foreign tax liability. Depending on the nature of the assets, this may well result in a lower taxable income than if the partner is a domestic taxpayer.