Nil valuation of interest rate reduction for staff loans to be amended

Publication date 25 April 2014

The interest rate reduction that employers apply to staff loans granted for the purchase or refurbishment of the principal residence is currently untaxed. However, in response to parliamentary questions, the Minister of Finance, Mr. Dijsselbloem, let it be known that he intends to amend the untaxed interest rate reduction as of January 1, 2015. The administrative burden for employers will be considerable.

The reason why the benefit from this interest rate reduction is currently not taxed is that it does not, on balance, affect the tax payable. Taxing the interest rate reduction as salary would result in a corresponding personal income tax deduction if the interest was deducted as interest relating to the principal residence. The tax rate at which mortgage interest is deducted will be reduced annually by 0.5% as of 2014. As a result of this limitation, the interest for personal income tax purposes will, in most cases, no longer be deducted at the same rate at which the benefit is taxed for payroll tax purposes. Not taxing the interest rate reduction for payroll tax purposes will, on balance, affect the tax payable. The Minister considers this an undesirable consequence and the tax treatment of the interest rate reduction will therefore be amended in the Tax Plan 2015. Taxing the interest rate reduction as of 2015 will in no way alter that fact that the taxable benefit can be transferred to the fixed exemption of the work-related costs rules, which will apply to all withholding agents as of 2015.

Practical consequences

The administrative burden for employers will be considerable. Firstly, the amount of the (monthly) reduction will have to be determined for each employee. The employer will then also have to decide whether the reduction will become part of the salary each month or whether it will be fully or partly designated as a final levy component under the work-related costs rules. Employers that wish to continue providing the benefit untaxed to employees should realize that this may use up a substantial portion of the fixed exemption of the work-related costs rules and this may mean that, when combined with other reimbursements and provisions that have been designated as final levy components, the fixed exemption may be exceeded. In that case, the excess amount will be subject to an additional tax of 80%. If the entire benefit from the interest rate reduction, or a part thereof, is not designated as a final levy component and if the employee’s salary is less than EUR 51,414, the change will, nevertheless, increase the administrative burden for the employer. Employers must pay social security contributions and income-related contributions under the Health Insurance Act on salaries up to EUR 51,414.

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