Netherlands — Taxation of Carried Interest

Overview

The Netherlands has specific tax rules for carried interest and similar management incentive arrangements. These rules are commonly referred to as the lucrative interest regime (lucratief belang).

A carried interest that qualifies as a lucrative interest may, as a starting point, be taxed in Box 1 as income from other activities. However, where the carried interest is held indirectly through a qualifying holding or pooling vehicle, it may be possible to apply the substantial interest route (aanmerkelijkbelangvariant). Under this route, the return is taxed in Box 2, provided the relevant conditions are satisfied.

The distinction is significant. In 2026, the highest Box 1 rate is 49.5%. Box 2 income is taxed at 24.5% up to €68,843 and 31% above that amount.

What is a lucrative interest?

The Dutch lucrative interest rules are intended to capture investment returns that are closely connected with an individual's work and provide the individual with the opportunity to earn a return that is disproportionate to the capital invested or risk assumed.

The Dutch Tax Administration describes the regime as applying where an exceptional return is available in connection with employment or other work, the expected return is higher than normal relative to the investment or risk, and ordinary investors would not have access to the same economic opportunity. The rules can apply to certain shares, receivables and other economic rights.

Carried interest arrangements can therefore fall within the lucrative interest regime even though the participant legally owns an investment instrument.

Grant of carried interest

Where carried interest is granted to an employee or director in connection with their employment, the initial acquisition can itself have tax consequences.

If the market value of the carried interest at the time of grant exceeds the consideration paid by the participant, the difference may constitute an employment benefit.

This makes the valuation of carried interest at acquisition important. A participant acquiring carry for its appropriate market value may be in a different position from a participant receiving a valuable carry entitlement for no or inadequate consideration.

The subsequent taxation of the return on that interest must then be considered separately.

Vesting

The subsequent vesting of carried interest does not generally create a separate Dutch income-tax event.

This should be distinguished from:

• the acquisition or grant of the carried interest;
• distributions or other returns generated by the carried interest; and
• disposal of the interest.

The precise tax treatment will depend on the legal and economic characteristics of the arrangement.

Receipt of carried interest

Where carried interest constitutes a lucrative interest, the default regime can result in the return being taxed in Box 1 as income from other activities.

For an individual below state-pension age, the highest Box 1 rate in 2026 is 49.5%.

An important alternative is available where the carried interest is held indirectly through a company in which the participant has a substantial interest.

This is commonly referred to as the substantial interest route or aanmerkelijkbelangvariant.

The substantial interest route

A typical structure can be represented as follows:

Fund / Carry Partnership
          │
          │ Carried interest
          ▼
   Carry Pooling Vehicle
          │
          │ Distribution
          ▼
     Carry Holder

Instead of holding the carried interest directly, the individual owns an interest in a company or pooling vehicle which in turn holds the underlying carried-interest rights.

For Dutch tax purposes, an individual generally has a substantial interest where the individual, alone or together with their fiscal partner, directly or indirectly owns at least 5% of the shares in a company. The 5% test can also apply separately to a particular class of shares and can apply to interests in foreign companies.

Where the company holds a lucrative interest and the participant satisfies the substantial-interest requirements, the Box 1 treatment can effectively give way to Box 2 treatment if an additional important condition is satisfied.

The 95% distribution requirement

At least 95% of the relevant return from the indirectly held lucrative interest must be distributed to the participant in the same calendar year for the substantial-interest route to apply.

The Dutch Tax Administration describes this as a situation where a company in which the individual has a substantial interest holds the relevant assets and distributes at least 95% of the return during the calendar year. The individual may then report the return as income from a substantial interest rather than income from other activities.

This requirement is important because the pooling vehicle cannot simply be used to accumulate the majority of carried-interest proceeds indefinitely while retaining Box 2 treatment.

Example

Suppose a Dutch carry holder owns a qualifying substantial interest in a carry pooling vehicle.

The vehicle receives:

€1,000,000 of carried-interest proceeds.

Assume for simplicity that the proceeds are not subject to corporate income tax in the pooling vehicle.

If the necessary amount of that return is distributed to the participant during the same calendar year and the other requirements are satisfied, the participant may be able to use the substantial-interest route.

Instead of the return being taxed under the default lucrative-interest treatment in Box 1, the distribution is taxed through Box 2.

For 2026:

First €68,843: 24.5%

Excess above €68,843: 31%

The Dutch Tax Administration confirms these 2026 Box 2 rates.

For substantial carry amounts, most of the distribution will therefore currently fall within the 31% band.

Taxation within the pooling vehicle

The participant-level taxation should not be confused with taxation at the level of the pooling vehicle.

The underlying nature of the income remains relevant to the corporate tax treatment of the vehicle.

For example, qualifying income and capital gains from an equity participation may potentially benefit from the Dutch corporate participation exemption (deelnemingsvrijstelling).

Interest income generally does not benefit from the participation exemption. Consequently, where carry economics are received by the pooling vehicle in the form of interest, corporate income tax may arise before the remaining profit can be distributed to the individual participant.

It is therefore useful to analyse a carry structure at two separate levels:

Vehicle level: How is the underlying carried-interest return taxed when received by the pooling vehicle?

Participant level: Does the individual qualify for the substantial-interest route, allowing the indirectly held lucrative interest to be taxed through Box 2 rather than Box 1?

A structure that achieves Box 2 treatment for the individual is not necessarily free from taxation at vehicle level.

Different forms of underlying return

One useful feature of the substantial-interest route is that the underlying economics of the carried interest may arise from different sources.

A fund's carry return might ultimately be generated by:

• capital gains;
• dividends;
• interest;
• partnership allocations; or
• combinations of different types of return.

The taxation of these amounts at pooling-vehicle level may differ. Once distributed to the participant through a qualifying substantial interest, however, the participant-level analysis focuses on the Box 2 regime.

This is one reason why the legal architecture of a Dutch carry arrangement can be as important as the waterfall economics themselves.

Phantom carry

Phantom carry differs fundamentally from an actual carried-interest investment.

Instead of owning an interest in the fund, carry partnership or pooling vehicle, the participant has a contractual entitlement to receive a payment calculated by reference to the fund's performance or carried-interest outcome.

A conditional grant of phantom carry does not generally create an immediate employment-tax liability.

When the phantom carry is ultimately paid, however, the payment will generally be treated as employment remuneration or a bonus, rather than an investment return.

The payment can therefore be subject to Dutch employment/income taxation at rates of up to 49.5% under the 2026 rates.

This can create a substantial tax difference between properly structured equity-based carry and a cash-settled phantom arrangement.

Changes from 2028

An important change is scheduled for indirectly held lucrative interests using the substantial-interest route.

The Dutch government proposed a multiplier for benefits from indirectly held lucrative interests taxed through Box 2. The measure increases the Box 2 taxable base so that the effective taxation of these returns moves closer to the Box 3 rate.

Using the rates on which the measure was based, the government described the effect as:

The government documentation explicitly states that the measure applies only to taxpayers with an indirectly held lucrative interest who use the substantial-interest route.

Accordingly, this should not be described simply as an increase in the general Box 2 tax rate. It is a specific adjustment to the taxation of indirectly held lucrative interests.

Practical considerations

Dutch carried-interest taxation depends heavily on the legal form through which the participant receives the economics.

Three arrangements that produce economically similar rewards can therefore have substantially different tax consequences:

Direct carried interest

Potential application of the lucrative-interest rules and Box 1 taxation.

Indirect carried interest through a qualifying pooling vehicle

Potential access to the substantial-interest route and Box 2 taxation, subject in particular to the 5% substantial-interest and 95% distribution requirements.

Phantom carry

Generally treated as employment or bonus remuneration when paid.

For fund managers designing a Dutch carry arrangement, the analysis should therefore consider not only the waterfall itself, but also the instrument used, acquisition value, ownership percentage, pooling structure, corporate-level taxation, timing of distributions and the 95% distribution requirement.