InsightsDecember 7, 2020
What is interest on tax?
When you run a business, you know that you’ll eventually need to pay income tax over your profit. But not every entrepreneur knows that in some cases you can also be charged with interest on tax. What exactly is interest on tax and why does the Dutch Tax and Customs Administration charge this?
What is interest on tax?
Interest on tax is a fee that you pay to the Dutch Tax and Customs Administration over your debt (the tax owed). You actually owe the tax to the tax administration as soon as the tax year (or period) ends. But because it’s not possible to submit a tax return immediately, the interest on tax is not charged from 1 January, but an interest-free period is used. How long this period is depends on the type of tax.
In 2020, your profit was €50,000. You need to pay €9,000 in income tax over this profit and you actually owe it to the tax administration from January 1, 2021. However, at that moment it’s not yet possible to file an income tax return. This is only possible from March. Therefore, the Dutch Tax and Customs Administration promises you that if you submit your tax return before 1 May 2021, you won’t be charged with any interest on tax. If you submit the tax return after 1 May 2021, they will charge interest on tax.
Why does interest on tax exist?
Wikipedia puts it this way: “Interest is a compensation that’s received for lending money”. The function of interest is threefold: it’s a compensation for availability, it stimulates a swift repayment and it compensates inflation. In this case, the tax you have to pay is considered a debt since you have access to a certain amount of money and the Dutch Tax and Customs Administration does not. By charging interest on tax, the tax authorities receive a compensation for this, while making sure that the payment won’t be done too late: the interest can rise sharply.
When do you need to pay interest on tax?
Exactly when the Dutch Tax and Customs Administration will charge interest on tax depends on the tax method. As mentioned, you owe the tax after the end of the tax year or period. The moment at which the tax meter starts to run can vary.
- In the case of income tax, ZVW (Healthcare Insurance Premium) and corporate tax, you’ll be charged interest on tax from the 1st of July of the year after the one to which the return relates. If you submit your return before 1 May (or 1 June for VPB / corporate income tax), no tax on interest will be charged.
- In the case of turnover and wage tax, the tax on interest is charged immediately on the 1st of January following the related financial year. If you make the correct adjustment or correction before 1 April, you avoid the interest on tax.
You’ll also be charged with interest on tax if you’ve filed a tax return but haven’t paid.
How to avoid interest on tax?
As we explained, you don’t pay tax on interest if you submit your return before a certain date. However, this might not always be possible. Another way to avoid paying interest on tax is by requesting a provisional assessment. This means that you pay taxes in advance throughout the year, based on an estimate of your profit (and other forms of income). You can choose to pay the full amount all at once at the beginning of the year (you’ll receive a discount if you do) or monthly. The amount you’ve paid through your provisional assessment will eventually be set off against the actual amount in income tax payable. Depending on how accurate your estimate was, this will leave a small amount to settle and the interest on tax on this amount will therefore be negligible.
Do keep in mind that when you request a provisional assessment, you’ll also receive one in the following year. In general, you will automatically receive a provisional assessment from the Dutch Tax and Customs Administration after working as an entrepreneur for 3 years. For this, your profit is estimated based on an old tax return. It’s always possible to change a provisional assessment if the amount that’s been imposed is either too high or too low.
If you apply for a retroactive provisional assessment at the end of the year, you always need to pay the total amount at once and you won’t be able to pay in instalments.
Is interest on tax deductible?
In some cases, interest on tax can be treated as a deductible business cost. This is the case with business taxes such as turnover tax (VAT), payroll taxes and corporation tax. The interest on tax charged on income tax and ZVW (Healthcare Insurance Premium) payable is not deductible. That’s because private income is taxed, even if (part of) the income comes from your own business.
Is it also possible to receive interest on tax?
In the case of an income tax return, the Dutch Tax and Customs Administration has 13 weeks to impose an assessment. If this takes longer without them having to make changes, the interest on tax will be reimbursed. In the case of the turnover tax return and wage tax, the tax authorities have 8 weeks to arrange the refund. It this takes longer, they will have to reimburse.
Interest on tax and Covid
One of the measures that the government has taken to support entrepreneurs during the Covid crisis is to set the rate of interest on tax to (almost) 0%. Because many entrepreneurs ran into direct payment problems, there was a possibility to defer tax. Normally, this would mean that interest on tax is charged, but this was prevented by lowering the interest on tax to 0.01%. Since 1 October 2020, the interest is charged at 4% again.