Lower House takes next step towards higher tax on benefits from lucrative interests
Many entrepreneurs use management participations to retain key employees. Depending on the design, such management participations can qualify as a lucrative interest. The tax treatment of such participations is under political pressure. The Lower House wants to increase the tax on benefits from lucrative interests.
In this article, we describe when the lucrative interest rule may come into play, what the consequences of qualifying as a lucrative interest are, and how the lucrative interest rule may change.
When do we speak of a lucrative interest?
In a management participation, managers regularly receive shares in the company for which they work. If they obtain this participation at an arm's length price, levying of payroll tax can be avoided. In order to keep the participation interesting and affordable, in many cases it is designed in such a way that the business contribution is relatively limited, but a relatively large share of the company's surplus profit is shared. This is called leverage. The potential returns that can be achieved from the management participations may then be disproportionate to the risks incurred by the managers in connection with the investment in the management participations.
This leverage is an important indicator of the presence of a lucrative interest. An equity interest qualifies as a lucrative interest if two conditions are met.
- Remuneration condition: the benefits from the shares are intended to be, in part, a reward for the manager's work.
- Leverage effect: with a small own contribution, a relatively high return can be achieved. This is the case when the management participations concern a subordinated type of shares that represent less than 10% of the total issued share capital (10% requirement).
There may also be a lucrative interest if shares or other capital rights are acquired that are economically similar or comparable to shares where such leverage is involved. Both the remuneration condition and the 10% requirement also apply to these economically comparable capital rights.
What are the consequences if there is a lucrative interest?
The benefits from a shareholding are normally taxed in box 2 (for an interest of >5%) or in box 3 (for an interest <5%) of the income tax. With a lucrative interest, however, the benefits are taxed in Box 1 at a tax rate as high as 49.5%. This is substantially higher than the box 2 rate of 31% or the box 3 rate of 36%. The idea behind this higher rate is that the benefit from a lucrative interest is also a reward for work performed and therefore should be taxed at the same tax rate as other labor income.
The law contains an option to exchange this high tax in box 1 for a lower tax in box 2. If the management participations are held through a company in which the manager owns more than 5% of the shares and at least 95% of the benefits received from the management participation are distributed by the company to private individuals in the same calendar year, then these benefits are taxed in box 2 instead of in box 1. In practice, this option is widely used and the design of the management participation is often specifically tailored to it.
Increase in tax burden on the way?
The possibility of exchanging the tax on the benefit from a lucrative interest in box 1 for a tax in box 2 has long been the subject of political debate. Consequently, in April 2024, a series of motions on "extra tax for the extremely rich" called on the government to ensure that private equity managers are always taxed at the progressive Box 1 rate for their benefits from lucrative interests. Although the motion is aimed at private equity managers, it will also affect management shareholdings in business that qualify as lucrative interests.
Although the motion was widely supported, it did not yet lead to new legislation. However, an investigation into the lucrative interest scheme did follow, which concluded that the scheme was functioning well and that adjusting the scheme could lead to a disruption of the well-run, cooperation-oriented implementation practice, with significant implementation consequences and unclear budgetary consequences.
This research did not discourage the initiators of the motion. On July 3, 2025, another motion was passed to still introduce a higher tax on benefits from lucrative interest as of January 1, 2026. While the box 2 fallback option may remain, the motion calls for the box 2 tax to be increased. This may involve increasing the current tax rate (maximum 31%) to a rate of 36%. However, it is not yet clear how the tightening will be designed and whether this tightening will actually reach the finish line.
In conclusion
The taxation of benefits from lucrative holdings is expected to become more onerous. The option, popular in practice, of exchanging the tax in box 1 for a tax in box 2 may become less favorable.
Do you have questions about this topic? Or do you want to know whether your participation scheme is at risk under the lucrative interest scheme? Please feel free to contact us.