When entering into a settlement agreement for personal injury claims in the Netherlands, a tax guarantee is usually provided. This guarantee ensures that the amounts paid to the victim are not taxed by the Dutch tax authorities.
Below is an example of a tax guarantee:
“TAX GUARANTEE
Why this guarantee? Based on legislation and jurisprudence, parties believe that the compensation and any previously provided advances are not subject to income tax and premium levies.
What is agreed? If, despite this, the inspector of direct taxes imposes assessments for income tax (IB) and/or premiums, the insurer will bear these costs, provided that the interested party adheres to what is stipulated below in a, b and c.
a. the interested party does not declare the compensation in the IB tax return as taxable income from work and home (box 1). However, they may inform the inspector separately, stating that, in the opinion of the insurer and the interested party, the compensation is tax-free and for that reason has not been declared as taxable income from work and home (box 1);
b. the interested party contacts the insurer as soon as possible, but in any case well within the response period specified by the inspector, as soon as the inspector inquires about the origin or composition of the disbursed amounts;
c. the interested party sends any assessment to the insurer as soon as possible, but in any case well within the response period specified by the inspector, and provides all cooperation in submitting an objection deemed necessary by the insurer or initiating appeal procedures.
All costs, interest, and penalties associated with these objection and/or appeal procedures shall be borne by the insurer;
This tax guarantee only applies to compensation for financial loss, including loss of earning capacity and pain and suffering. Therefore, the question of whether the compensation is taxable must be assessed according to the situation as it was at the time the compensation was paid and, at the latest, at the time this agreement was entered into;
This tax guarantee applies only to income tax in box 1 and only to tax under Dutch law. The guarantee therefore does not apply to tax that may be due on taxable income from savings and investments in box 3, even if the amount of compensation leads to taxable income in box 3.”
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Frequently asked questions
What is a tax guarantee?
When a settlement agreement is concluded, the insurer usually gives a tax guarantee: the assurance that the compensation paid out will not be taxed by the Tax Authority.
What happens if the Tax Authority does tax it after all?
Then the insurer bears that assessment, provided you comply with the conditions, including not declaring the compensation as taxable income in box 1.
Why is compensation in principle untaxed?
Because it is compensation for damage and not income from work or a home. The tax guarantee records that agreement in writing in case the tax authority sees it differently.