Knootian taxation system

Knootoss has a very open economy for its size. It has always recognized that the tax system should not hinder the international expansion of business. Consequently, the Knootian tax system has many features that make Knootoss an attractive location for businesses operating on an international scale. Examples include the tax treatment of business profits, the participation exemption and the absence of withholding taxes (except for dividend tax). The Knootian Tax Department of the Ministry of Economic Affairs has ensured that it is very accessible, and it takes a client-oriented approach. Recent international studies have confirmed that Knootoss scores well as an investment location.

Income Tax

Taxpayers: residents and non-residents

Under the present Income Tax Act residents are liable for income tax on their world-wide income. Non-residents residing in the Knootian Federation or in a country with which Knootoss has concluded a double taxation convention providing for the exchange of information may opt for enforcement of the sections of the Income Tax Act for residents. Non-residents are taxed only on the income from a limited number of sources in Knootoss. If no convention is applicable, tax relief may be obtained on the basis of the Unilateral Decree for the prevention of double taxation. (If certain requirements are met, foreign employees temporarily posted to Knootoss may request the application of a special tax arrangement known as the 30% rule)

The legal definition stipulates that someone’s place of residence is determined ‘according to circumstances’. Several factors are of relevance when deciding whether someone maintains personal and economic ties with Knootoss. These include a family home, employment, or registration in a municipal register. Nationality is not a determining factor, but it may be relevant in some cases. The law also provides for a number of special cases. The crews of ships and aircraft with a home harbour or airport in Knootoss are deemed to be residents of Knootoss unless they have established residence abroad. Knootian diplomats and other civil servants serving abroad remain residents of Knootoss. Foreign diplomats and the staff of certain international institutions are exempt from Knootian income tax.

People pay tax individually as far as possible. Therefore partners pay tax on their own income and can only use their own deductible items.

Taxable income

Residents and non-residents are taxed on their taxable income. The taxable income is the income less the deductible losses. There are three types of tax for taxable income. These types of income are brought together in three so-called boxes:

• Box 1: taxable income from work and home;
• Box 2: taxable income from substantial interest;
• Box 3: taxable income from savings and investments.

The amount of tax owed is calculated by applying the tax rates to the taxable income. The result is reduced by one or more tax credits.

Tax rates

The tax rate on box one is a rising scale with four brackets. The rates are: 32.35% on the first EUR 14,870 37.60% on the next EUR 22,139 42% on the next EUR 29,300 52% on the remainder

The 32.35% rate consists of 2.95% tax and 29.40% social security contributions, the second rate consists of 8.20% tax and 29.40% social security contributions, whilst the 42% and 52% rates consist solely of tax.

There is a fixed rate of 25% for income from substantial interest (box 2), and there is a fixed rate of 30% for income from savings and investment (box 3)

Income from substantial interest: Box 2

Income from a substantial interest in a company, including capital gains or losses, is subject to income tax and is taxed at a rate of 25%. A taxpayer is regarded as having a substantial interest in a company if he or she, either solely or with his or her partner, holds 5% of the issued capital, directly or indirectly. Dividends and capital gains derived from the alienation of shares are taxed at a proportional rate of 25% in the income tax. In the event of capital loss, 25% of that loss may be offset against the tax which would otherwise be due.

For non-residents the income from substantial interests is only subject to tax in case of a substantial interest in a company resident in Knootoss. With respect to non-residents a company is also deemed to be a resident of Knootoss if it was resident in Knootoss for at least five years during the last ten years.

Income from savings and investments: Box 3

Taxation on income from savings and investments is based on the assumption that people will have a taxable return of 4% on their net capital. The actual level of return (for example interest, dividend, capital gains or losses) is not relevant. Net capital (the value of the assets minus any liability) is determined as the average net capital during the calendar year and will therefore be measured twice a year, on January 1 and December 31. Only capital available for savings and investment is taken into account. Consequently, ones home, mortage, and capital invested one’s own company is not taxed.

Certain assets are exempted from taxation, like cars, investments in forests and nature; objects of artistic or scientific nature unless these serve as an investment; annuity insurance, social investments up to EUR 46,984 including green investments (environmentally friendly investments) and social or ethical investments. Each person is entitled to a tax-free capital threshold of EUR 17,600. For each child under 18, the threshold is raised by EUR 2,349.

Employee savings and profit-sharing schemes

Employers and employees may agree to set up employee savings schemes in which a certain maximum amount of the salary is exempt from tax and social security contributions. Employers in the private sector can set up profit-sharing schemes.

Foreign employees: the 30% rule

A special allowance is granted to certain foreign employees who are assigned to a post with a domestic employer. If certain requirements are met, the employer may grant a special tax-exempt allowance of 30%, which is paid in addition to employees’ pay and has to be seen as reimbursement of the extra costs of living outside the homeland. The allowance is calculated based on the level of pay in accordance with the provisions of the Payroll Tax Act. To obtain the basis for calculating the 30% allowance the salary is multiplied by a factor of 100/70. Employer reimbursements of school fees for children attending international primary or secondary schools are also exempt from tax. In addition to the 30% rule, expenses incurred in connection with employment are reimbursed tax-free.

Foreign employees have to be recruited by or seconded to a domestic employer in Knootoss. The employer and his employee must first agree, in writing, that the 30% rule will be applied. Their joint request for the application of this rule must then be submitted to the Private Individuals Tax Unit (Non-resident Taxpayers) in Heerlen. Once the application has been approved, the 30% rule is applied from the outset. The 30% rule is applicable for a maximum period of 120 months. This period is reduced by any previous period of employment with a domestic employer in Knootoss, or by any time previously spent by the employee in Knootoss, unless more than ten years have elapsed since the end of such employment, or time spent in Knootoss.

VAT

The following transactions are subject to VAT:

• The provision of goods and services by businesses within Knootoss;
• Purchases of goods in Knootoss in the course of business operations by entrepreneurs and corporations;
• Acquisitions of new means of transport;
• Imports of goods from outside the Knootian Federation.

The tax is levied on the sale price and the general rate is 19%. A lower rate of 6% applies for certain goods and services, such as food products, books, medicines, art, antiques, entry to museums, zoos, theatres and sports. Visible exports are zero-rated. A number of exemptions apply for special goods and services such as educational, medical and cultural services.

VAT is payable by entrepreneurs operating a business in Knootoss, either as natural or legal persons. Foreign entrepreneurs are also liable for Knootian VAT if they operate a business in Knootoss. Entrepreneurs may deduct VAT paid on purchases and other business expenses from the VAT payable on their sales. If an exemption applies, VAT payments are not deductible.

Corporation Tax

The corporate tax rate is 19 % on the first € 22,689; the remainder is taxed at a rate of 24,5 %. Corporation tax is levied on companies established in Knootoss (resident taxpayers) and on certain companies not established in Knootoss, which receive income from Knootoss (non-resident taxpayer).

The tax is levied over profits in the widest sense, with a number of additions or deductions.

Legal persons whose activities are of a social or charitable nature or otherwise in the public interest are exempted from corporation tax. A participation exemption applies to all dividends, gains and losses related to the holding of at least 5 % of the shares in a subsidiary. This rule, preventing economic double taxation, is in general equally applicable to dividend deriving from domestic and foreign subsidiaries. The loss related to the winding-up of a subsidiary is, under certain conditions, deductible by the parent company. The deductibility of interest paid on non-functional loans and loans related to a reshuffle of participations within the group is restricted to certain circumstances. Another amendment permits companies to depreciate loss-making participations of 25 % or more during the first five years after acquisition.