Taxation of a lucrative interest

Certain types of management investment plans (including sweet equity and carried interest) may qualify as lucrative interest. A lucrative interest is considered granted with the intention to also form a remuneration for services rendered by that individual (e.g., employment or management services). To qualify as a lucrative interest, the interest should in general offer potentially a disproportional high return.

As a principal rule, proceeds derived from a lucrative interest are taxed in Box 1 (progressive income tax rates up to 49.5%). However, under certain conditions, it is possible to elect for taxation in Box 2 (31% rate, with a reduced rate of 24.5% for the first EUR 67,804 in income).

Needless to say, the Box 2 regime is more beneficial. However, three cumulative conditions must then be met: (a) the lucrative interest is held through an intermediate holding company; (b) the taxpayer holds a substantial interest (in short, 5% or more) in the intermediate company; and (c) at least 95% of the net lucrative interest proceeds are distributed by the intermediate company to the individual within the same calendar year. For the avoidance of doubt, it is noted that this regime only applies to the return on investment. Any underpayment of the ‘fair value’ upon grant may already be taxed as employment/services remuneration in kind (taxable in Box 1).

Findings of the report

The report appreciates the apparent benefits of the current rules, including a reasonable level of certainty for taxpayers and authorities, transparency for the tax authorities and a tax outcome that generally is aligned with what would be experienced in surrounding jurisdictions. The report also appreciates that any changes may negatively affect such benefits of the current regime.

Nevertheless, the report roughly considers two possible amendments to the lucrative interest regime:

  • The possibility to elect for Box 2 taxation is abolished and lucrative interests should be taxed in Box 1 as a wage (if the taxpayer is an employee) or income from miscellaneous activities (if the taxpayer is providing services in an independent capacity); or
  • The applicable tax rate in Box 2 for income derived from a lucrative interest should be increased (so, bringing Box 1 and Box 2 closer together).

The report concludes that it is not desirable to make any changes on short notice. Any changes should not be enacted prior to the new rules on the taxation of (net) wealth (Box 3). The new Box 3 regime is currently expected for 2028.

Public consultation

Under the public consultation, interested parties are now able to provide their view on the current regime and provide suggestions for improvement. Specific input is also being requested on the alternatives that the report proposes. Views can be submitted ultimately on 2 April 2025.

What’s next?

Loyens & Loeff’s Funds PE (investment management) practice represents a substantial number of clients who deal with lucrative interest taxation (including private equity and venture capital investors). In that capacity, we will be involved in the public consultation in cooperation with various industry bodies.

In case you have any questions or comments, please reach out.