Part I. Rulings — Internal Revenue Bulletin 2002-15

to a tax-free asset allowance of 17,600 EUR. Nonresidents are subject to tax on the income in this box from assets within the Netherlands minus related debt. Assets within the Netherlands include only immovable property, rights in immovable property, and rights in the profits of a company with a registered office within the Netherlands provided that the rights are not in the form of stock.

Under the new system, each form of income may be included in only one box. If there is a loss in one box, it may not offset positive income in the other two boxes. The loss may, however, be carried over and deducted against income in that box in a later year. In addition, if a taxpayer incurs a loss on the complete termination of his or her substantial interest that is subject to tax in Box 2, as much as 25% of that loss may be applied against the Box 1 tax.

Box 1 taxable income comprises approximately 95% of the total income tax base. Boxes 2 and 3 comprise approximately 1.5% and 3.5% respectively of the total income tax base.

Taxable income within the three boxes is reduced by personal deductions, such as medical expenses, educational expenses, donations, and alimony. Personal deductions are used to offset first income in Box 1, then income in Box 3, and finally income in Box 2. Any excess personal deductions may be carried forward.

After reduction by personal deductions, taxable income is subject to the following income tax rates in the three boxes as follows:

Box 1 Progressive rates of up to 52% Box 2 25% Box 3 30%

Various credits are allowed against the taxes of the three boxes combined. Some of these credits, such as the general tax credit, child credit, old-age credit, and the handicapped credit, are nonrefundable. Two additional credits, a wage credit and a credit for the dividend tax, also are allowed, and may, in some cases, lead to a refund.

United States — Kingdom of the Netherlands Income Tax Convention

This ruling confirms that the Netherlands investment yield tax is a tax for which a credit may be allowed under Article 25(4) of the U.S.-Netherlands income tax convention because, under Article 2(2), it is substantially similar to a prior Dutch tax that was a covered tax under the convention.

Rev. Rul. 2002–16

ISSUE

Whether the newly enacted Dutch tax on an individual’s imputed income from savings and investment in the Netherlands, Box 3 of the Netherlands Individual Income Tax Act of 2001, is a tax for which a credit may be allowed against U.S. income tax liability under the Convention Between the United States of America and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, effective December 31, 1993 (the “Treaty”).

FACTS

Prior to January 1, 2001, the Netherlands individual income tax ( de inkoms- tenbelasting ) was imposed on a single taxable income base, which comprised all the income that a taxpayer received in a year. Various deductions were allowed against this income. Additionally, a dividend and interest allowance could be used against income from savings and investments.

Effective January 1, 2001, the Netherlands introduced a schedular system of individual taxation that applies to both residents and nonresidents. Under the new system, instead of a single taxable income base there are three separate bases. These are referred to as “Boxes,” and are organized as follows:

Box 1 includes taxable income from work (including profits and losses from business and professions and sales of business property, wages, pensions, and income from partner

ships), dividends received by security dealers, and imputed income from an owner-occupied home. Expenses related to business profits are deductible. Nonresidents are subject to tax on the income in this box from Dutch sources, including imputed income from a home within the Netherlands.

Box 2 includes taxable income derived from a substantial business interest in corporations. Substantial is defined as a 5% or more interest. Two types of income are taxed: dividends and capital gain realized on selling assets that form a substantial holding. Acquisition (margin) interest is deductible. Nonresidents are subject to tax on the income in this box with regard to substantial interests in Dutch companies.

Box 3 includes taxable income from savings and investments. Taxable income is the fixed yield (imputed income) set at 4% of the value of the investment assets reduced by certain liabilities. Taxpayers cannot reduce their tax burden by proving that their actual rate of return on investments was in fact less than 4%. If income imputed from investment assets is subject to tax under Box 3, any actual interest, dividend, and rental income will not be taxed. The investment yield tax applies to assets such as real estate (other than the taxpayer’s personal residence), stocks and shares, savings deposits, and nonexempt endowment insurance. If income from an asset is subject to tax under Box 1 or 2, income will not be imputed with respect to that asset for purposes of Box 3. Also, income is not imputed with respect to assets without yield capacity (such as personal use property). Interest paid and other expenses relating to imputed income taxed under Box 3 are not deductible. However, debt that exceeds 2,500 EUR and that is not related to the assets included within Box 1 and Box 2 can be deducted from the tax base on which the imputed income of 4% is computed; in addition, all taxpayers are entitled

2002–15 I.R.B. 740 April 15, 2002

LAW AND ANALYSIS

Under Article 25(4) of the Treaty, a credit may be allowed against U.S. tax liability for the Box 3 tax if, under Article 2(2), the Box 3 tax is a substantially similar tax imposed in place of a tax that was in force at the time the Treaty was signed. Under the general rule of Article 25(4) of the Treaty, Methods of Elimination of Double Taxation, the United States treats as an income tax, for which a credit may be allowed under Article 25, the appropriate amount of income tax paid or accrued to the Netherlands by or on behalf of a resident or national of the United States. For purposes of Article 25(4), the taxes referred to in paragraphs 1(a) and 2 of Article 2, Taxes Covered, are considered income taxes.