Posted on 18/09/2017 by Joep Bakker

Pro-rata mortgage interest deduction in EU work states

Based on current tax law you can deduct mortgage interest as a non-resident in the Netherlands if 90% or more of your income is taxable in the Netherlands. If 90% or more of your income is earned in the Netherlands, you may be considered a qualifying non-resident taxpayer which means you are eligible for certain deductions such as the mortgage interest deduction. Due to preliminary questions asked by the Dutch Tax Appeal Court, the European Court of Justice (ECJ) answered these questions and decided that the work state has to grant pro-rata deduction if a non-resident has no income of meaning in the home state.

In the court case at hand a Dutch entrepreneur living in Spain owned two companies of which one was located in the Netherlands and the other was located in Switzerland. He received 60% of his income from his Dutch BV. The other 40% was attributable to the Swiss company. In his Dutch income tax return he had taken 60% of his Spanish mortgage interest into account as a deduction. He was denied that deduction by the Dutch tax authorities due to the fact that he did not meet the 90% requirement. According to the Dutch Tax Appeal court it was not clear how to explain EU legislation in this specific situation. Because of the unclarity preliminary questions were asked to the ECJ.

The ECJ decided that EU residents are entitled to a pro-rata deduction if these deductions are associated with personal and family circumstances and these deductions cannot be claimed in the home state due to the fact that there is virtually no source of income in that (fiscal) home state. The percentage of the mortgage interest that is deductible in the Netherlands is equal to the percentage of income that is attributable to the Netherlands, in this case 60%. According to the ECJ it does not matter if a part of the world wide income is earned in a so called third state (non-EU/EER), in this case Switzerland.