Currently involved in a PE deal in the Netherlands? Read this.
Management Incentive Plans are in flux. We are seeing a striking diversity of structures and approaches in the market as a result. Drawing on in-depth conversations with several leading Dutch PE sponsors, as well as insights gathered at the KPMG Private Equity Summit, we have distilled the most important developments shaping MIPs in the current deal environment. Here is our perspective - and what it means for your next transaction.
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The Dutch MIP landscape is diversifying
The near-universal standard of three years ago - pref/ords, sweet equity (lucrative interest) with taxation in Box 2, envy ratio of two to two-and-a-half times - has given way to a much richer toolkit. SARs, performance-related fees, ratchets and hybrid structures, either instead of the ‘old school’ sweet equity or in addition to sweet equity, are increasingly common. Stronger positions of management, longer holding periods and upcoming changes to the Dutch tax system require sophisticated sponsors to tailor structures to the specific dynamics of each transaction rather to apply a single template.
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SARs are not as tax-inefficient as they appear
The corporate income tax (CIT) deductibility of SAR payments can significantly close the gap with sweet equity returns for management. Sponsors who understand this dynamic - and address it proactively in the plan design - are able to offer a genuinely competitive package without the administrative complexity of an equity participation structure.
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The timing of CIT deductibility is a strategic lever
In certain structures, future SAR or ratchet liabilities can be recognised on the balance sheet during the holding period, generating a CIT benefit before exit. Sponsors who plan for this early avoid difficult allocation discussions in the sale process - and retain greater control over the economics.
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Tax rulings are no longer universal
Some sponsors continue to seek advance tax rulings for Box 2 structures as standard practice. Others, having built sufficient experience, have concluded they feel comfortable enough implementing the structure without this advance certainty from the tax authorities. The right approach depends on structure, timing and relationship with the tax authorities, and the decision is increasingly one that experienced sponsors are taking deliberately and confidently.
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Leaver provisions reward careful design
The financial consequences of leaver scenarios vary considerably across the market. Sponsors who invest time in designing a leaver framework that is clear, commercially defensible and consistently applied find that it protects both the cohesion of the management team during the holding period and the sponsor's reputation in the market over the long term.
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MIP design belongs at the beginning of the process, not the end
The decisions made at the front end - on structure, instrument choice, tax treatment and leaver mechanics - compound throughout the holding period and crystallise at exit. The sponsors who get the most out of their MIPs are those who treat this as a strategic exercise from day one.
The full picture
Why now? Three forces converging in 2026
The shift in focus is not coincidental. Three forces are simultaneously reshaping how sponsors and management teams think about incentive plans, and creating both complexity and opportunity for those who navigate them well.
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Market dynamics
Longer holding periods and a higher cost of capital mean that financial engineering alone no longer generates consistent returns. Where cheap leverage and multiple expansion once provided a forgiving backdrop for imprecise MIP design, the current environment rewards sponsors who invest in alignment from the outset. A well-designed MIP is no longer merely a deal requirement - it is a driver of value throughout the holding period.
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A shifting tax landscape
The anticipated tightening of the Dutch lucrative interest regime (as from 2028 at the earliest), combined with ongoing uncertainty around Box 3 following the transition to taxation on actual returns, creates a genuine planning opportunity for sponsors willing to engage with it now. Regular equity investments (investments with no or very limited envy) by management structured as a Box 3 investment (combined with SARs) were widely considered ‘trending’ approximately three years ago. With the shift to actual-return taxation, and higher tax rates in Box 2, alternative, tailor-made structures, combining equity and non-equity incentives, attract more interest - and sponsors who act ahead of the 2028 deadline will be better placed than those who do not. The window for optimisation is open, but it will not remain so indefinitely.
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A market in search of a new standard
A few years ago, almost every Dutch PE transaction followed the same basic blueprint. That uniformity has given way to a markedly more varied landscape. Sweet equity, SARs, ratchets, performance-related bonuses and hybrid approaches now coexist. One observation we heard consistently from PE sponsors in our preparatory conversations was precisely this: there is a clear view of what each firm does internally, but limited visibility on what peers are doing. That desire for benchmarking - and for an honest, peer-level discussion on what is genuinely working in the current environment - was a significant driver of demand for the session.
Corporate structuring: a more diverse toolkit
The traditional equity participation structure - pref/ords with a STAK and ManCo layer - remains the foundation of many Dutch PE transactions and continues to serve sponsors well in the right circumstances. At the same time, the market is seeing increasing experimentation driven by specific transaction dynamics, and sponsors are finding that flexibility in their approach translates into a genuine competitive advantage when attracting and retaining management talent.
The clearest example is buy-and-build. Where a platform sees frequent joiners and leavers, or where the valuation of the business changes regularly, establishing a new envy ratio at each entry point becomes commercially and operationally complex. Some sponsors have responded by moving to a SAR-based structure for (second-tier) management - a bonus arrangement triggered at exit, usually without any requirement for the manager to invest. The logic is sound: when the participation amount for a second-tier manager is modest, a cash-settled instrument can achieve the same alignment objective with significantly less administration. For those managers, the SAR can in practice be a more effective retention tool than a nominal equity stake.
An alternative approach gaining traction in buy-and-build contexts is 100% ordinary shares held in Box 3 (regular equity investment; no sweet equity), combined with a performance-related fee (PRF), a structured bonus with a vesting period, linked to value growth, that is deductible for CIT purposes at the level of the operating company. That tax deductibility may create a benefit at exit that thoughtful sponsors are able to incorporate into the overall economics of the plan.
Ratchet structures remain relevant - particularly where management holds a strong negotiating position, for instance where a team has independently agreed the terms of a sale and is free to select its preferred PE partner. In those circumstances, a ratchet provides a commercially elegant mechanism for sharing meaningful upside without diluting the primary return structure.
Tax qualification of the investment: design determines outcome
Tax treatment is not a function of how an instrument is labelled. It follows the underlying economics of the arrangement. The four principal tax positions under Dutch law as they apply in 2026 are as follows.
- Box 1 - Lucrative investment (sweet equity): Leveraged shares, hurdle shares, ratchets and performance shares may fall within the lucrative interest regime - similarly attracting rates of up to 49.5% - unless structured so as to qualify for Box 2 treatment, in which case the maximum rate is 31%.
- Box 2 - Substantial interest (indirect lucrative investment): Leveraged shares that qualify as a lucrative investment for Dutch tax purposes may be structured in such a way that any income and capital gains derived from the lucrative investment are taxed in Box 2, with a maximum rate of 31% (with the first EUR 68,843 taxed at 24.5%) instead of progressive rates of up to 49.5%. This requires, amongst others, that (i) the lucrative investment is held through a ManCo (i.e., indirectly), (ii) each manager holds a so-called substantial interest in the ManCo and (iii) ManCo distributes at least 95% of the income derived from the lucrative investment to management in the year of realisation.
- Box 3 - Privately held minority shareholding: Regular equity investments of less than 5%, outside a lucrative investment (sweet equity) context, are taxed annually on a deemed return of 6% at a rate of 36%.
The practical takeaway is clear: sponsors who engage carefully with the tax architecture of the MIP - rather than applying a standard template - are able to offer management a materially better after-tax outcome at no additional cost to the fund. The difference between Box 1 and Box 2 tax treatment, on a meaningful management investment, is significant. That difference is a function of design, not label.
The SAR question: understanding the full economics
The liveliest part of our technical discussion - both in our preparatory sessions and in the room on the day - concerned the true net tax position of SARs relative to equity participation.
At first glance, SARs appear to be at a tax disadvantage. SAR proceeds are taxed as employment income at rates of up to 49.5%, compared with a maximum Box 2 rate of 31% (in 2026) for a properly structured sweet equity investment. However, a carefully designed SAR plan reduces the CIT payable by the operating company generating taxable profits, because the cash bonus payment is typically deductible. A sponsor who incorporates this CIT benefit into the plan design - whether by uplifting the gross bonus or by building the deductibility into the economic model - is able to offer management a net outcome that approaches, and in some cases matches, the net return on a classic sweet equity investment.
This is one of the clearest examples of how expertise in MIP design creates value: sponsors who understand the full economics of the SAR - including the CIT dimension – are in a stronger position in the management negotiation, because they can offer a compelling package whilst maintaining control over the structure.
A further dimension arose from deal experience: it is possible, in certain circumstances, to recognise the anticipated future SAR or ratchet payments as a liability on the balance sheet during the holding period, generating part of the CIT benefit before rather than at exit. Sponsors who plan for this avoid having to negotiate the allocation of that tax benefit during the sale process - a potentially contentious discussion in a compressed timeline. The legal principle governing the timing of recognition under Dutch tax law (goed koopmansgebruik, or sound business practice) requires careful analysis. Securing the cooperation of the buyer post-closing - and protecting that cooperation by appropriate indemnities in the sale and purchase agreement - is a structuring point that rewards early attention.
Advance tax rulings: a deliberate strategic choice
The question of whether to seek an advance tax ruling from the Dutch tax authorities is increasingly one that experienced sponsors are addressing as a deliberate strategic decision rather than a matter of default practice.
Some sponsors continue to seek rulings as a matter of course for Box 2 structures - and report that rulings are rarely refused, provided the structure is not aggressive. That approach provides certainty and is entirely appropriate for sponsors who value it. Box 2 implementations are typically deferred pending receipt of the tax ruling, though managers are committed to investing (provide their committed funding) at closing.
Others - typically those who have built a track record with a particular structure - have concluded that the structures are sufficiently mainstream, and the likelihood of acceptance sufficiently high, that implementation without a tax ruling is a reasonable and commercially pragmatic position. The outcome is increasingly dependent on the particular inspector assigned to the matter, and building a productive relationship at that level is a genuine differentiator.
A clear understanding of where the relevant envy ratio threshold sits for a ruling-compliant Box 2 structure - generally an exit envy factor of two between the management and sponsor return profiles - remains important context. Box 1 and Box 3 structures are not typically the subject of ruling requests. The absence of wage taxes and social security contributions at the time of the investment and, in the event of SARs, the deductibility of the SAR payments for CIT purposes are generally covered by the tax ruling request.
Leaver provisions: the reputational and commercial case for getting them right
Leaver frameworks in the Dutch PE market are relatively standardised at the definitional level. The three-category structure - Good Leaver, Intermediate Leaver and Bad Leaver - is widely recognised, and the circumstances giving rise to each classification do not diverge materially between sponsors.
The divergence - and the opportunity - lies in the financial consequences and the overall package design. Bad Leaver pricing ranges from the lower of subscription price and fair market value with a further discount of up to 50%, to nominal value only. The range is considerable. Sponsors who invest in calibrating these provisions thoughtfully - ensuring that the framework is commercially robust, clearly documented and consistently applied - tend to find that this investment pays dividends in two ways: it protects the cohesion and motivation of the management team during the holding period, and it supports the sponsor's reputation in a market where management teams increasingly take advice and compare terms.
The method of valuation is an area of increasing focus. The use of an independent expert to determine fair market value in leaver scenarios - rather than a sponsor-determined formula - is seen by management teams as a mark of good faith and is becoming more common as market expectations evolve. Sponsors who stay ahead of this trend protect themselves from difficult conversations at a sensitive moment.
One practical lesson from experience: a leaver framework that is too generous - or absent altogether - can create unintended consequences during the holding period. Where managers who remain see departing colleagues receive full or near-full value with no holding-period discount, the incentive effect of the MIP for the remaining team is materially diminished. A well-constructed leaver framework serves the interests of the management team as a whole, not just the departing individual.
A final structural point of importance: when bonus instruments - including ratchets and SARs - are paid out by the shareholder rather than by the operating company, the payments are unlikely to be deductible for CIT purposes. Sponsors who intend to achieve tax deductibility should establish the obligations of the different parties and the payment mechanism correctly at the point of structuring. This is straightforward to address at the design stage; it is significantly more difficult - and sometimes impossible - to remedy after the fact.
How we can help
NautaDutilh's Private Equity and Tax teams advise sponsors on the full lifecycle of management incentive plans - from initial design and structuring through negotiation, implementation, ruling processes and exit - combining corporate law and tax expertise within a single, integrated team. We work with sponsors across the market and bring that breadth of experience to every mandate.
If you have questions about any of the topics covered in this article, or would like to discuss how current market developments affect your existing or planned MIP arrangements, please reach out.
