Salary split


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EXAMPLES SALARY SPLIT SITUATIONS The general situation as described above is just one in which a salary split is created; this may also arise in the following situations (among others):

  1. The employee is formally employed with an employer in his/her home country, but also physically works in the host country while maintaining an economic employment relationship* with a company in the host country.
  2. The employee works more than 183 days per calendar year/12-month period in the host country without having an employer in the host country.
  3. The employee is employed by an employer located in a country other than the employee’s home country while working in this country and others.
  4. The employee works for the permanent establishment (branch) of his/her employer in the host country.
  5. The situation under 1 typically occurs within international groups and in secondment situations where employees employed by one group company perform activities for group companies in other countries.

*An economic employment relationship exists if the employee works under the direction of the employer and the employer bears the cost, risk and responsibility for the employee, without the employee having a formal contract of employment with that employer.

THE NETHERLANDS AND SALARY SPLIT

For an employee residing outside the Netherlands while being covered for social security in his/her home country, a salary split with the Netherlands can be attractive. If the Dutch-sourced gross taxable income does not exceed €50,000, the average total tax rate will be approximately 17.6% (in 2021). And if the 30% ruling applies, the average total tax rate will be approximately 9.5% (for detailed information on the 30% ruling please see our 30% ruling memo).

SALARY SPLIT BENEFIT

If the avoidance of double taxation by the home country (exemption method) exceeds the tax obligation in the host country, a salary split can be beneficial. However, if the employee has substantial tax reductions in his/her home country, or if the average tax rate in the host country is higher than that of the home country, the outcome could be unfavourable.

EXAMPLE

This example is a simplified illustration of how a salary split works in practice. The tax rates shown are fictitious.

For an employee residing outside the Netherlands while being covered for social security in his/her home country, a salary split with the Netherlands can be attractive.

Assumptions:

  • The employee is a resident of the Netherlands.
  • The employee physically works for 50% of the time in the Netherlands, 25% in France for the French group company, and 25% in Germany for the German group company.
  • The employee has a formal employment contract with the Dutch group company.
  • The employee is paid via the Dutch payroll for 100%.
  • For purposes of simplicity social security is disregarded in this example.
  • The employment costs are cross charged to the French and German group companies relative to the employee’s physical presence in those countries.
  • In France and Germany the employee works under the direction of the respective group companies.
  • The total annual gross salary amounts to €150,000.
  • The average tax in the Netherlands is 40%.
  • The average tax in France is 25%.
  • The average tax in Germany is 30%.
If the avoidance of double taxation by the home country (exemption method) exceeds the tax obligation in the host country, a salary split can be beneficial.

In this example, the salary split provides a financial advantage of €9,375.

DIRECTORS

For an employee, a salary split situation may arise if the employee physically works in the host country while also continuing to work in his/her home country. For a person receiving a director’s fee in their capacity as statutory director of a company in the host country, under most tax treaties the director does not have to be physically present in the host country for a salary split to exist.

NEXT Memo: Directors' remuneration

OTHER MEMOS IN THIS ISSUE

Directors' remuneration

Life assurance rather than pension contribution

Dutch tax facilities for innovative companies

Legal obligations of recognised sponsors