FROM A TO Z
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):
- 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.
- 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.
- 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.
- The employee works for the permanent establishment (branch) of his/her employer in the host country.
- 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.
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.
- 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.
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.