WE REALISE YOUR INTERNATIONAL DREAMS
Growing complexity in (international) legislation and regulation means our clients are increasingly in need of truly integrated services. The nature of today’s issues means that our service offering no longer rigidly separates corporate tax, employee tax, social security, VAT & customs, legal and immigration.
As a pragmatic partner, we are proud to master each of these disciplines. These topics are just a small selection to give you an idea of what LIMES international can do for you.
Under the 30% ruling, a Dutch resident employee may elect to have ‘partial non-resident taxpayer’ status. This choice can be made each tax year and can be changed on a year-by-year basis. With partial non-resident taxpayer status, for ‘Box-1’ income (business profits, income from employment, and income from owner-occupied property) the employee is considered a Dutch resident taxpayer. However, for ‘Box-2’ (substantial interest) and ‘Box-3’ income (savings and investments), the employee is considered a non-resident taxpayer. As a result, investment income, for example, will not be subject to Dutch taxation, except for income from Dutch sources, such as Dutch real estate (i.e., a second home).
The employee may still claim personal deductions, such as alimony and annuity payments, though. Fiscal partner regulations, such as optimal allocation of certain deductible costs, are not affected by this choice. Foreign withholding taxes on 'Box- 2' and 'Box-3' income cannot effectively be credited against Dutch tax.
US nationals residing in the Netherlands who have elected to have partial non-resident taxpayer status are considered US residents for tax-treaty purposes. One of the consequences of this legal fiction is that they do not have to report their worldwide income from employment in 'Box-1', but only the income related to the employment activities physically carried out in the Netherlands.
Lastly, an employee electing to have partial non-resident taxpayer status must do so while the relevant tax assessment is still open for appeal, but preferably already when filing the Dutch personal income tax return. In most cases the partial non-resident taxpayer status is advantageous for the employee.
An employee who participates in a Dutch pension scheme can accrue pension rights over the pensionable salary, including the 30% allowance. The Dutch wage tax facility for pension contributions will then apply: the employer’s contribution remains tax free, and the employee’s contributions remain tax deductible.
Please note that the employee’s tax-deductible pension contribution while participating in the company pension plan affects the taxable wage of the employee. Since the taxable wage must always meet the salary threshold (see 1.3), the employee may consider waiving the pension rights to increase the taxable salary and remain eligible for the 30% ruling. As an alternative to pension rights, in this case the employee may be better off with a life annuity.
6.3 NET SALARY AGREEMENT
The 30% ruling may also apply to net salary and tax equalisation agreements, in which case the 30% ruling would result in a substantial reduction of the employer’s costs.
The 30% allowance may be paid while the request for the 30% ruling application is still being processed. However, if the request is rejected, taxes on the remuneration will subsequently need to be recovered from the employee. Alternatively, the salary paid will need to be grossed up at the employer’s expense.
In the view of the Dutch Tax Authorities, the 30% ruling can only be taken into account in the payroll administration of the employer. This may cause inconvenience if the 30% ruling is issued after the end of the calendar year in which it can first be applied. In such situations, it may be necessary to update the payroll retroactively and file corrected wage tax returns.
For the application of the 30% ruling the employer and the employee must jointly file a request.
If the request is filed within four months from the first day of employment, the 30% ruling applies retroactively for the period from the first day of employment. If the request is not filed within four months, the 30% ruling only applies from the first day of the month following the month in which the request was filed. The same applies if the employee changes employer (see 1.1.1).
Therefore, it is important to file at least a provisional request within four months from the first day of employment, even if all relevant information is not yet available.
If the employee meets all requirements, the Dutch Tax Authorities will send a notification stating that the 30% ruling has been granted. Otherwise, they will send a notification that it has been denied. The latter decision can be appealed and can ultimately be brought before the Dutch tax court.
LIMES international is recognised by the Dutch Tax Authorities as a pilot firm for the 30% ruling fast track. This means that LIMES international is allowed to independently determine whether an employee will be eligible for the 30% ruling. Within five working days of receiving the required information from the employer and employee, LIMES international will determine whether the employee is eligible for the 30% ruling. The Dutch Tax Authorities will issue the official 30% ruling notification within approximately two weeks.
The Dutch tax authorities will not issue a new notification. The new end date will have to be entered in the payroll administration by the employer.
The 30% ruling can be granted for a maximum period of five years (60 months). The 30% ruling will end on the last day of the salary period after the salary period in which the employment ends (i.e., the actual employment activities cease), provided that this latter salary period falls within the 60-month period.
1.1 EMPLOYEE RECRUITED OR ASSIGNED FROM ABROAD
A crucial criterion for the 30% ruling is that the employee be recruited or seconded from abroad. This means that, to be on the safe side, the Dutch employment or secondment contract should be signed before the employee arrives in the Netherlands. If the spouse who joins the employee has a job offer to work in the Netherlands, the same procedure applies.
1.1.1 CHANGE OF EMPLOYER
When an employee changes employer within the Netherlands, this clearly means that the new employer is not recruiting or seconding the employee from abroad. However, as an exception to the condition mentioned above, the 30% ruling can continue to apply if the employee changes employer provided that all other conditions of the 30% ruling are still being met. The ruling can only be continued if the period between the end of the previous employment (last working day) and signing the new employment contract does not exceed three months. This continuation is also possible if the previous employer ‘forgot’ to apply for the 30% ruling.Please note that a transfer of an employee from one group company to another group company is also considered a change of employer unless the Dutch Tax Authorities consider both group companies as a qualifying group of wage tax withholding agents [Samenhangende Groep van Inhoudingsplichtigen: SGI].
Freelancers from abroad who meet the conditions for the 30% ruling (apart from being an employee) may be eligible as well by ‘opting-in’ as an employee. By ‘opting- in’, the freelancer can benefit from the 30% ruling while remaining ‘independent’ for Dutch labour law purposes.
1.2 DUTCH WITHHOLDING AGENT
To apply for the 30% ruling, the employee must have a withholding agent for Dutch wage tax purposes. A foreign employer may voluntarily register as a withholding agent for Dutch wage tax purposes to meet this criterion.
1.3 SPECIFIC SKILLS OR EXPERTISE / SCARCITY
An employee is deemed to have specific skills or expertise if the employee’s annual taxable salary (excluding the 30% allowance) exceeds the ‘salary threshold’, i.e., the minimum salary required to be eligible for the ruling. For 2022 the salary threshold has been set at € 39,467. For employees under the age of 30 who have a qualifying master’s degree, the salary threshold has been set at € 30,001 for 2022. No salary threshold applies for qualifying PhD degree holders, scientists, and certain types of medical specialists. Salary in kind and variable salary components are also included when calculating the salary.
Salary received from foreign employment will be added to the Dutch salary when determining whether the salary at least meets the norm. In the case of part-time employment, the part-time salary must still be at least equivalent to the salary threshold. The part-time salary will not be ‘recalculated’ to a 100% employment salary.
Please note that the salary will continuously be tested against the norm on an ongoing basis: if the employee no longer earns more than the salary threshold, the specific skills or expertise cannot be proven, and the employee will no longer qualify for the 30% ruling. The salary thresholds are indexed annually.
1.3.1 SCARCITY TEST
Apart from the specific skills or expertise test mentioned above (i.e., the ‘salary threshold’), a scarcity test applies. However, based on information from the Dutch Tax Authorities, the scarcity criterion will be assumed to have been met if the salary threshold is met. The Dutch Tax Authorities will only require a scarcity test in exceptional circumstances, in which case the following three factors will be considered:
1.4 KILOMETER NORM
Only employees who, for more than 16 months of the 24 months prior to the first day of work in the Netherlands, have lived at a distance of more than 150 kilometers from the Dutch border may qualify for the 30% ruling. This especially affects employees from Belgium, Luxembourg, France, the United Kingdom, and part of Germany.
The maximum 30% tax free allowance is calculated based on the taxable wage from current employment. This includes variable wage components such as bonus payments, income from stock options, and other taxable wage, in cash or in kind. The 30% ruling does not apply to redundancy pay, i.e., income from previous employment or pay during ‘garden leave’.The 30% tax free allowance is maximised at 30/70 of the taxable wages from current employment during the application period of the 30% ruling. The 30% tax free allowance must be agreed separately.
The 30% ruling does not apply to wages for which relief for double taxation is granted. Unless agreed otherwise, the 30% tax free salary (allowance) is payable on top of the agreed salary. However, from a budget perspective most employers prefer to include the 30% tax free allowance as an integral part of the remuneration package, in which case the contract of employment must include an addendum specifying that the agreed salary will be reduced in accordance with labour law and in exchange for the 30% tax free allowance. This reduction in salary may affect income-related payments (tax credits, etc.).
As mentioned in 1.3 the salary threshold must continuously be met, which may mean that the reduction of the agreed salary and the tax-free allowance will be less than 30%. For example, if an employee earns a taxable wage of € 45,000, given that the salary must exceed the salary threshold of € 39,467 after the deduction of the tax-free allowance, the tax-free allowance is not € 13,500 (30% of € 45,000) but rather €5,532 (€ 45,000 - € 39,468).
Since the 30% tax free allowance is intended to cover all extraterritorial costs, the actual extraterritorial costs may no longer be reimbursed tax free in addition to the 30% allowance. Other professional costs relating to the employment that are not deemed to be extraterritorial costs may be reimbursed, in part or in whole, tax free (in addition to the 30% tax free allowance), in accordance with the provisions of the Dutch Wage Tax Act 1964. For children attending an international school, the school fees may be reimbursed tax free in addition to the 30% allowance. The school fees can be reimbursed tax free for an international school or an international department of an ordinary school if the following conditions are met:
The 30% ruling is a Dutch tax facility aimed at attracting foreign employees with specific skills or expertise to work in the Netherlands. Application of the 30% ruling results in a substantial increase in net salary and/or a substantial reduction of the employer’s costs. The 30% ruling provides for a tax-free allowance (30% allowance), which is deemed to cover all ‘extraterritorial costs’, i.e., extra costs employees incur when living outside their home country.
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 individuals receiving directors’ fees in their capacity as statutory director of a company in the host country, under most tax treaties they do not have to be physically present in the host country for a salary split to exist.
In this example, the salary split provides a financial advantage of €9,375.
A salary split exists when the salary of an employee is attributed to two or more countries. It can arise in several ways. For example, a salary split situation arises when you are formally employed by a company in another country (host country) while continuing your employment with your formal employer in your home country. Consequently, you will most likely become liable to tax in the host country, while continuing to be liable for tax in your home country as well. Tax treaties and/or domestic tax law should prevent double taxation. If the foreign tax relief provided by the home country exceeds the tax liability in the host country, the salary split is financially beneficial.
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):
*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. Given an indicative Dutch-sourced gross taxable income of € 50,000, the overall tax burden would be approximately 16% (in 2022). If the 30% ruling applies, the tax burden on a Dutch sourced gross taxable income of € 50,000 would be approximately 7% (in 2022). For more 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 employees and directors with international responsibilities a salary split is a legitimate and often attractive instrument to reduce taxes. In many cases it is even the (legally and fiscally mandatory) consequence of an actual working situation. In this memo we elaborate on the conditions and benefits of a salary split structure.
The first €35,129 of taxable income is taxed at a rate of 9,45%. This means that only €3,320 of tax is due. The annual amount of tax due can even be less when certain tax credits apply.
Under the provisions of the 30% ruling (tax facility), an employee may be entitled to a tax-free cost allowance amounting to 30% of the income from present employment (including the allowance). To be eligible for this facility, employees must be recruited or seconded from abroad and have specific expertise or skills that are not available (or are scarce) on the Dutch labour market. An employee is deemed to have a scarce expertise or skill if the employee’s annual taxable salary (excluding the 30% allowance) is at least € 39,467 (2022).
A director, too, can qualify for the 30% ruling provided that all other conditions for the ruling are met. To give an example of the benefit of the 30% ruling, assuming an indicative gross remuneration of € 60,000: if the 30% ruling applies, the tax due on the gross remuneration of € 60,000 is € 5,760; otherwise € 12,433 is due. See also the below table.
Table (2022 rates)
Under most tax treaties signed by the Netherlands, the Netherlands can and will levy tax on the remuneration received by a non-resident director of a Dutch resident entity.
Depending on the applicable tax treaty, the state (country) of residence of the director will have to provide for double tax relief. Whether a director benefits from the situation with his or her Dutch-sourced director’s remuneration depends on two factors:
Employee X and director Y are both residents of a foreign country.
Employee X and director Y both perform work in their country of residence for the Dutch entity (A).
In the situation described above, the remuneration of director Y will, in most cases, be taxable in the Netherlands. The remuneration of employee X on the other hand will be taxable in the foreign country.
DUTCH TAX RATES
The first bracket of the Dutch income tax provides a combined rate for social security contributions and tax. Director Y is subject to social security legislation in a foreign country and is therefore only liable to tax on his or her Dutch sourced taxable income.
From an international tax standpoint, directors’ remunerations differ from other types of remunerations. When a Dutch entity decides to remunerate one of its non-resident directors, the amount of tax due can turn out to be surprisingly low.
Although the situations of person X and Y may not seem to differ at first sight, for tax purposes they will be treated differently.
DUTY TO PROVIDE INFORMATION
You have a duty to report all changes that are relevant to the employee’s right of residence and all changes that are relevant to your status as a recognised sponsor to the Immigration and Naturalisation Service (IND). The IND reserves the right to request supplementary documentation and or to dismiss applications at their discretion. The IND may even cancel a Dutch residence permit during the period of validity, if the requirements are no longer met.
Changes with regard to the employee
All changes that affect the employee’s right of residence must be reported to the IND within 4 weeks. Such changes include (but are not limited to) the following:
*For example the employee does not meet the income requirement, because he/she will work fewer hours or be on a certain type of leave.
Changes with regard to the recognised sponsor
All changes that will affect your status as a recognised sponsor must be reported to the IND within 4 weeks*. Such changes include (but are not limited to) the following:
* If the company’s address changes, the IND must be notified within 2 weeks.
DUTY TO KEEP RECORDS
You have a duty to keep records and an obligation to retain them, for up to 5 years after the sponsorship/employment has ended. Your records must include the following information about the employee:
DUTY OF CARE
You have a duty to ensure a careful recruitment and selection process. You must also inform the employees of the relevant regulations as well as their rights prior to, during and at the end of the employment contract. This includes (but is not limited to) the following:
If you, as a recognised sponsor, do not fulfil the aforementioned obligations, the IND may impose sanctions, such as a warning or penalties.
WITHDRAWAL OF THE STATUS AS RECOGNISED SPONSOR
If you, as a recognised sponsor, do not employ a highly skilled migrant or an Intra company transferee (ICT) within 3 years from the date your company was registered as a recognised sponsor, the IND reserves the right to withdraw your status as a recognised sponsor. Therefore, please note, you must intend to employ multiple highly skilled migrants and/or ICT’s, to minimise the risk of losing the status.
LEGAL OBLIGATIONS OF RECOGNISED SPONSORS
As a recognised sponsor, you have certain legal obligations. You are responsible for ensuring that your employees meet the criteria for obtaining their Dutch residence permit and remain eligible for this permit during its validity. Furthermore, as a recognised sponsor, you must fulfil the following legal duties:
A bank savings scheme is an alternative for a life assurance. Premiums paid for both facilities are tax deductible up to certain limits. The differences and matches between the two facilities are listed below.
LEGAL ATTENTION POINTS
In order to benefit from the above mentioned tax benefits, the employee and his spouse/ partner has to sign a pension waiver. From a perspective of duty of care of the employer (“zorgplicht”) it is advisable to renew this waiver annually, in order to make sure that the employee is well aware of his choice.
Furthermore, the employer should be aware that paying a bonus rather than a pension contribution may have an effect on income related benefits and payments. For example it may also affect the amount of a termination payment. Therefore it is important to label the additional salary in the correct way.
PROTECTIVE TAX ASSESSMENT
For the sake of completeness, please note that upon emigration from the Netherlands of the expatriate employee, the Dutch tax law provides for a protective tax assessment in order to prevent the employee from redeeming the pension or life assurance policy during 10 years after emigration. After the lapse of said 10 years, the employee may consider redemption after all. However, the employee should first review which state has the right to tax the proceeds from the redemption of the policy according to the applicable tax treaty and secondly - if the new residence state has the right to tax - for how much.
The system of protective tax assessments applies to pensions as well as life assurance policies. As such it will not make a difference whether the employee participates in a pension plan or in a life assurance policy.
For a more detailed explanation of the above tax planning opportunity, please contact:
LIMES international tax + global mobility B.V.
P.O. Box 504, 2300 AM LEIDEN
+31 88 089 90 00
The above example can be implemented dependent on personal circumstances and in accordance with restrictive rules. For example, the maximum contribution into the life assurance/bank savings scheme depends on the employee’s (Dutch taxable) salary (in previous and current employments) and (Dutch recognised) other pension rights accruals in the current and previous 7 years.
The above potential pitfalls and risks can easily be prevented if the employee waives his pension rights and takes out a life assurance/bank savings scheme instead. The employer can pay the amount of the employer contribution in the pension to the employee as regular salary or a bonus. In other words, the employer costs will not change. Moreover, it provides a tax benefit to the employee (or the employer depending on the structure). In this memo we will elaborate on this potential tax benefit/solution, and the various alternatives to structure it.
In this memo we will elaborate on this potential tax benefit/solution, and the various alternatives to structure it.
The calculation can be depicted as follows (in €, rounded):
LIFE ASSURANCE RATHER THAN PENSION CONTRIBUTION
When it comes to old age income assurance, in addition to the Dutch state pension, the Netherlands distinguishes between:
If an employee is entitled to the 30% ruling, to participate in a qualifying pension plan for Dutch tax purposes gives rise to, among others, the following points of attention.
One of the tax-friendly schemes is facilitated through WBSO, a Dutch law promoting research and development. This law provides tax incentives for companies, knowledge centres and self-employed persons involved in R&D.
The WBSO R&D tax credit scheme run by the Ministry of Economic Affairs and Climate Policy is intended to provide entrepreneurs with an incentive to invest in research. Under this law, companies can lower the wage costs for R&D, and other R&D costs and expenditures, such as for prototypes or research equipment. You can apply for the R&D deduction on the tax return you submit to the Dutch Tax and Customs Administration. Companies pay less wage tax and lower their national insurance contributions.
PURPOSE OF WBSO
For the purpose of this law, research and development is defined as:
Applications must be received one day before the month of the desired start of the period for which this facility is required. For example, an application must be received by the Dutch Tax Authorities on the 30th of April if you want the facility to start on the 1st of May. An exception is the 1st January which requires the application to be received before the 21st of December. The application of self-employed entrepreneurs covers the period from the date of submission to the end of the calendar year.
Another interesting tax-friendly scheme is the ‘Innovation Box’, the purpose of which is to stimulate technical innovation in the Netherlands. Profits derived from intangibles that qualify for the Innovation Box scheme are taxed at a tax rate of 9%. Considering that the normal Dutch corporate income tax rate is 25.8% on taxable profits above € 395,000, innovative companies can make significant tax savings in the Netherlands.
Technical innovations developed under an approved R&D project that qualifies for a WBSO certificate (‘R&D declaration’) from the Ministry of Economic Affairs have access to the Innovation Box scheme. Small taxpayers with a net group turnover of EUR 250 million over 5 years or gross profits from innovative assets of more than EUR 37.5 million over 5 years only qualify for the Innovation Box regime if they have a qualifying ‘entry ticket’, i.e. a patent, utility model, plant breeder’s rights, orphan drug and supplementary protection certificate, software or other asset that is not common and/or a novelty item. For larger taxpayers, additional entry conditions apply.
If you are interested in learning more or would like to discuss the options please feel free to contact us.
DUTCH TAX FACILITIES FOR INNOVATIVE COMPANIES
Historically, the Netherlands is known for its long and strong tradition of setting out innovative projects around the world.
In sectors such as water management, energy and food, the Netherlands is leading the way in international research and development of new technologies. To support this technology, the Netherlands has various regulations to facilitate these initiatives in a tax-friendly way.