The Dutch 30% ruling: good for expats, better for the wealthy. Article by John Graham
The Dutch 30% ruling: good for expats, better for the wealthy
Article by John Graham
For many years the Netherlands has had a special arrangement for expats on the basis of which part of the remuneration from employment can be exempted from Dutch tax.
Over the years the terms of the arrangement have changed. Originally it was a tax deduction of 35%, now it has to be paid as a separate allowance of 30% of the total remuneration, i.e. the salary and the allowance together. It used to be for five years, then it was for ten years and now it is for eight years. Some aspects have become stricter in recent years. Nevertheless, it offers interesting tax planning opportunities for “normal” expats, but can also be very useful for wealthy individuals looking for a place to relocate for a period of time.
The ruling is called a 30% ruling but in fact means that an allowance can be paid of 3/7 of the salary. If one is looking at a total remuneration of EUR100,000, then to make maximum use of the facility the salary would be EUR70,000 and the allowance would be EUR30,000. It is possible to agree a lower allowance although there are unlikely to be many situations where that would be beneficial. The allowance is intended to cover “extraterritorial” expenses which means expenses which a person incurs as a result of moving from one country to another, for instance extra living expenses, home leave, language courses, cost of living allowances and similar.
Broadly, there are two situations in which you can get the ruling: intra group transfers from abroad and a regular foreign hire. For the foreign hire, it is important that the employee (and you must be an employee: if you are self-employed, it will be necessary to take various steps before you arrive in the
Netherlands) is taken on from abroad and that his contract is carefully worded to comply with the requirements of the ruling. As a general rule, if the employee has come to the Netherlands looking for work and taken on a job while in the Netherlands he will not qualify. Advance planning is therefore vital.
What are the requirements?
The person must have been taken on from abroad or have been transferred within a group of companies.
Since 2012 there has been a requirement that the individual must have lived at least 150km from the Dutch border during at least two/three of the two years prior to coming to the Netherlands. This can result in the strange situation that somebody living in Kent, England, and going to work in
Groningen might not qualify even though they have moved 300 or 400 km and have the additional expense of having to take a ferry or go through the Channel Tunnel, which is a considerable extra expense, while somebody living 150km over the border in Germany along a motorway, which might only be an hour away by car (and closer than many places in the Netherlands), would qualify. There have been some court cases in respect of the distance but the last word has not yet been said. A person from Belgium or Luxembourg will not qualify and individuals from certain parts of Germany, France and Kent in the United Kingdom also will not qualify (except in the cases mentioned below).
There is an exception for somebody who previously worked in the Netherlands and returns within eight years after originally coming to the Netherlands. In that case the 150km rule is applied to the two years prior to his/her first arrival.
A person who has been doing research for a Ph.D. or equivalent and who comes to the Netherlands within one year after receiving his/her Ph.D. will qualify even if they live within the 150km limit and even if they live in the Netherlands provided that in 16 of the 24 months prior to starting their Ph.D. research they lived more than 150km from the Dutch border.
The person concerned should have specific expertise which is in short supply in the Netherlands. The expertise requirement is assumed to be met on the basis of a minimum remuneration requirement. Since the salary must be separate from the allowance, it has to be grossed up to determine the effective remuneration. A salary of EUR35,770 per annum is sufficient so that the total remuneration required is EUR51,100. The figures are indexed.
Furthermore, for individuals under the age of 30 with a master’s degree, the salary requirement is lower, at EUR27,190, meaning a gross remuneration of EUR 38,842.
The salary requirement is deemed in most cases to show that the individual has sufficient education
and/or experience. However, the information on the actual job can be important if one has to show the relevant expertise is in short supply. This will be the case if almost everybody meets the remuneration requirement and a particular example is professional footballers. In that case three factors are relevant:
• relevant education;
• experience (if the employee has worked more than two and a half years in a similar function he/she will be assumed to have adequate relevant experience;
• the relationship between the remuneration level in the Netherlands and in the country of origin. Generally, the net remuneration in the country of origin should not be below the net remuneration (excluding the 30% allowance) in the Netherlands.
The application must be made by the employee and the employer together.
How long does it last?
The arrangement lasts for a maximum of eight years but can terminate earlier if the scarcity no longer exists. The time period is reduced for earlier periods in the previous 25 years that the individual has lived in the Netherlands. It is possible to change employer during the eight year period but care is needed here since there should not be more than a three months gap and one still has to qualify under the other rules.
What are the benefits?
An allowance of 30% of the total remuneration can be paid tax free. This has to be included in the employment contract using appropriate wording (if the actual “reasonable” expenses are in excess of the 30% then the higher figure may be paid tax free but this will be open to audit by the tax authorities).
Certain removal and storage costs may be deductible in addition, depending on Dutch domestic rules. In addition to the 30% allowance, school fees for children at international schools may also be reimbursed tax free, excluding accommodation expenses. There are certain conditions.
A rather odd benefit is that the taxpayer is entitled to exchange his foreign driving licence for a Dutch driving licence without having to take a driving test. This is quite a benefit for those from outside the European Union.
Perhaps the most important benefit is that the expatriate, who in most cases will be considered a resident of the Netherlands, can opt to be a deemed partial non-resident. This election means that in addition to the 30% allowance any investment income is taxed in the Netherlands as though the person concerned is a non-resident, which basically means that almost all investment income and gains other than income from real estate in the Netherlands or from a Dutch company in which one has a holding of at least 5% can avoid tax in the Netherlands. One can decide each year whether one wants to use this possibility of being a partial non-resident.
This option can be a valuable tool for an individual with substantial assets with potential gains or with
significant income. There is no need to consider whether or not they should be remitted. The income can be brought freely into the country and even interest on Dutch bank accounts is not taxable on this basis. Care is needed if investments are in locations where they might be subject to tax elsewhere, for instance where withholding taxes may apply, since as a general rule the tax in the other country will not be reduced: the partial non-resident status will normally mean that double tax treaties cannot be applied for income taxed under this status.
This status can also be an opportunity for an individual with a significant shareholding to realise an untaxed gain (providing he can leave his previous country without an exit tax). Of course, in certain cases a tax free capital gain may be possible without the 30% ruling as a step-up may be available on arrival in the Netherlands.
It is important to note that pension contributions and social security contributions will be based on the remuneration excluding the allowance. This also means that any benefits will be reduced.
With or without the 30% ruling, if one also works outside the Netherlands it is possible to have a salary split which means that, provided the employment income is actually taxable in the other country (or allocated to the other country for taxation), then it is exempt in the Netherlands subject to progression. This means that, for instance, if an individual has a salary of EUR100 and spends,
say 30%, of his time working in another country, then provided that income can be taxed in the other
country (this may require a separate employment agreement with an employer in the other country) it is more or less exempt in the Netherlands. One may still pay tax in the other country but generally at lower rates because one is on the lower tax bands and also often has the benefit of various allowances in the other country. Also here, care is needed because social security contributions do not follow the same rules as taxes and this means that calculations need to be made to see whether it is advantageous.
Therefore, despite the fact that the Netherlands has a top tax rate of 52%, for expats it has a number of
benefits and it is particularly worth considering for those with significant assets.
Article written by John Graham from Graham, Smith & Partners International Tax Counsel, Amsterdam, The Netherlands. “The 30% ruling: good for expats, better for the wealthy”, published in Offshore Investment, number 242, December 2013