'Deemed location of employment' explained

Expatica.com Expatica.com - Expatica.com

'Deemed location of employment' explained 26/07/2004 00:00

For tax purposes, the Netherlands clearly defines employer and employee relationships and location of employment. The consequences go beyond expat employees, as Susanne Sikkema of Loyens & Loeff explains.

1. Introduction
2. Employee
3. Employer
4. Working entirely outside the Netherlands
5. Working partially in the Netherlands
6. Within the Income Tax Act 2001
7. The insurance obligation for social insurances
8. Summary

1. INTRODUCTION

As of 1 January 2001, both the Wage Tax Act 1964 and the Income Tax Act 2001 introduced the so-called "deemed location of employment".

In short, this rule states that an employee who carries out work for an employer who is established in the Netherlands is considered to have worked in the Netherlands, as a consequence of which – in principle – Dutch wage and, as the case may be, income tax is due.

The fiction applies regardless of where the work is carried out and regardless whether the employee lives in the Netherlands or not.

However, it does not apply to an employee who lives outside the Netherlands and does not carry out any work in the Netherlands at all. An employee who partially carries out his work outside of the Netherlands does not owe (wage) taxes over that portion of the wages that, according to the national legislation of the other country, is assigned to this country for income taxation – provided the tax treaty that has been entered into with this country does not determine that this country should allow a tax allowance.

If there is no applicable tax treaty, the employee in question will have to substantiate the fact that he owes taxes over the related portion of the wages in this other country. He might also have this obligation if this is stated in the applicable tax treaty.

The "deemed location of employment" has been introduced in order to avoid that employees would benefit from a double tax allowance due to the difference in tax systems, simply because they are (also) carrying out work outside their country of residence.

Tax treaties usually are effective in remedying this, as they have not only been created to help avoid double taxation, but also to help avoid double exemption. The latter which could theoretically be effectuated by allowing wages to be paid out during a period that work is not being carried out in the Netherlands.

Creating the obligation to pay taxes over the period during which an employee is working for an employer who is established in the Netherlands, helps this country collect the related taxes it otherwise might not have been able to collect as a consequence of the application of a tax treaty.

This article will explore to whom this fiction applies and under what circumstances. Also, I will go into the exceptions to the fiction as well as the definitions given for the terms "employee", "employment" and "employer/tax withholding entity".

2. EMPLOYEE

The "deemed location of employment" applies to employees, but how is the term "employee" defined in the Wage Tax Act 1964? An employee is a natural person who has an employment relationship governed by public or private law with the employer. There are also two other forms of employment.

Employment relationship governed by private law

An employment relationship governed by private law is a relationship between an employer and an employee on the basis of an employment contract. The Civil Code gives the following definition of an employment contract:

"An employment contract is a contract whereby one party, the employee, takes on the obligation to work for the other party, the employer, for a certain period of time, in return for wages."

The existence of an employment contract is based on three elements:

the employer has the right to give the employee directions and instructions on, among others, the contents and the execution of the work. In other words, there is a relationship of authority;

the employee may not have the work carried out by another person; he must do this personally;

the employee has a right to remuneration in return for the work he has carried out and, conversely, the employer has the obligation to pay out remuneration.

If all these conditions have been met, there is an employment relationship between the employee and the employer. In most cases, this is accompanied by an employment contract, though this agreement does not have to be in writing. If there is no such written contract, there still can be an employment relationship.

Employment relationship governed by public law

Civil servants have an employment relationship governed by public law. This employment relationship is not based on an employment contract pursuant to the Civil Code, but rather on an appointment by a government body.

The three elements listed above apply mutatis mutandis (with the necessary changes) to an employment relationship governed by public law, but are not deciding factors.

The most important aspect is that the employee has been appointed by a government body.

Fictitious employment relationship

Sometimes one of the three elements of an employment relationship is missing. In most cases, this is the relationship of authority.

The Wage Tax Act 1964 contains a list of persons to whom this applies, such as, among others, contractors for work, intermediaries and students.

By means of a fiction, their employment relationship is considered a "real" employment relationship, giving rise to a so-called fictitious employment relationship between employer and employee.

Non-employment relationship

There are also "non-employment relationships". These exist where payments are made out, not pursuant to an employment relationship, but pursuant to, for instance, a benefit, such as the Old Age Benefit (AOW) and the Unemployment Benefit (WW).

For fiscal purposes, the receivers of these benefits are considered employees, allowing these payments to be subject to wage tax.

Location of employment fiction: only for "real" employment relationships

From the above, it is clear that there are several types of employment situations that can be considered employment relationships – be it fictitious or "non". However, the location of employment fiction only applies to "real" employment relationships governed by public or private law. This is why it is important to determine what the nature of the employment relationship is.

Pursuant to the location of employment fiction, work that is partially carried out abroad for an employer who is established in the Netherlands is considered to be carried out in the Netherlands.

All employees who have an employment relationship that is governed by Dutch private law with an employer who is established in the Netherlands are always subject to Dutch wage tax, regardless of their place of residence.

3. THE EMPLOYER/TAX WITHHOLDING ENTITY

An employer (the tax withholding entity) is, among others, the party with whom the employee is in an employment relationship.

For the location of employment fiction to be applicable, the employer must be established in the Netherlands. When is this the case?

Employer as defined by the Wage Tax Act 1964

The Wage Tax Act 1964 lists three types of employers (or "tax withholding entities"):

those with whom one or a number of persons has a current employment relationship. This is the party who owes wages and can wield authority and has the obligation to withhold and pay wage tax. Wage tax is due per employment relationship over the wages that the employer pays or should pay.

those who pay out wages based on a past employment relationship with themselves or another party. Wages are all that is enjoyed based on current or past employment. For instance, wage tax must be withheld on pension payments paid out by the employer, the pension fund or the insurance company. The law determines which payments are covered by this rule.

those who make payments, other than wage payments, based on an employment relationship. Though the right to these payments does not constitute wages, wage tax is due over these payments.

Place of establishment employer

In principle, any employer who does not live or is not established in the Netherlands does not have to withhold Dutch wage tax.

The fiscal place of residence of natural persons or legal entities depends on the factual circumstances. For natural persons, an important criterion is where the centre of a person’s life interests is; in other words, the presence of lasting ties of a personal nature with a particular country is vital in determining the place of residence.

For legal entities, the most important criterion is where the actual management operates from. If, when applying this criterion, it becomes evident that the legal entity is established in more than one country, then other circumstances start to play a role, such as the legislation of the country in accordance with which the legal entity has been established. Each country may have its independent and different rules on this matter.

Place of establishment employer/tax withholding entity outside the Netherlands

It is not important where the employees of an employer who is established outside the Netherlands live or work. Even if they lived the Netherlands, the employer in principle would not have to withhold Dutch wage tax.

Under certain circumstances, an employer who is not established in the Netherlands may owe Dutch wage tax. This depends on either of the following two circumstances:

the employer has a (fictitious) permanent establishment in the Netherlands, or a permanent representative who is established here;
the employer has registered as an employer (tax withholding entity) with the Tax Authorities and maintains a wage administration in the Netherlands for the employees in his/ its employment here.

Permanent establishment or permanent representative

A permanent establishment is a permanent location that is at the disposal of the employer and is the location from which company activities take place, for instance an office or a branch office. Permanent establishments are not independent legal entities.

A permanent representative is a person who operates on behalf of the non-Dutch employer, has been authorised to enter into contracts on this employer’s behalf and makes use of this authorisation on a regular basis.

If there is either such a permanent establishment or a permanent representative who lives or is established in the Netherlands then the employer owes Dutch wage tax. However, it should be kept in mind that the employees must carry out their work within the context of the permanent establishment or on behalf of the permanent representative.

Fictitious permanent establishment

In two situations, the law has determined that certain activities constitute a permanent establishment.

If, during a period of at least 30 days, work is carried out in the territorial waters of the Netherlands, or that part of the continental shelf outside the territorial waters that is considered the Netherlands, then these activities are considered to be taking place on a permanent establishment in the Netherlands.
If work is carried out by a person whose activities are aimed at mediating on behalf of persons who personally carry out work in the Netherlands and third parties for whom this work is carried out, then the activities of the intermediary also constitute work carried out from a permanent establishment.

This second rule was introduced in order to avoid tax evasion by non-Dutch labour brokers and/or employment agencies. In the past, if the intermediary was not established in the Netherlands, then wage tax only had to be withheld if there was a permanent establishment or permanent representative in the Netherlands.

As this was often not the case, while there were a number of non-Dutch employees who did not file a tax return in the Netherlands, this meant that any possible taxes due could not be collected.

Under the current legislation, this no longer constitutes a problem, as employment agencies that make employees available on the Dutch labour market through a fictitious permanent establishment now must withhold wage tax. If, for whatever reason, the taxes they owe cannot be collected, then the party who is hiring in the employees can be held liable for the wage tax due. There are similar rules for turnover tax.

A consequence of the fictitious permanent establishment is that a non-Dutch employer may have the obligation to withhold Dutch taxes.

Exceptions

Diplomatic, consular and other categories of representatives of nations as well as their civil servants as well as certain organisations appointed by the minister are also not obligated to withhold taxes. The "deemed location of employment" does not apply to their employees.

4. SCOPE OF THE "DEEMED LOCATION OF EMPLOYMENT": WORKING ENTIRELY OUTSIDE OF THE NETHERLANDS

The "deemed location of employment" does not apply to employees who live outside the Netherlands and do not work in the Netherlands at all.

Criterion of location of residence

In order to prove that an employee lives outside the Netherlands it is important to first determine where the place of residence is (for fiscal purposes).

The fiscal location of residence of both natural persons and legal entities depends on factual circumstances, which must be evaluated objectively. The place of residence of natural persons is determined, among others, by looking at circumstances that substantiate the existence of lasting ties of a personal nature with a particular country.

Lasting does not mean "forever". Also, a temporary stay can be considered lasting as long as the ties are strong enough. A purely economical tie is not enough to consider the place where a natural person is staying the fiscal place of residence.

Even the registration in the population registry or the nationality of a person are only supportive criteria. Factors that do play an important role are: where the family is staying, where the work is carried out, where the social contacts are and the duration of the stay.

Lasting ties of a personal nature are therefore decisive when determining the fiscal place of residence of a natural person. This will be there where the centre of his personal interests lies.

Working entirely outside the Netherlands

When determining whether an employee’s work is carried out entirely outside the Netherlands, one should look at the period during the calendar year that the employee – who does not live in the Netherlands – has carried out work in employment for his employer (the tax withholding entity).

If the employee has spent at least one (half of) day working in the Netherlands in the context of this employment relationship then the work has not been entirely carried out outside the Netherlands.

The consequences of such a strict interpretation are that the checking of (e-)mail at the Dutch office or the visiting of the Dutch office to discuss business matters during vacation could already lead to the conclusion that the work is not entirely carried out outside the Netherlands, with all due further consequences.

It is hard for an employer to judge all these matters. When withholding wage tax for an employee who lives and works outside the Netherlands it is not always clear whether, during the course of a year, this employee will carry out a portion of his work in the Netherlands.

However, the employer must decide, when paying out the wages, whether he will have to withhold wage tax. This means he has to try to estimate in advance how long the employee will be staying in the Netherlands. This must be done on the basis of objective criteria, being facts and/or circumstances. If he does not expect that the employee will be carrying out work in the Netherlands, he does not have to withhold wage tax.

If, due to unforeseen circumstances, the employee ends up carrying out a portion of his work in the Netherlands then, as of the moment that this is clear, the employer will have to withhold wage tax. For wage tax purposes, wage tax does not have to be withheld retro-actively over periods during which it has not been withheld, as the premise is that the decision not to withhold wage tax over this period was based on the right circumstances.

The fact that the situation proved to be different after all, does not matter. (The taxes due, however, may end up being levied by means of the income tax assessment). The employer can request that the Tax Authorities pay him back wage tax that was withheld over a period during which it turns out that the employee did not work in the Netherlands. The employee can be compensated for this amount by means of the income tax return.

Exceptions

The Wage Tax Act 1964 contains a few exceptions regarding certain categories of employees who do not live and work in the Netherlands.

The "deemed location of employment" does not apply to employees of the Dutch nation, managing directors or supervisory directors of Dutch entities, seafaring employees and airline employees. The factual circumstances regarding their place of residence are not decisive; instead the following rules apply.

On board a ship or airplane

Employees working on a ship or airplane that participates in international transportation are subject to wage tax in the country from where the factual management of the shipping or airline company is carried out.

In most cases, there are tax treaties with special rules determining which country is allowed to levy taxes over the wages paid out to these employees. This is usually the employees' country of residence.

Directors' wages

A legislative fiction has determined that managing directors and supervisory directors are to be considered employees, as a consequence of which their wages are subject to wage tax.

Managing directors and supervisory directors who live abroad and receive wages from a legal entity that is established in the Netherlands in connection with an existing or past employment relationship, always owe wage tax in the Netherlands, regardless of where the work is or was carried out.

This is the case, even if the director only carries out his duties outside the Netherlands. In this context, the location of establishment – where the factual management is – is the deciding factor. The place of residence of the directors is not relevant. In some cases, a tax treaty may decide otherwise.

Working for the Dutch nation

Any employee of the Dutch nation owes Dutch wage tax, regardless of place of residence – this includes diplomats and other civil servants who work abroad.

Generally speaking, the diplomatic and consular representatives of other nations working in the Netherlands do not owe Dutch wage tax.

Dutch legislation also contains a wage tax exemption for employees of Dutch legal entities under public law that have been recruited abroad. These employees are exempted from paying Dutch wage tax if there is no tax treaty applicable and the employee has been recruited in the country in which he works.

5. WORKING PARTIALLY IN THE NETHERLANDS

If an employee partially carries out work in the Netherlands for an employer who is established in the Netherlands then he is considered to have carried out all his work in the Netherlands so that, in principle, he owes Dutch wage and income tax over his entire wages.

Even though, in this case, the location of employment fiction results in wage tax being due in connection with all work activities, this does not mean that wage tax will be levied in the Netherlands over the entire wages.

Possible exceptions are:

when a tax treaty is applicable;

when there is no applicable tax treaty, but the income is factually subject to taxes elsewhere.

Tax treaty applicable

If a tax treaty is applicable then, and this treaty assigns the levying of taxes in connection with the work carried out either abroad or in the Netherlands to another country, the Netherlands will not levy taxes. In other words, it is sufficient that the Netherlands cannot levy taxes pursuant to this tax treaty.

Tax treaties apply the following rules when determining which country may levy taxes. The main rule is that the country in which the work is carried out may levy taxes over the related income from employment. Subsequently, at least one of the following conditions must be met:

the employee spends at least 183 days per calendar / tax year / 12-month period (depending on the tax treaty) in the country of employment; or
the wages are paid out by, or on behalf of, an employer who is established in the country of employment; or
the payment is borne by a permanent establishment of the employer in the country of employment.

If an employee carries out work in a country other than their country of residence while none of the three above criteria are met, then, according to the tax treaties, the country of employment may not levy taxes. The taxes may be levied by country of residence, and if so, this only regards the income generated during those days on which the work was factually carried out in this country.

In those situations covered by a tax treaty, the employee who lives abroad does not have to substantiate the fact that he (factually) owes taxes in this other country, unless the (factual) owing of taxes in another country is one of the conditions stated in the tax treaty.

Consequently, the "deemed location of employment” is limited by the applicability of a tax treaty.

No applicable tax treaty / factual tax payment obligation

The main rule applying to employees who do not work in the Netherlands is that they are considered to be employees in accordance with Dutch law – and are therefore subject to Dutch wage tax – if they partially carry out work in the Netherlands or are in the employment of a legal entity governed by Dutch public law.

If no tax treaty is applicable, then an employee who lives outside the Netherlands will only be able to avoid Dutch taxes if they can substantiate that they factually owe taxes in another country over the work they partially carry out outside the Netherlands.

They can do this by proving that they have paid taxes in this country, by supplying a tax assessment stating the amount of tax due abroad, or a certified document provided by the foreign tax authorities stating that they are subject to taxation in this other country.

It is not enough that they, in principle, owe taxes abroad according to the legislation in that other country.

Statement issued by the tax authorities

If it is not clear if and to what degree wage tax must be withheld in the Netherlands, the employee can request that the tax authorities issue a statement on this matter. Based on this statement the employer (tax withholding entity) will not (or only partially) have to withhold wage tax. The employer may also independently decide not to withhold wage tax. The risk of this decision lies with the employer.

6. THE "DEEMED LOCATION OF EMPLOYMENT" IN THE INCOME TAX ACT 2001

The Income Tax Act 2001 has the location of employment fiction, which is meant to coordinate the system of levying taxes contained in the Wage Tax Act and the Income Tax Act. It would defeat all purposes, if the employee owed wage tax pursuant to the Wage Tax Act, while this was cancelled due to the fact that this same obligation did not exist in the Income Tax Act.

7. THE INSURANCE OBLIGATION FOR SOCIAL INSURANCES

The "deemed location of employment" rule has been created for employees who do not live in the Netherlands and who, because they (partially) carry out work in the Netherlands, end up being covered by Dutch wage and income tax – pursuant to this fiction. But what are the consequences of all this are for social insurances?

The fiction only has consequences for the wage and income tax obligations. Not for the national and employee insurance schemes.

The main rule in social insurances is that an employee is insured in the country in which he works. In most cases, the employee will be living in the country in which he works, in which case complications will not arise.

Facts and circumstances are also used to determine the place of residence of a person for social insurance purposes. The rule that the place with which the person is question has the strongest personal ties is the place of residences also applies here.

Pursuant to this rule, employees who live outside the Netherlands, who come to (temporarily) carry out work in the Netherlands, are obligatorily covered by Dutch social insurances. There are a few exceptions.

All these rules apply to employees who carry out work within the context of an employment relationship. Work that is done in the capacity of managing director is, for social insurance purposes, considered to be work carried out by a self-employed person, to whom other rules apply.

Placement abroad within the EU

When employees are placed elsewhere within the EU, (EC) Regulation 1408/71 applies. As of 1 June 2003, the scope of this regulation has been expanded upon, allowing it to apply to third country nationals who are staying legally within the EU.

This regulation determines which social insurance system is applicable to employees who (also) work in a country within the EU other than their country of residence, in order to avoid that they are covered by more than one system or no system at all.

The regulation contains a number of rules that deviate from the main rule, while it also determines – in the case of double coverage – which social insurance system is applicable.

If an employee carries out work in more than one EU-country, one of which is the country of residence, then the social insurance system of the country of residence applies.

An E-101 statement can be issued, stating the applicable social insurance legislation.

In principle, an employee who is sent abroad (within the EU) for a maximum of one year (a maximum prolongation is possible for another 12 months, depending on the circumstances) remains covered by the social insurance system of his country of origin, providing the following conditions are met:

prior to being sent abroad, the employee was covered by the social insurance system of the country of origin;

the employee is a national of one of the EU member states, or is legally residing on the territory of a EU member state (the latter category was created by the expansion upon (EC) Regulation 1408/71 as of June 1, 2003);

the employment relationship in the country of origin is continued during the period of placement abroad;

payment for the work carried out abroad is borne by the employer who is established in the country of origin;

the employer has substantial company activities in the country of origin of the employee;

the period during which the employee is to carry out his work abroad is not expected to exceed 12 months;

the employee is not being sent abroad to replace an employee whose period of 12 months has been completed;

the company where the employee is working may not place the employee with another company.

Placement outside the EU / treaty applicable

Non-EU nationals who work in the Netherlands may be exempted from the social insurance obligation in the Netherlands, if there is a social insurance treaty between the Netherlands and their country of residence.

Most treaties have determined that an employee who is sent abroad for a period of one, two or five years can remain covered by the social insurances in his country of residence. Each treaty has its own set of conditions, but generally speaking they are the same as apply within the EU pursuant to the (EC) regulation.

Placement outside the EU / no treaty applicable

If there is no treaty, there might be a double insurance obligation. In principle, the country where the work is factually carried out may collect the contributions. This all depends on the circumstances of the case.

Under certain circumstances, a non-resident of the Netherlands who works here for a period not exceeding six months will not obligatorily be insured with the employee insurance schemes. If the work is factually carried out in the Netherlands while the related income is subject to wage tax, then the employee will almost always obligatorily be covered by, and owe contributions to, the national insurance schemes.

8. SUMMARY

The ”deemed location of employment”

The Dutch law has created "deemed location of employment" to stop employees, who work in the Netherlands but don't live in the country, from taking advantage of the difference between the various tax systems to enjoy a double exemption.

Due to the "deemed location of employment", employees who live abroad but work for an employer who is established in the Netherlands, are considered to be carrying out their work in the Netherlands. Consequently, in principle, their entire wages are subject to wage tax in the Netherlands.

However, the fiction is not to be applied without limitation. It does not apply if:

the work is carried out entirely outside the Netherlands;

if, and to the extent that a tax treaty to which the Netherlands is a party, is applicable in which it has been determined that the levying of taxes over the related income from employment is to be assigned to another country;

the related income from employment is factually subject to taxation in another country.

Social security

Social insurances' principal rule is that the country of employment may collect the contributions. The location of employment fiction does not apply. For employees who (also) carry out work within the EU in a country other than their country of residence, (EC) Regulation 1408/71 contains a number of exceptions and streamlines some of the more complicated situations.

The Netherlands has also entered into a number of bilateral social security treaties that determine which country, and under which circumstances, may levy contributions. Both the regulation and the treaties are aimed at avoiding double coverage and no coverage.

Finally, the national legislation of the Netherlands contains a number of rules as a consequence of which employees, who (temporarily) work in the Netherlands are covered, or specifically not covered, by Dutch social insurances and which ascertain whether they are obliged, or not, to pay contributions.

August 2003 (sections 1-4) September 2003 (sections 5-8)

Susanne Sikkema is an attorney with Loyens and Loeff.