In the Netherlands, foreign employees who qualify for the government's 30 percent ruling can receive tax-free reimbursement for their extra expenses. Rina Driece of Loyens & Loeff explains what does and does not qualify as an "extraterritorial expense".

• Introduction
• The 30 percent-ruling defined
• The extraterritorial expenses
• How removal costs are categorised
• Housing expenses
• When is applying the 30 percent ruling worthwhile?

The 30 percent ruling is a fiscal facility for foreign employees who come to work in the Netherlands temporarily and who also meet certain requirements.

As these employees are considered to be incurring extra expenses due to the fact that they are working outside their country of origin, they can - aside from their normal wages - receive a tax-free reimbursement for these extra expenses, which are referred to as extraterritorial expenses.

The term "country of origin" means the country where the employee worked before he came to the Netherlands.

If the employee meets a certain number of requirements, he has a right to a predetermined - fixed - reimbursement for extraterritorial expenses, amounting to 30 percent of his wages. This is referred to as the "30 percent reimbursement". In that case, he need not prove the exact extent of the extraterritorial expenses.

If these conditions are not met, then the actual extraterritorial expenses may be reimbursed free of tax. However, the foreign employee must show proof of these expenses!

In most cases, it is more attractive to qualify for what is referred to as the "30 percent ruling", on the basis of which the fixed 30 percent reimbursement may be paid out.

If, for whatever reason, the requirements are not met, and the employee does not qualify for this "ruling", then it should be determined whether extraterritorial expenses are actually incurred. The employer can then pay the employee a tax-free reimbursement for these expenses.

The 30 percent ruling defined

The 30 percent ruling has two important aspects:

1. If an employee qualifies as an extraterritorial employee, his employer may reimburse (tax-free) his extraterritorial expenses by paying him a fixed reimbursement amounting to a maximum of 30 percent of the wages. All other requirements must also be met, of course.

2. The 30 percent ruling further grants the employee (if he is a resident of the Netherlands) the possibility of choosing for the status of partial non-resident taxpayer on his income tax return. This means that outside the context of wages, there is a further advantage to be gained from the 30 percent-ruling.

The extraterritorial expenses

In order to be able to determine whether certain expenses may be reimbursed free of tax (the same applies to wage in kind), it must be determined whether (1) the expenses are business expenses (2) they are extraterritorial expenses or (3) they are other expenses - of a more private nature.

(1) When it comes to business expenses, it must in particular be determined whether they are incurred in connection with the job. The Wage Tax Act contains certain guidelines. If the reimbursement may be provided free of tax pursuant to this Act, then it can also be provided net - over and above the 30 percent-reimbursement.

(2) The question of whether certain expenses are of a business or of a private nature, often gives rise to discussion. If the reimbursement concerns private expenses, then this reimbursement (or wage in kind) will be subject to tax. When a reimbursement (or wage in kind) is subject to tax - a so-called taxable advantage - then the 30 percent-ruling may be applied to it.

(3) It is not at all easy to determine whether an expenses is extraterritorial or not - even for the tax authorities.

The Wage Tax Act contains the following examples of extraterritorial expenses incurred by:

• looking for suitable housing
• the cost of double housing
• higher costs of housing due to a tight housing market
• suitable schools for the children
• requesting/converting official documents, such as employment permits, residence permits and driver's licenses
• language courses
• leisure time, and such
• visiting family and others in the country of origin, or having them come to the Netherlands.

In other words, these expenses can largely be connected with the "cross-border" nature of their necessity. These are expenses the employee would not have incurred if had he stayed in his country of origin.

But there are also plenty of expenses that are not so easy to qualify.

We would have loved to have been able to make life easier for everyone involved by providing a list of expenses that are to be considered extraterritorial.

However, neither our firm nor the Tax Office in Heerlen can do this. Every situation requires the evaluation of the specific circumstances, whereby the wage administration department will have to make a choice - in the hopes that the wage tax authorities will accept it.

How removal costs are categorised

The State Secretary of Finance has explicitly determined that removal costs are expenses that - despite their clearly "cross-border" nature - are to be regarded as business expenses that may be reimbursed over and above the 30 percent reimbursement. In other words, they are not considered extraterritorial expenses.

This is in contradiction of what the tax authorities have determined, namely that a person who does not live in the Netherlands, but works here, and who therefore has double housing expenses - or the employee who buys tickets on a weekly basis to go back home - can call these extraterritorial expenses.

As a consequence, these types of expenses are deducted from the 30 percent reimbursement, instead of being reimbursed tax-free as business expenses over and above the 30 percent-reimbursement.

What, exactly, is the difference between these and the removal expenses? Both types could be incurred both in the country of origin as well as due to the fact that the employee is working outside his country of origin.

Housing expenses

There is also an "extraterritorial portion" in the housing expenses that employees who live in the Netherlands incur. These are caused by the higher rent paid on the special - expensive - expat housing market.

The State Secretary has determined that the Dutch, on average, spend approximately 18 percent of their (fiscal) wages on housing. This part of the wages is taxed and can be subject to the 30 percent-reimbursement.

If more is spent on housing, then this additional amount is an extraterritorial expense, which may be reimbursed free of tax - but which will be deducted from the 30 percent reimbursement (see below).

When is applying the 30 percent ruling worthwhile?

In practice, two questions will always remain difficult to answer. Are certain expenses to be considered (wholly or partially) extraterritorial or not? And, what is the exact fiscal advantage of the 30 percent-ruling?

The actual extraterritorial expenses may be reimbursed free of tax. If the employer directly reimburses the employee for these expenses (such as for a home leave), then a problem arises regarding the fixed 30 percent reimbursement because the 30 percent reimbursement also provides for extraterritorial expenses.

And it goes without saying that the ruling does not intend for expenses to be reimbursed (free of tax) twice.

Therefore, a reimbursement (or wage in kind) of extraterritorial expenses (for instance, the employer himself pays for the annual ticket back home) may remain free of tax - however, it will be deducted from the 30 percent reimbursement.

Consequently, if the 30 percent ruling is applied, the advantage tends to disappear.

Therefore, the question shall be put before the tax authorities whether those expenses that qualify as extraterritorial expenses will have to be treated as such.

Or whether - taking into account the rather complicated road towards ending up with the same amount of taxes due - they might simply be qualified as taxable wages, upon which the 30 percent-ruling may be applied.

In the meantime, the Tax Office in Heerlen has lent its approval to this approach of treating extraterritorial expenses as taxable wages . As long as the tax collectors get what is their due - or as long as the approval is not misused.

April 2002

Rina Driece works with Loyens & Loeff in Rotterdam.