In the Netherlands, foreign employees who qualify for the government's 30 percent ruling can receive tax-free reimbursement for their extra expenses. Finsens' tax experts take you through the basic rules and consequences of the 30 percent ruling for expats in the Netherlands.

Almost every expat has heard of the 30 percent ruling and wants to benefit from it, but not many expats who know exactly what the 30 percent ruling means and how it works.

 

What is the 30 pc ruling?

The 30 percent reimbursement ruling (30% ruling) is a tax advantage for foreign employees working in the Netherlands. If a number of conditions are met, the employer is allowed to grant a tax free allowance amounting to 30 percent times 100/ 70 of the gross salary subject to Dutch payroll tax. This results in a maximum (effective) tax rate of approximately 36.4 percent. This tax free allowance is considered as compensation for expenses a foreign employee has for working outside their home country.

Conditions
To be eligible for the 30 percent ruling the following conditions have to be met:

• The employee works for an employer liable to withhold Dutch payroll tax on the employee’s salary.
• Employer and employee have to agree in writing that the 30 percent ruling is applicable.
• The employee has to be transferred from abroad to a Dutch employer or has to be recruited from abroad by a Dutch employer.
• The employee has to have specific experience or expertise which is not, or is rarely available in the Netherlands, for example specialists in a specific line of business.
• To be eligible for the 30 percent ruling you have to be in an employment situation. If you are self-employed it will not be possible to claim the 30 percent ruling. However, if you set up a UK Limited Company or Dutch BV and become an employee of that company, you are considered to be in an employment situation and consequently eligible for the 30 percent ruling.
• The application for the 30 percent ruling has to be done by both employer and employee. If the 30 percent ruling is applicable, the gross salary of the employee will be reduced by 30 percent. This will most likely also have implications for your potential unemployment or disability benefits since these benefits are based on taxable salary. Therefore the tax authorities require that both employer and employee are aware of these consequences. This agreement in writing can be done by means of a clause in your employment contract or as an addendum to the employment contract.
• It is only possible to claim the 30 percent ruling if you are transferred from abroad. You have to prove that you were residing in another country before you came to the Netherlands for this job. The employer has to state, by means of a letter of recommendation to the tax authorities, the reason why he/she hired the employee and what makes the employee so special for the company. The employer may be asked to prove that they did not succeed in finding an employee with comparable expertise in the Netherlands.
• The employee has to have specific skills that are scarce on the Dutch labour market. These specific skills are determined by several aspects such as salary, age, employment history, education and level of employment. None of these are conclusive; it is the combination of all aspects that will determine your specific skills.

Financial consequences

So, based on the above mentioned conditions you may be eligible for the ruling, but what does it actually mean?

The salary you agreed on will be reduced by 30 percent. In return you will receive this 30 percent reduction as a reimbursement for expenses. This is the most common way as it will not influence the salary burden for the employer. However, the employer is not obliged to pass on the advantage of the ruling to the employee. In practice it is possible for the employer to partially or fully take the benefit.

What is considered to be ‘salary’?
This has been a major discussion point over the last few years. Of course, your gross salary is considered to be salary, but what about your bonus, holiday allowance, company car, redundancy settlement or any other benefits in kind?

Basically, your ‘regular employment income’ is the basis for calculating the 30 percent tax-free reimbursement. There are regulations regarding pension premiums but your bonus, holiday allowance, benefits in kind and company car all fall under the ruling. Recently the Supreme Court ruled that severance payments do not fall under the 30 percent ruling definition of ‘regular employment income’ and therefore no 30 percent tax free option. If you are made redundant, it is then important to have a breakdown of the redundancy package so it can be determined which part can be considered to be payment of your bonus and outstanding holiday allowance and which part is the actual severance payment.

Other benefits

Beside the fact that 30 percent of your salary will be paid tax free, there are also other benefits.
30% Ruling and Box 3
Under the 30 percent ruling you can opt for ‘partial non-residency status’. You are then considered to be a non-resident tax payer in Box 2 and Box 3, even though you are living in the Netherlands. For Box 1 income you are considered a resident tax payer, therefore you do not pay income tax on assets in Box 2 and 3 (except for real estate located in the Netherlands and substantial shareholding in a Dutch resident BV) and you are entitled to the partnership ruling in Box 1.

Driving Licence
If you have a foreign driving licence, in most cases you will still have to redo your test in order to obtain a If you have a foreign driving license, in most cases you will still have to redo your test in order to obtain a Dutch license. However, if you benefit from the 30 percent ruling, it is possible to switch your foreign driving license without retaking the test.

Points of attention

Retrospective Period

The 30 percent ruling will become effective in retrospect if the application is submitted within four months after the commencement of your employment contract. If the application is submitted after four months, it will become effective as of the first day of the month following the month of application.

Duration

The maximum duration of the ruling is 10 years, and will be reduced by other periods you have stayed in the Netherlands. After five years the tax authorities may ask the employer to prove that the employee still meets all the conditions.

Changing Jobs
If you change jobs you can reapply for the ruling, provided that you still meet the conditions regarding specific skills and you start this new employment within 3 months of terminating the previous one.  There are recent court decisions on a start of new employment outside the aforementioned 3 months. Potentially, one could still qualify:

• Where the contract was outside the three-month period but the actual work started within the 3 month period. This was decided in the case of those working for a newly created B.V. ;
•  where the actual work was initiated after the three-month period, but the contract was agreed to within the three-month period.

Forgot to apply for the ruling?

So, you’ve just found out that you met all the conditions for applying when you arrived in the Netherlands, but haven’t applied till now. In practice, we encounter quite a few situations where the request for the application of the ruling was not filed, or the company informed the employee that they weren’t willing to apply for the ruling, but the employee would have been eligible. What options do you have?

Although it is a pity that you missed the first couple of years of the benefit, it is still well worth your while to try to obtain the ruling. The tax authorities will reduce the total duration of the ruling with the period you have already resided in the Netherlands. That may still mean a considerable period of the maximum 10 years you can receive the benefit.

 

This information was supplied by Finsens Financial Services.
www.finsens.nl