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30/01/200830 percent ruling update: Supreme Court decides on severance payments

Our experts point out possible ways of mitigating the tax burden on severance payments.

30 percent ruling

The 30 percent reimbursement ruling (hereinafter: 30 percent ruling) is a tax facility 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 36.5 percent.

30 percent ruling and severance payments

Recently, the Supreme Court ruled that the 30 percent-ruling is not applicable with regard to severance payments. This matter had been the cause of debate in two lower courts, after an employee appealed against the Ministry of Finance’s decision that the 30 percent ruling should not be applied on these payments. The severance payment is taxed against normal (progressive) rates. In most cases, the payment will for the most part be taxed against 52 percent, since the regular gross income will already fill the lower brackets of income taxes.

Possible ways of mitigating the tax burden on severance payments

Taxation on the severance payment can be deferred if, instead of receiving a net amount in your personal bank account, the gross amount (before payroll taxes) is paid out as a lump sum to cover future pension etc. The lump sum should be paid out to an insurance company or to a besloten vennootschap (Ltd.), which can act as an insurance company. The insurance company is obliged to pay out an annuity, which will be taxed with payroll tax / income tax in the year of reception.

The possible advantages of an annuity are:

  • Lower income tax rates in the Netherlands; in the situation where, when receiving the annuity you have no other income, the annuity will first of all fill the first three tax brackets;
  • Lower income tax rates abroad; the annuity is often taxable in the country of residence only, according to Dutch tax treaties. If you receive the annuities after emigrating, you may be able to benefit from lower rates
  • No box 3 net asset tax; the annuity is regarded as “pension” and the capital is therefore not taxable in box 3. (Of course if you benefit from the 30 percent ruling again in a new employment situation, you may opt to be a deemed non-resident and not pay box 3 anyway)


The disadvantage of an annuity is the charges by the insurance company or the cost of setting up a B.V.; the initial cost charges by an insurance company can be between five to nine percent of the initial capital outlay. There are of course quite a few tax aspects with regard to this; make sure you receive sound advice.

 

30 January 2008

This update was supplied by Finsens, tax advisors based in Amsterdam (www.finsens.nl)

[Copyright Expatica 2008]


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