We keep you updated on the most important changes to the tax facility for foreign employees in the Netherlands known as the 30 percent ruling.

On 24 August 2005, the Dutch Ministry of Finance published a new decision on the compensation of extraterritorial costs and the 30 percent ruling, which replace several previous decisions.

The 30 percent ruling helps foreign workers in NL cut their costs

The 30 percent ruling is a tax 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 because 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 costs.

If the employee meets a certain number of requirements, he or she has a right to a predetermined - fixed - reimbursement for extraterritorial expenses, amounting to 30 percent of his or her total remuneration.

Now only the formal employer can apply

In the past, when employees were seconded within the group, it was common practice that the associated Dutch organisation applied for the 30 percent ruling, while the employee continued to be formally employed by the foreign parent company.

The salary of the seconded employee was then processed by the salary administration of this Dutch company, and the 30 percent ruling was implemented in the name of the Dutch company. This is no longer possible.

From now on, the only party who can apply for or implement the 30 percent ruling is the formal employer, which means the employer by whom the employee is employed under private law.

This means that the foreign employer has to apply for the 30 percent ruling, which means keeping salary records in the Netherlands to be able to apply for this benefit.

A possible alternative is that a local employment agreement is concluded between the seconded employee and the associated Dutch organisation.

For situations in which the 30 percent ruling has not been requested and awarded in the name of the formal employer in the past, but in the name of the Dutch company and all the relevant information (for example, a copy of the employment agreement with the foreign company) has actually been provided, the tax authorities cannot withdraw this award.

Extraterritorial costs and working abroad

The decision indicates that it is possible to grant a tax-free allowance for the additional costs an employee incurs as a result of working abroad (extraterritorial costs). This may also apply to local (Dutch) employees. If the employee already benefits from the 30 percent ruling, however, it's not possible to have a tax-free allowance for extraterritorial costs. In addition, the 30 percent ruling will remain in force should the employee work for a short period outside the Netherlands.

The 30 percent ruling can now be applied to a benefit in kind

Previously, there was some uncertainty as to whether the 30 percent ruling could be applied to a benefit in kind. The new decision confirms that this is possible with regard to the salary from the present employment, on condition, however, that there is a supplement to the employment agreement, in which the salary is reduced under employment law in exchange for a free allowance (addendum).

Additional tax assessment

The tax-free compensation of the actual extraterritorial costs to an employee who benefits from the 30 percent ruling is not permitted. If this is done erroneously and the Tax Authorities impose an additional tax assessment, the 30 percent ruling can be applied to the salary correction. A condition is, again, that the salary is reduced under employment law in exchange for a free allowance (addendum).

Final taxable salary (eindheffing)

If the employer applies the rules for final taxation, the 30 percent ruling can be applied to the final taxable salary. A condition for this, however, is that the final taxable salary is determined for each individual employee.

The end of employment

If an employee who benefited from the 30 percent ruling receives a bonus after the application period has expired, the 30 percent ruling may still be applied under certain conditions. It is required that the bonus relates to the period in which the 30 percent ruling was still applicable and that there was unconditional entitlement to the bonus at the end of the term.

Payment reductions

The decision regulates that the compensation for extraterritorial costs is not included in the basis on which the payment reduction for investigation and development activities and the payment reduction for shipping is calculated.

Effective date of 30 percent ruling

If a seconded employee first works abroad for a certain period of time, prior to becoming employed in the Netherlands, the question arises when the 30 percent ruling takes effect.

The decision states that the term of the 30 percent ruling enters into effect when the employment with the Dutch withholding agent commences, irrespective of whether this employment is carried out in the Netherlands or abroad. Exceptions are possible if the employee works exclusively outside of the Netherlands for a longer period of time and does not (yet) live in the Netherlands.

New application in the event of changes in employer

If an employee utilises the 30 percent ruling and starts with a new employer, the 30 percent ruling must be applied for again with this new employer within four months after the start of this new employment (note: this also applies within the group context).

When Dutch employees don't qualify for tax-free compensation of extraterritorial costs

If a Dutch employee has lived outside of the Netherlands for less than 10 years, he or she will not qualify for application of the 30 percent ruling (as a result of the deduction on the maximum term). In addition, this employee cannot incur (tax-free) extraterritorial costs according to the decision, since the country of origin has remained the Netherlands. A tax-free compensation of extraterritorial costs is therefore not possible.

September 2005

Jeroen Gombert is based in Deloitte's Amsterdam offices. He can be reached by email at jgombert@deloitte.nl or by telephone at  +31 20 582 5868.

Subject: The Dutch 30 percent ruling, Tax in the Netherlands