Taxing questions: determining your liability

29th July 2003, Comments 0 comments

Determining your tax liability is important when you have to decide on things like bringing your family to the Netherlands or selling your home. According to The Expat Toolkit 2001, clarifying your residency status is key.

Resident tax liability or (partial) non-resident tax liability
Residents/partial non-residents: Part of your salary paid outside the Netherlands
Salary-split residents/partial non-residents
Real non-residents and non-Dutch income
US citizens
30%-ruling and non-earned income

Resident tax liability or (partial) non-resident tax liability

Whether your taxable income is your worldwide income or income from a limited number of (Dutch) sources only depends on the answer to the question whether you are to be regarded as a resident taxpayer or a non-resident taxpayer. Or even as a partial non-resident taxpayer.

Most probably, also in the country where you come from, a distinction is made between residents and non-residents when taxing people. The main rule is that you have to pay tax on your worldwide income in the country in which you are considered to have your place of residence. Generally, the place of residence is determined by the factual circumstances.

The subject is rather difficult and sometimes not clear at all, since one person may have a different interpretation of the facts than another person. And if the other person is the tax inspector, you may have a problem!

If you live in one country (for example Belgium) and you work in another country (for example the Netherlands), you will - in general - have to pay taxes on your employment income (your earned income) in that other country (the Netherlands), whereas you pay your taxes on your non-earned income in your home country (Belgium). In the Netherlands you are regarded as a non-resident taxpayer. The tax liability for a non-resident in the Netherlands is limited (in general) to the employment income.

If you are regarded to have your place of residence ("the centre of your personal and economic life") in the Netherlands, you will have to report your world-wide income on your Dutch tax return: earned income abroad, income from investments, rental income from your home abroad, etc., whereas you can deduct certain expenses: alimony, mortgage interest for principal place of residence, support for relatives, study expenses, gifts to Dutch charity institutions, etc.

As of 2001, non-residents are in position to choose to be treated as if they were resident taxpayers. This would for instance be attractive if the major part of their income from work is taxable in the Netherlands and they therefore pay tax on their salary here and have deductible expenses, for instance mortgage interest paid for their home. For purposes of the application of a tax treaty they remain a non-resident of the Netherlands.

To make things even more complicated, there is a fourth status available (under the 30%-ruling only): partial non-resident tax liability. In that case, you are a resident of the Netherlands and thus a resident taxpayer, but - upon request - you are treated - fictitiously - as a non-resident taxpayer certain income taxed. You are, however, a resident taxpayer for other types of income and deductibles. This is an additional benefit of the 30 percent-ruling and of interest to those of you who own a substantial number of assets.

Income from investments will not be taxed in the Netherlands although in fact you are a resident. Expert advice in this area is a "must" in order to be able to make the right decision, but most probably being a partial non-resident will be attractive under almost all circumstances.

The choice must be made during the calendar year (in other words, making your choice on the first income tax return will be too late). It is advisable to express your preference on the application form for the 30%-ruling. Your choice can be reconsidered each year during the relevant calendar year. If you already benefited from the 35 percent-ruling, you can reconsider your status of deemed non-resident taxpayer too.

The question whether you are qualified as a resident taxpayer or as a non-resident taxpayer is important too if you also earn employment income outside the Netherlands. If you are a resident taxpayer or a partial non-resident taxpayer, you have to report income earned outside the Netherlands on your Dutch tax return, with a relief for double taxation available under a tax treaty or similar facility. If you are a "real" non-resident, the income earned outside the Netherlands is not taxable although you may have to report it on your income tax return.

Obviously, the status you have has an impact on your tax liability regarding non-earned income, but since this article is a toolkit for the Dutch working place, only the consequences for your earned income are explained.

We can assure you that many other books can help you understand the further consequences and, of course, there are many friendly tax specialists who can provide you with paid advice on the details of everything!

Ask advice to choose your best tax status!

Residents/partial non-residents. Part of your salary paid outside the Netherlands

Should part of your salary - earned in connection with your Dutch employment and therefore taxable in the Netherlands - for whatever reason (maybe you need a certain amount of money in your home country) be paid outside the Netherlands, this part of the salary must be included in the payroll-salary in order to guarantee the benefit of the 30 percent-ruling. It is not possible to still claim the benefit when reporting the "foreign" income on your income tax return.

 

Salary-split residents/partial non-residents

The above describes a different situation from the situation in which you are working under a so-called "salary split". In that case, most probably you have a second employment position with a non-Dutch employer, for whom you work in another country than the Netherlands and for which you receive a salary from that foreign company which is taxed in that other country. You, as a resident of the Netherlands (also if you are a partial non-resident), will, under all circumstances, have to report this income earned abroad on your Dutch income tax return. You have to check whether there is a relief for double taxation available on the basis of a tax treaty or a similar facility. The 30 percent-ruling cannot be applied on the foreign income.

Real non-residents and non-Dutch income

If you are a "real" non-resident, you do not have to worry: all income - physically - earned outside the Netherlands is not taxable in the Netherlands. You only have to report that part of your salary which can be allocated to working days (requiring physical presence!) in the Netherlands. You could do so for wage tax purposes, but for practical reasons, you would be better off doing that on your income tax return, when all details are available (the days need to be counted!). The consequence is that you will receive a tax refund: a nice way of saving! Please note that the income not reported on the Netherlands tax return is, in principle, subject to tax in your home country or another country.

 
A non-resident can ask the tax authorities to treat him as a resident taxpayer. Be aware of the possible negative consequences: other income you may have (abroad) has an impact on your tax liability in the Netherlands and giving up your preference for the resident tax liability within eight years may cause the Netherlands tax authorities to claim back part of the tax benefits realized in the preceding years.

US citizens

If you are a US citizen (or you still file US tax returns since you have a green card), and you elect the status of a partial non-resident taxpayer, you will be treated as a "real" non-resident pursuant to the US-NL tax treaty. Therefore, also in this situation income physically earned outside the Netherlands will not be taxable in the Netherlands.

 

30 percent-ruling and non-earned income

In addition to the fact that you receive a non-taxable 30 percent-allowance there is another benefit of the 30 percent-ruling to apply. As explained above you - as a resident taxpayer - are treated differently from a non-resident taxpayer. Under the 30 percent-ruling the status of "partial non-resident taxpayer" is available. This means that you, as a resident of the Netherlands, can choose to be treated as a non-resident for certain portions of your income. Which option is the most favourable one depends on your personal income situation and your assets - but most probably being a partial non-resident will be the best choice. This choice can be made every year. If you have made your choice for the deemed non-resident tax liability under the 35 percent-ruling, you have the opportunity to revise your choice now the 30 percent-ruling applies to you too. However, we cannot think of any situation in which the resident tax status would be more favourable.

 

 Please click here for more information about The Expat Toolkit 2001 -- A Guide to the Dutch Workplace, edited by Ruud Blaakman, Stephanie Dijkstra and Rina Driece.

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