Almost every expat has heard of the 30% ruling and wants to benefit from it, but there aren’t that many expats who know exactly what the 30% ruling means and how it works. Finsens' tax experts take you through the basic rules and consequences.

What is the 30% ruling?    

The 30% reimbursement ruling (the 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% times 100 / 70 of the gross salary subject to Dutch payroll tax. This results in a maximum (effective) tax rate of approximately 36.4%. 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% ruling the following conditions have to be met:

• The employee works for an employer.
•  Employer and employee have to agree in writing that the 30% 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 rarely available in the Netherlands, for example specialists in a specific line of business.
•  In order to be eligible for the 30% ruling you have to be in an employment situation. If you are self-employed it will not be possible to claim the 30% 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% ruling.
• The application for the 30% ruling has to be done by both employer and employee. If the 30% ruling is applicable, the gross salary of the employee will be reduced by 30%. 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% 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%. In return you will receive this 30% 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% 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% ruling definition of ‘regular employment income’ and therefore no 30% 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% of your salary will be paid tax free, there are also other benefits.

30% Ruling and Box 3
Under the 30% 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 Dutch licence. However, if you benefit from the 30% ruling, it is possible to switch your foreign driving licence without retaking the test.

Points of attention

Retrospective Period
The 30% ruling will become effective in retrospect if the application is submitted within 4 months after the commencement of your employment contract. If the application is submitted after 4 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 5 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.  

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?

Well, although it is a pity that you missed the first couple of years of the benefit it is still well worth trying 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.

 19 February 2008

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

[Copyright Finsens + Expatica 2008]