The 30% ruling

The Netherlands had a special tax regime for expatriates, the so-called 35% ruling, which provided for a reduction of taxable income equal to 35% of the employee's remuneration. In 1999, when the Dutch government issued the proposed changes to the Dutch income tax act (which entered into force 1 January 2001) , changes to the 35% ruling were announced as well. At that time no details were given, except that the 35% deduction would be reduced to 30%. On 24 October 2000 the Dutch government published the new proposed rules for the 30% ruling. The 'old' 35% ruling {dated 29 May 1995) was abolished on 1 January 2001. A summary of the new rules {which entered into force 1 January 2001 as well) is outlined below.

According to the new rules, the employer may pay the employee a tax-free allowance that does not exceed 30% of his total remuneration. In addition, the employer may reimburse the fees paid for the employee's children to attend an international school tax-free. It is no longer possible to claim a deduction of school fees paid by the employee in the individual income tax return. Therefore, in cases where the employee pays the school fees himself, it is advisable to have the employer reimbursing the employee and to reduce the salary of the employee by amending the employment contract. Under the new 30% ruling, the effective top income tax rate in the Netherlands amounts to 36.4% {this is 70% of the new top rate of 52% for resident taxpayers) .For the year 2000 and before the effective top rate was 39% {this is 65% of the old top rate of 60% for resident taxpayers).

The 30% exemption does apply to the employee's employment income relating to the assignment to the Netherlands. Therefore, the 30% exemption can also apply to employment income which relates to work days spent outside the Netherlands provided that the Netherlands has the right to tax this income e.g. under a relevant tax treaty with another State. No exemption, ho.wever, is granted to severance and pension payments and income which is eligible for double tax relief. The new regulations also state that the 30% ruling only applies to regular payments. It is unsure whether this implies that for example -bonuses and share options are excluded. The explanatory notes indicate, however, that this restriction applies to severance and pension payments only.

The explanatory notes also state that it is no longer allowed to split the gross salary mentioned in the employment agreement in a taxable part of 70% and a non-taxable part of 30%. This means, for example that if a gross salary has been agreed of EUR 100,000 per annum, that it is not allowed to pay EUR 30,000 tax free {and subject EUR 70,000 to tax) .In this example the salary agreed upon should be EUR 70,000 with an additional tax free allowance of EUR 30,000. As a consequence all existing employment agreements would need to be revised! For gross salary contracts there is a solution by changing the contracts. For employees with a guaranteed net salary, it is impossible to comply with this. For example assume an employee has a guaranteed net salary of EUR 60,000 per year. The gross salary is a question mark and is known by making a gross-up calculation. The outcome may vary from year to year depending on changes in tax rates, personal tax circumstances etc. Due to the unknown gross salary, it seems impossible to mention the tax free allowance in the contract separately and reducing the {net taxable) salary with an equal amount. Another complexity arises with employee stock options. At the time of grant it is unknown how much the stock option income will be. It is therefore unclear how the benefit of the 30%-ruling can be claimed on this type of income.

It is no longer allowed to build up pension on the tax free allowance of 30%. This will have an enormous effect on employees who do have currently a pensionable base equal to their full gross salary. The explanatory notes also indicate that no social security tax is due on the 30% tax free allowance. For employees with a gross annual income (including the 30% tax free allowance) of less than roughly EUR 60,000, the benefits for unemployment and disability will be based on the income excluding the tax free allowance. Employees with a gross income exceeding EUR 60,000 are not affected, since 70% of this amount exceeds the maximum income for social security tax purposes.

We have discussed the issues mentioned above with the competent tax inspector. He was not able to provide further clarification. Given the enormous complexity and administrative problems for employers and employees we hope that these new requirements will be abolished.

Reimbursement of double household cost can no longer be reimbursed tax free in addition to the 30% tax free allowance. It is deemed to be included in the 30% tax free allowance. Under the old regulations, the double household cost could be reimbursed free of income tax for a period of maximum two years in addition to the tax free allowance of 35%.

The exemption is available for a period of 10 years. This is only five years, if the employee no longer meets the conditions set out in paragraph 4 below (if the date -at which the conditions are no longer met -occurs more than 5 years after the arrival in the Netherlands, the exemption will be no longer applicable as of the date the conditions are no longer met) .The new law stipulates that after a period of 5 years the tax authorities can request that the employer demonstrates that the employee still meets the conditions. The period can then, on joint request of employer and employee, be continued up to the full period of 10 years. The tax authorities cannot request this if the employer has demonstrated himself that the employee still meets the conditions at the beginning of the sixth year.

The maximum period of 10 years is reduced by the duration of any previous stay or previous period of employment in the Netherlands. A reduction of the maximum period will not be taken into account if the expatriate has not stayed or worked in the Netherlands during the 10 years preceding the arrival date in the Netherlands.

In order to qualify for the 30% ruling, the following conditions have to be met.
- The employer must make a reasonable case that the employee possesses special expertise which is not available or scarce on the Dutch labour market.
- The employee must be recruited from abroad.
- The employer is a Dutch wage tax withholding agent or tax withholding agent if it has one or more employees Netherlands and is keeping the payroll administration and has notified itself with the tax inspector.

The new law stipulates that an employee who meets all of the following 3 conditions will automatically meet the specific expertise test:
- The employee has been transferred within an international group for the purpose of job rotation.
- The employee has been working with the group outside the Netherlands for a period of at least 2.5 years.
- The employee belongs to the middle or high management of the company.

In principle, the employee must have been recruited from abroad. An exception to this requirement is made if the employee changes from one domestic employer to another, provided that the employee still meets the other conditions of the ruling in his new employment and that the new employment commences within 3 months after the termination of the old employment. As compared with the original proposed new rules a change was made, which seem to include a typo. One could read the new rules as such that a person who is recruited while present in the Netherlands -but hired by a non-Dutch legal entity, which subsequently seconds the individual directly to the Netherlands -would be able to qualify. We have discussed this with the competent tax inspector. He agreed that this could be read as such but he feels that this was not the intention and will therefore not accept this position.

In the following situations there is a Dutch withholding agent for wage tax purposes:
- The employee is employed by a Dutch company.
- The employee is employed by a foreign company, which has a permanent establishment in the Netherlands.
- The employee is employed by a foreign company, which does not have a permanent establishment in the Netherlands. However, the Dutch tax inspector considers the foreign employer as a wage tax withholding agent at the foreign company's notification.
In order to make optimal use of the 30% ruling, it is necessary that all the employee's remunerations (including items which are paid from abroad such as bonuses etc.) are included in the Dutch payroll administration. In other words, where it was possible in the past to claim the benefit of the 35%-ruling in the individual income tax return on items which were not processed in the Dutch payroll, under the new rules this is not possible anymore.

As opposed to the 'old' 35% ruling, a specific time frame is mentioned in the new law. The application for the 30% exemption should be filed within 4 months of the date of the employee's arrival in the Netherlands. If the application is not filed within 4 months, the 30%-ruling becomes effective as of the first day of the month subsequent to the month in which the application has been filed. The request must be made jointly by the employee and the new domestic employer with the tax authorities in Heerlen.

Under the 'old' 35% ruling a seconded employee who is a resident taxpayer of the Netherlands could elect to be treated as a 'deemed non-resident' for the entire 10 year period of the ruling. As a consequence, the employee is subject to Dutch tax on specific sources of income and wealth only (e.g. world-wide employment income, Dutch real estate).

The new Income Tax Act provides for the possibility that the Ministry of Finance sets rules which also allow for this election. The new rules provide -generally speaking -for same result as the current rules (i.e. the employee is subject to Dutch income tax on specific sources of income only (e.g. world-wide employment income, Dutch real estate; passive income such as interest from saving accounts continues to be exempt from Dutch income tax) .There are two major differences with the old 35% ruling. Firstly, under the new rules the election to be treated as a deemed non-resident can be made from year to year (i.e., it is possible to elect to be treated as a deemed non-resident in the first year and in the subsequent year as resident taxpayer).

The election must be filed with the tax inspector and always becomes effective on the first day of the calendar year in which the election has been filed. Secondly, the employee is entitled to personal deductions (such as alimony payments) even if the election for deemed non-residency has been made. This was not possible under the old 35%-ruling.

Employees who have been granted a previous 35% ruling, will not be eligible to continue this after 31 December 2000. The 'old' 35% ruling will be abolished. The competent tax inspector has informed us that he expects that all existing 35% rulings will be converted automatically into a '30% ruling' .The duration of the 30% ruling will be equal to the remaining period applying to the old 35%-ruling on 31 December 2000.