The 30% regulation for extraterritorial employees, as will be further discussed and explained in this article, has been subject to various (major) changes over the years. In practice there often still seems to considerable lack of clarity around this regulation. In this article we hope to provide more clarity in ‘the world of the 30% regulation’.
It should be noted that an important characteristic of legislation and regulations is that these are always subject to the continually changing wishes of society. It is also inherent to the 30% regulation that these wishes will, in all probability, also be subject to changes in the future.
The term ‘extraterritorial costs’
The 30% regulation is part of the regulation in the Income Tax Act 1964 which covers the so-called extraterritorial costs. In this context, extraterritorial costs can be considered as a ‘reimbursement’ for the extra costs which arise for employees who take up a post outside their country of origin. One can think of the costs incurred in obtaining official documentation (e.g. residence permits), extra cost of living expenses and travel costs for returning to the Netherlands.
The flat-rate approach versus the actual costs incurred
With claims based on the 30% regulation, the actual extraterritorial costs for the employee must be examined (and calculated). To makes things simpler, a flat-rate sum is utilized, namely maximum 30% of the employee’s annual taxable income. In doing this, only part of the employee’s annual income from employment will be taxed, rather than their entire annual income.
If the actual extraterritorial costs incurred turn out to be higher than the flat-rate reimbursement (maximum 30% of the employee’s annual income) it is wise to disregard the 30% regulation. In this case the flat-rate approach is omitted and the actual extraterritorial costs incurred are deducted from the annual taxable income.
It is in no case possible to combine both methods.
What are the current conditions to be able to apply the 30% regulation?
The term ‘extraterritorial employees’ relates to both incoming and outgoing employees. This means employees recruited from overseas or sent overseas by a tax withholding entity. Take note: supplementary cumulative requirements are associated with this.
Firstly, the incoming employee must possess specific expertise which is not available or is very scarce in the Dutch labour market. On 1 January 2012 an important change came into force which has provided simplification in this area: the subjective ‘case by case’ approach has been replaced by a simple, objective criterion.
For the level of specific expertise, the salary is assessed. If the taxable salary (after deduction of the tax free reimbursement) amounts to a minimum of €36,705 for ‘regular’ employees and €27,901 (amounts at 2015) for employees with a master’s degree and under the age of 30, then one can speak of specific expertise. The incoming employee must satisfy this salary standard every year. Moreover, the salary standard will be annually indexed by the tax authorities.
Employees recruited for work in the Netherlands in the context of scientific research, from junior doctors to specialists, always possess specific expertise and therefore do not have to satisfy the minimum salary criterion.
The second cumulative demand states that the employee must have been living at least 150 km from the Dutch border for more than two thirds of the 24 month period prior to commencing the employment in the Netherlands. The reason for this ‘extra’ requirement, which came into force on 1 January 2012, is that employees living relatively close to the Dutch border cannot make use of the regulation. Their cost patterns are seen as comparable to those of the Dutch, whereby the allowance is not deemed appropriate.
This condition is currently under attack. The Supreme Court has submitted questions on this to the European Court of Justice. On 24 February 2015 the European Court of Justice ruled that the condition is not in conflict with European law, unless it turns out that the flat-rate 30% allowance constitutes a clear overcompensation in relation to the actual extra costs incurred by the foreign employee. The Dutch judiciary will have to investigate this point further.
Employees who qualify as outgoing employees in the context of the 30% regulation are employees who:
- are sent from the Netherlands to countries in Africa, Asia, Latin America and a number of Eastern European countries.
- are sent from the Netherlands to another country in order to pursue science or provide education;
- represent the Netherlands as civil servants in another country;
- are sent to the BES Islands (Bonaire, St Eustatius and Saba), Curaçao, St Maarten or Aruba as civil servants, legal officials and service men/women;
- as service men/women are sent to countries outside the Kingdom of the Netherlands.
The 30% regulation is applicable if the employee remains in the relevant country for at least 45 days within a period of 12 months. Periods of less than 15 days are not taken into consideration. If the 45 day criterion is satisfied at least once, then every subsequent period of at least 10 days will be taken into consideration. For outgoing employees, no decision on the 30% regulation is required.
The added advantages of using the 30% regulation
Alongside having a higher net salary by applying the 30% regulation, there are several other advantages associated with it. These are:
- With the 30% regulation it is possible to opt for the so-called partial tax obligation. This means that the employee is not taxed on his or her box 2 income (income from substantial interests, with the exception of a substantial interests in a Dutch entity) and box 3 income (income from savings and investments, with the exception of Dutch real estate);
- With the 30% regulation the employee and his or her family members can exchange their foreign driving license for a Dutch driving license;
In contrast to the main rule that extraterritorial costs may not be reimbursed tax-free if the 30% regulation is applied, it is possible for an employer to reimburse tax-free the costs of an international school for the employee’s children if the employee is using the 30% regulation. Take note: the school costs must be paid directly by the employer and not via the employee him/herself.
The 30% regulation and the impact on national insurance and pension
A consequence of applying the 30% regulation is that the taxable salary is reduced. The 30% regulation has the same impact on the salary threshold (or ‘premium salary’) for the national insurance and employee insurance schemes. This means that the premiums are lower if the 30% regulation is applied, but only when the salary is lower than the maximum salary threshold level. A disadvantage of having a lower premium salary is that the insured salary is also lower. Because of this, any future benefit payment could turn out to be lower for the employee.
With the implementation of the expenses allowance scheme, which as of 1-1-2015 is obligatory for all employers, it is possible to accrue pension on the tax-free allowance. Because of this it could be the case that the pension scheme needs to be adjusted.
The 30% regulation must be included in the labour conditions and must be established in mutual consultation between the employer and the employee. The request can be submitted prior to commencement of the work in question, whereby the regulation can be applied as soon as the employee starts that work. If the request is submitted later, the regulation can be applied retroactively. Take note: for the regulation to be applied retroactively, the tax authorities must receive the request within a maximum period of four months following commencement of the work in question. If the request is not submitted within this time frame, the regulation will be applied from the first day of the month following the month in which the request was submitted.
What needs to happen during the period of the 30% regulation?
The 30% regulation is granted for a maximum period of 8 years. The employee must continually satisfy the salary standard, which means that the employer must check every year whether the employee’s taxable salary is sufficient.
In contrast to the former legislation, it is possible as of 1-1-2012 to reimburse less than 30% of the salary tax-free, in order to satisfy the salary standard. To meet the standard at the end of the year, the tax-free reimbursement can be ‘corrected’ downwards whereby the taxable salary meets the minimum criterion.
If an employee does not meet or no longer meets the salary criterion, the 30% regulation will expire for the relevant year and subsequent years. It is therefore important, for employees who are not reimbursed the full 30% of their salary tax-free, to check at the end of a year whether he/she once more meets the salary standard and/or whether he/she has room to possibly receive an extra tax-free reimbursement.
Tips in practice
- Request the 30% regulation in good time for your incoming employees;
- If the full 30% is not being utilized, check each year whether the employee meets the salary criterion and whether there is possible room for an extra tax free reimbursement;
- The reduced salary standard can only be applied if the employee is below the age of 30 (and possesses a master’s degree). As soon as the employee turns 30 the normal salary standard applies. Make sure that this is processed in the payroll;
- Decisions issued between 1-1-2007 and 1-1-2012 should be reviewed after 5 years. If the employee no longer satisfies the new conditions, the 30% regulation may no longer be assessed 5 years after issue of this decision;
- As employer you are responsible for an accurate payroll. Make sure therefore that the 30% regulation is not applied beyond the end date recorded on the decision statement of the tax authorities.
Source: Tax Globalizers Expat Solutions.