Employees from abroad with specific expertise that is scarce on the Dutch labor market will, subject to conditions, be eligible for tax relief, i.e. the 30% ruling. If the 30% ruling is applicable, 30% of the employee’s salary can be paid as a tax-free allowance. The remaining 70% is salary that is subject to tax. Below, we discuss some important developments with respect to individuals who have been recruited within a radius of 150 kilometers from the Dutch border and the application of the 30% ruling on trailing payments made after the employee has finished their assignment in the Netherlands.
Court cases regarding border workers
Employees whose secondment to the Netherlands took effect on or after January 1, 2012, and who were living within a 150 kilometer radius of the Dutch border during more than 16 of the 24 months prior to the start of their Dutch employment or assignment, are no longer eligible for the 30% ruling. Two court cases on whether the 150 kilometer requirement is compatible with EU law rendered conflicting judgments: the Tax Court in Breda recently ruled that this condition is not contrary to EU law, while the Tax Court in Haarlem ruled that it was contrary to EU law and that it therefore should be abolished. The judgment rendered by the Tax Court in Breda has been appealed before the Dutch Supreme Court.
Changes to the 30% ruling
Specific condition for border workers not applicable to employees returning to the Netherlands
The aforementioned condition for border workers could also adversely affect employees who, after a previous stay in the Netherlands, are returning to take up new employment or an assignment. Employees who stayed in the Netherlands for more than 8 of the 24 months prior to their return, will no longer be eligible for the 30% ruling. As this is an unintended consequence of the 150 kilometer radius condition, it will not apply to employees who previously stayed in the Netherlands and who met the 150 kilometer test when they first arrived for their employment or assignment (and this employment or assignment commenced less than 8 years ago). This change has retroactive effect to January 1, 2012.
Application of the 30% ruling on trailing payments
The 30% ruling may be applied to trailing payments, if they are actually paid in the month following the month in which the employment or assignment in the Netherlands ended. Trailing payments are payments received after the conclusion of the assignment in the Netherlands, but which relate to the assignment period in the Netherlands, such as accrued vacation allowance, a 13th month incentive payment, or a payment to compensate outstanding vacation days. The Dutch tax authorities have now given approval for trailing payments to be made under application of the 30% ruling, if the payment occurs in the month following the month the employment or assignment ended.
For example: (assuming the employer withholds Dutch income tax on a monthly basis) if an employee leaves the Netherlands in January, trailing payments may still be made under application of the 30% ruling in February. This change, which has retroactive effect to January 1, 2012, allows employers one month to make trailing payments under application of the 30% ruling.
The 30% ruling cannot be applied to trailing payments made later than one month after the month in which the Dutch employment or assignment ended. This is particularly important in situations where, for example, bonuses are paid annually on a fixed date, and to income from equity-based compensation plans (subject to Dutch income tax to the extent attributable to duties performed in the Netherlands). The total payment will be subject to Dutch income tax (under the 30% ruling only 70% would have been taxed), which will result in a significantly higher Dutch income tax liability. This position, which has been adopted by the Dutch Ministry of Finance since January 1, 2012, has now been set out more clearly in the relevant rules.