On March 18, 2010, the European Court of Justice (“ECJ”) decided that the Netherlands must grant the self-employment deduction to non-residents, irrespective of whether they elect for taxation as resident taxpayers.

Self-employed taxpayers are entitled to a special deduction in computing taxable income, provided that they spend a minimum number of hours on their business each year. Non-residents are also entitled to this deduction, but hours spent working outside the Netherlands do not count towards the required minimum number, unless an election is made to be taxed in the same way as a resident taxpayer.

The Dutch Supreme Court decided that to exclude hours worked outside the Netherlands in this way, in principle, infringes the freedom of establishment under the EU Treaty. However, the Supreme Court requested a preliminary ruling from the ECJ on the question of whether the availability of the option to be taxed as a resident had the effect of neutralizing this infringement. In this respect, it should be noted that although electing for taxation as a resident enables a non-resident to take into account hours worked outside the Netherlands, it also carries with it serious disadvantages.

In its ruling, the ECJ confirmed that the exclusion of non-Dutch hours for non-residents constituted an infringement of the freedom of establishment, and decided that this could not be neutralized by offering the possibility to be taxed as residents.

Facts and legal background

The taxpayer in this case, a Mr. Gielen, lived in Germany and ran a horticultural business, partly in Germany and partly in the Netherlands. In the year in question, he spent more than 1,225 hours working on the business as a whole, but less than 1,225 hours working in the Netherlands. The Dutch tax authorities rejected Mr. Gielen’s claim for the self-employment deduction on the grounds that he had not spent the minimum number of hours required for the deduction (1,225) working in the Netherlands and he had not elected for taxation as a resident taxpayer. The Dutch Supreme Court decided that the Dutch rules were discriminatory but referred the question to the ECJ as to whether the option to be treated as a Dutch resident taxpayer neutralized this discrimination.

The ECJ’s ruling

The ECJ decided that the Dutch rules on the self-employment deduction infringed the freedom of establishment. Residents and non-residents were in comparable situations as regards the requirement to work a minimum number of hours in the business in question in order to be eligible for the deduction. The different treatment for non-residents according to whether or not the hours were spent in the Netherlands therefore discriminated against non-residents and constituted an infringement of the freedom of establishment. The ECJ supported this decision by reference to its earlier case law.

The ECJ also decided that offering non-residents the possibility to be taxed as residents could not neutralize this discrimination: a discriminatory regime cannot be rendered non-discriminatory simply by offering an alternative, non-discriminatory regime. 

KPMG Meijburg & Co comment

This decision has implications for other Dutch tax benefits, such as the deduction for new businesses, the R&D deduction, the partner deduction, and (prior to 2010) the small business allowance, since these benefits, like the self-employment deduction, are linked to the number of hours spent on the business. The decision may also have implications for non-residents who wish to claim tax relief for mortgage interest. In the Renneberg case (C-527/06), which dealt with a situation prior to a major tax reform in 2001, the ECJ held that the refusal to grant such relief was discriminatory. Assuming that the Renneberg decision still applies under current legislation, it is now clear from the current case that the Netherlands will not be able to rely on the availability of the option to elect for taxation as a resident to neutralize that discrimination.