20 September 2022
Employment Tax
Impact High
Summary
Today, the Dutch Government has published the draft legislation to amend the 30% ruling (Dutch expat tax regime).
It is proposed that the maximum 30% ruling tax free allowance will be capped as per 1 January 2024. This would be done by limiting the basis of this tax-free allowance to the regulated maximum remuneration for the public sector (2022: EUR 216,000 gross annual remuneration, indexed annually, also known as the so-called Balkenende-norm as included in the Wet Normering Topinkomens). Transitional rules will be introduced for existing cases (grandfathering up to 1 January 2026).
What does this mean?
For high-earners, the 30% ruling in practice reduces their effective Dutch marginal income tax rate from 49.5% to 34.65% (i.e. 49.5% tax rate x 70%). As a result of the announced changes to the 30% ruling (capped at EUR 216,000 income per annum, 2022 amount), the connected tax-free allowance will be capped at approx. EUR 64,800 on an annual basis (EUR 216,000 x 30%). As such, the effective maximum net tax saving would be capped at approx. EUR 32,000 (EUR 64,800 x 49.5%) per employee per year. Clearly, this would impact the net-after-tax income of such employees working on a gross employment contract. In case of employees who are working on a net contract basis (including tax equalisation), the employer costs would increase. Hence, for employers this could have a substantial impact from a talent management and budgeting perspective (amongst others).
Transitional law
It has been proposed that the maximum 30% ruling tax free allowance will be capped as per 1 January 2024. However, it is proposed that transitional law applies for individuals for whom the 30% ruling was applied in payroll in the last wage tax period (loontijdvak) of 2022 (typically: December 2022). For these existing cases, the cap of the tax free allowance will apply only as per 1 January 2026, resulting in a defacto transitional period of three years. For individuals who will have the 30% ruling as per 2023, the cap of the tax free allowance will apply as per 1 January 2024.
Consequently, we expect that employers will consider (where possible) to have employees start their Dutch employment/secondment in 2022 instead of early 2023 if they earn (or are expected to earn) more than EUR 216,000 (2022) per annum. This way, the transitional law would apply to them until 1 January 2026 which means their 30% tax free allowance will only be capped as per this date instead of as per 1 January 2024. Based on the documentation that is currently available it seems that in order to be eligible for the transitional law it is required that the 30% ruling has been actually applied in the wage tax administration. Further guidance in this respect has yet to be provided.
International developments
Introducing a cap of the 30% tax free allowance potentially impacts the attraction of the Netherlands as a country of residence for employees. As such, the proposed legislation can impact the talent management of your company in view of retaining existing employees and attracting new employees, for instance compared to other countries that (recently) increased the scope, duration and/or benefit of national tax incentives (such as Denmark, Sweden and Italy).
Other points of attention
Partial non-residency (special income tax status)
In addition, we note that the Dutch Government did not propose any changes to the partial non-resident taxpayer status (that is available for 30% ruling holders) for 2023. Consequently, taxpayers with the 30% ruling can continue to opt to be treated as a partial non-resident taxpayer of the Netherlands for the 2023 calendar year. As a result, they do not need to report their worldwide income with respect to income from substantial interest (Box 2) and income from savings and investments (Box 3). Only the Dutch-sourced income (e.g. substantial interest in a Dutch company and/or holding Dutch real estate) is then subject to Dutch taxation. Based on the wording of an accompanying letter it can be derived that this related benefit of the 30% ruling will be further investigated but that no measures will be taken for 2023.
International school fees
Under proposed new 30% ruling legislation, it remains possible for employers to reimburse the international school fees for the children of the employee on a tax-free basis, in addition to the fixed 30% tax free allowance. These costs could still be reimbursed tax-free ‘on top’ of the capped 30% ruling allowance (i.e. there will be no changes in this respect).
Possibility to reimburse actual costs instead
Regardless of the changes in the 30% ruling, it will remain possible to reimburse the actual costs incurred by employees in connection to working outside their country of origin instead of applying the 30% ruling. This might become beneficial in certain cases as the 30% ruling benefit will be capped on approximately EUR 65,000. In other words, if extraterritorial costs higher than approximately EUR 65,000 are paid to an employee, in some scenarios it is most likely more beneficial to reimburse the actual extraterritorial costs tax free instead of applying the 30% ruling. The election for which regime to apply should be made in the first wage tax period of each calendar year, with the exception of the first four months of employment in the Netherlands (in that case the election should be made in the fifth month). Further guidance in this respect has yet to be provided.
Salary norm (specific expertise test)
Lastly, we note that the minimum salary norm of the 30% ruling (in view of the specific expertise test) will be raised due to the annual indexation (which is substantially higher in previous years because of e.g. inflation). For 2023, this indexation will be 6.3%, which will result in an annual (general) salary norm of approx. EUR 41,953 (2022: EUR 39,467).
Action required by employers
As a result of the aforementioned legislative changes, it is important for employers to:
1.Obtain insight
2.Communicate
3.Take action
How we can help
As Vialto Partners, we can assist you with the required steps to obtain insight into the impact of the proposed legislation on your workforce, how to communicate this to employees and to take action in anticipation of the upcoming changes. As per the moment the proposed changes would apply we would be able to assist with for instance payroll reviews and comparative calculations.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
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