19 September 2023
Employment Tax
Introduction
By means of this NewsFlash, we want to provide you with the relevant updates in light of the announced legislative proposals on Dutch Budget Day and other changes in legislation set to take effect on 1 January 2024. Below, you will find further details and considerations regarding proposed and upcoming legislation that is relevant from an employment tax perspective.
30% ruling – cap of the maximum tax free allowance under the Dutch expat tax regime
The maximum 30% ruling tax-free allowance will be capped as of 1 January 2024. This will be done by limiting the basis of this tax-free allowance to the regulated maximum remuneration for the public sector 2024 EUR 233,000 gross annual remuneration, indexed annually, also known as the so-called Balkenendenorm as included in the Wet Normering Topinkomens ). This legislation was already enacted at an earlier stage, but will impact income received as of 1 January 2024 (subject to transitional law, grandfathering up to 1 January 2026 for specific cases, see below).
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%, 2024 figures). As a result of the changes to the 30% ruling (capped at EUR 233,000 income per annum, 2024 amount), the connected tax-free allowance will be capped at EUR 69,900 on an annual basis EUR 233,000 x 30% . As such, the effective maximum net tax saving would be capped at approx. EUR 34,600 EUR 69,900 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
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 de facto transitional period of three years for this group. For individuals who will have the 30% ruling as per 2023, the cap will apply as per 1 January 2024.
For individuals for whom the 30% ruling was applied in payroll in the last wage tax period of 2022, but who changed to a new wage tax withholding agent (inhoudingsplichtige) in 2023, specific attention is required. In case there is a gap between the end date of the previous employment and the start date of the new employment, the Dutch tax authorities are of the opinion that the transitional law is no longer applicable. For these cases, the cap of the 30% tax-free amount will apply as per 1 January 2024 as well.
Action required by employers
As a result of the aforementioned legislative changes, it is important for employers to:
Other matters
2024 salary norm (specific expertise test)
We note that the salary norm of the 30% ruling (minimum required taxable salary in view of the specific expertise test to qualify for this Dutch expat tax regime) will increase per 1 January 2024 due to the annual indexation. On Budget Day it is announced that the general indexation for 2024 will be 9.9%, resulting in:
The indexation of 9.9% results in the highest increase of the required minimum salary since the introduction of the salary norm of the 30% ruling. Consequently, it is possible that some employees may no longer benefit from the 30% ruling, or only to a lesser extent as of 1 January 2024.
Partial non-resident taxpayer status
Please note that the Dutch Government did not propose any changes to the partial non-resident taxpayer status (special income tax status that is available for 30% ruling holders, which is e.g. relevant for the tax treatment of their personal income and investments, “Box 3”).
Assessment of work relationships (Wet DBA)
The Dutch government wants to work towards a (more) level playing field for employees and self-employed individuals. To realise this, the government has been looking into fitting tax measures for employees and self-employed individuals, enhancing the definition of when an individual is considered an employee or self-employed and strengthening enforcement measures in case of false self-employment.
One of the measures that the Dutch tax authorities had introduced in this regard was working with a pre-approved model agreement. With this pre-approved model agreement, the taxpayer would have certainty on the qualification of the activities as self-employed, and that this would not be considered as false employment. One type of these pre-approved model agreements stated that the individual is considered self-employed if he can be substituted freely (modelovereenkomst vrije vervanging).
Following case law from the Supreme Court of March 2023 (see further details below), the Dutch tax authorities have recently announced to withdraw the approval of model agreements that are based on the concept of free substitution as of 1 January 2024. This concerns both the general model agreements as well as the sector-specific agreements and individual agreements that are based on free substitution. This means that the client and individual will have to re-evaluate the qualification of the work relationship and, if needed, adjust this accordingly. Parties that have earlier received approval from the Dutch tax authorities for using the specific model agreement based on the concept of free substitution will receive a letter from the Dutch tax authorities ultimately by 1 October 2023.
Case law of March 2023
On 24 March 2023, the Supreme Court ruled in the so-called Deliveroo-case that the presence of an employment contract hinges on a comprehensive evaluation of all circumstances involved. While the obligation to perform the work personally is a factor that may hold significance in assessing the employment relationship, it is not the sole determining factor. This means that also when parties have agreed that the individual can be substituted freely, this may still be considered as an employment relationship.
From an enforcement perspective, the Dutch tax authorities are currently not enforcing the rules regarding the qualification of the work relationship until 1 January 2025, pending new legislation. In the meantime, the Dutch tax authorities will not impose additional assessments or correction obligations, unless there is malevolence or if instructions from the Dutch tax authorities are not followed in a timely manner. The Dutch tax authorities will continue making company visits and conduct audits, so it will remain important to look into the qualification of the work relationship with self-employed individuals.
Work-related cost scheme
Reduction tax free budget (vrije ruimte)
The work-related cost scheme enables employers to spend part of the total taxable wage (the tax free budget) on providing tax-free reimbursements, benefits in kind or provisions to employees. In 2023, the tax free budget was temporarily increased to 3%. As of 2024, the tax free budget is being reduced again:
| 2023 | 2024 | |
| Cap 1st bracket | EUR 400,000 | EUR 400,000 |
| Tax free budget 1st bracket | 3.00% | 1.92% |
| Tax free budget 2nd bracket | 1.18% | 1.18% |
Employers must pay a final levy (eindheffing) over any amount above the tax free budget. For 2024, the percentage will remain unchanged and will amount to 80%.
Increase tax-free travel allowance
As of 1 January 2024, the maximum tax-free travel allowance will increase from EUR 0.21 per kilometer to EUR 0.23 per kilometer.
Income tax – Change in Box 1 (lucrative investments)
Investments held by senior executives (or other individuals) in relation to a company for which they perform or have performed services, can under circumstances qualify as so-called lucrative investments. This concerns e.g. certain carried-interests and other qualifying leveraged investments. Directly held lucrative investments are taxed in Box 1 (tax rate up to 49.5% , while indirectly held lucrative investments are under conditions taxed in Box 2 (currently: 26.9% tax rate). The changes mentioned below are relevant for both directly and indirectly held investments.
As a result of a Dutch Supreme Court ruling earlier this year, legislative changes are now proposed with respect to this so-called lucrative investment regime (lucratiefbelangregeling). Due to this court decision, fewer investments or investment structures would qualify as a lucrative interest. The purpose of the proposed legislative changes published on Budget Day is to avoid that investments and/or investment structures that were set up with the intention to qualify as a lucrative investment would no longer qualify as such due to the Supreme Court ruling of 14 April. We note that a potential effect of the proposed legislation is that certain investments and/or -structures that did not qualify as a lucrative interest before the aforementioned Dutch Supreme Court ruling will also qualify as such afterwards (even if this was initially not intended/expected).
In addition, it is good to note that on Budget Day new legislation was proposed with respect to the qualification of foreign (hybrid) partnerships/entities. In the proposed legislation, the Dutch tax treatment of foreign partnerships/entities will under circumstances change and be aligned with their tax treatment in the foreign jurisdiction (i.e. transparent or opaque, ‘symmetry approach’ to avoid so-called hybrid mismatches). It is intended for this legislation to apply as per the 2025 tax year. This legislation can also impact the Dutch tax treatment of lucrative investments held through foreign partnerships/entities.
In view of the above, it would be advisable to review Dutch and foreign personal investment structures to determine if and to what extent these would potentially be impacted by these proposed legislative changes.
Income tax – Change in Box 2 tax rate (substantial interests)
Currently, tax on income from substantial interest (“Box 2”) is taxed at a flat rate of 26.9% 2023 figures). As of 1 January 2024, tax on income from substantial interest will be taxed via two tax brackets (see figure below). Through the implementation of two tax brackets rather than a flat rate, the government seeks to incentivise taxpayers to more regularly distribute profits.
| With a taxable income from substantial interest of more than | But not more than | The tax due amounts to the amount stated in column III, plus the amount calculated by taking the percentage stated in column IV of the part of the taxable income from substantial interest that exceeds the amount stated in column I | |
| I | II | III | IV |
| – | EUR 67,000 | – | 24.5% |
| EUR 67,000 | EUR 16,415 | 31% | |
Income tax – Box 3 (personal investment income)
In the Tax Plan 2024, the government proposes an increase in the applicable Box 3 tax rate to 34% per 1 January 2024. As part of the Budget Day plans last year, an increase to 33% per 1 January 2024 was announced. This is now increased by one additional percent, to 34%. The tax-free income (heffingvrij vermogen) will not be indexed per 1 January 2024 and will remain EUR 57,000 per individual EUR 114,000 for fiscal partners).
In addition, retroactive changes are proposed in view of the qualification of specific components as “savings” (to better reflect the actual return on investment of those components). This applies for example for membership rights in a Homeowners’ Association (lidmaatschapsrecht in een VvE) and the claim on a third-party account of a notary or bailiff (vorderingsrecht derdengeldenrekening van notaris of gerechtsdeurwaarder). These changes are proposed to take retroactive effect per 1 January 2023.
In the meantime, the discussion about the current applicable legislation for Box 3 continues and several cases are pending in court. Due to the deemed return on investment that the Dutch tax authorities take into account to determine the taxable income for Box 3, the key question is whether the deemed return on investment correctly reflects the actual return on investment. An important development in this respect is that the Advocate-General stated on 18 September 2023 that the current Box 3 taxation is contrary to the principle of prohibition of discrimination and an infringement of property rights. It is now up to the Supreme Court to issue a final decision with respect to the sustainability of the current Box 3 taxation. This judgement is expected in the next half year.
For the time being, the Dutch tax authorities will continue to determine Box 3 taxation based on the deemed return on investment. Taxpayers can file an appeal and provide proof in case a lower actual return on investment would apply.
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
Please feel free to reach out to the following Dutch Vialto Partners colleagues to discuss further:
Further information on Vialto Partners can be found here: www.vialtopartners.com
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