On 4 April 2025, the Dutch Supreme Court ruled in a case regarding the wage concept for Dutch wage tax purposes. Specifically, the Supreme Court ruled on the question whether tax exempt
reimbursements and benefits in kind should be considered as ‘wage’ for the purpose of the so-called employer’s levy for excessive termination payments (hereafter: excessive employer’s
levy). In this update, you will find a summary of the Supreme Court ruling, as well as the impact thereof on employers.
The Supreme Court ruling of 4 April provides insight into the question whether tax exempt reimbursements and benefits in kind (as meant in art. 31a(2)Dutch Wage Tax Act 1964) should be considered ‘wage’ for the purpose of art. 32bb (the article on the excessive employer’s levy). In an earlier stage, at the district court and the court of appeal, it was ruled that based on the historical and legal systematic interpretation of the ‘wage’ concept, tax exempt components should not be considered as ‘wage’ for the purpose of the excessive employer’s levy under art. 32bb.
However, the Supreme Court has taken a different approach. In short, the Supreme Court ruled that the concept ‘wage’ for Dutch tax purposes should be interpreted grammatically, i.e. in line with Chapter II of the Dutch Wage Tax Act 1964, and hence that there is only one concept of wage for Dutch tax purposes. This means that for the purpose of the excessive employer’s levy of art. 32bb, in short, all wage components should be taken into consideration, i.e. including the tax exempt reimbursements and benefits in kind. This can for instance include the tax-free reimbursement for extraterritorial costs under the Dutch expat tax regime (the 30% ruling), or components included in the tax free budget (“vrije ruimte”) of the Dutch Work Related Cost Scheme (“werkkostenregeling”).
While the Supreme Court ruling of 4 April provides clarity on which income components should be included, this further decreases the flexibility of employers under this legislation while increasing the administrative burden.
Background of the ‘excessive employer’s levy’
Under art. 32bb of the Dutch Wage Tax Act 1964, under circumstances an employer owes a 75% Dutch employer’s levy when an employment agreement is terminated and the employee is deemed to receive an ‘excessive severance pay’. The rationale behind this legislation is that the Dutch government wanted to discourage employers to provide severance payments exceeding one time the annual remuneration. However, due to the broad scope of the legislation, a 75% levy could also be due by employers in cases where no severance is paid to the employee. Similarly, the legislation could also apply in case an employee leaves the company at their own initiative, which makes the impact of this legislation difficult to predict from an employer’s perspective.
Calculation methodology
In short, an employer owes a 75% Dutch employer’s levy when an employment agreement is terminated and the employee is (deemed) to receive an ‘excessive severance pay’. The legislation only applies to high earners (> EUR 680,000 wages on an annual basis, 2025 number). The taxable basis of this employer’s levy follows from a complex formula. The main element of this legislation (in short) is that it takes the employee’s remuneration in the year of severance (and following years) (“t”) and compares this with the remuneration in the second year prior to the year
of severance (“t-2”) (recalculated to amounts on an annual basis). Insofar the total of the wages (including severance payments) in the year of severance (t) is more than twice the amount of the wages in the second year prior to the year of severance (t-2), the 75% employer’s levy is due (in short). We note that this simplified example assumes that the employment exists during the full year in the relevant calendar years (t and t-2).
The actual formula is more complex than described above and e.g. includes time-apportionment rules in case an employment does not exist during the full year. In addition, the calculation also takes into account the difference between the wages in the year prior to the year of severance (t-1) compared to the second year prior to the year of severance (t-2).
Impact of the Supreme Court ruling of 4 April
As described above, the calculation methodology of art. 32bb Dutch Wage Tax 1964 is complex, with many variables that can impact the overall outcome. Aside from factors such as the termination date, it is important to include the correct remuneration components into the calculation.
In lower case law, there had been various proceedings regarding the question whether tax exempt reimbursements and benefits in kind (as meant in art. 31a(2) Dutch Wage Tax Act 1964) should be considered ‘wage’ for the purpose of article 32bb. Previously, in the majority of these lower proceedings, it was ruled that tax exempt components do not qualify as ‘wage’ for the purpose of article 32bb, and hence could be excluded when applying the provisions of this article.
For instance, this meant that individuals with a total income above the threshold of EUR 680,000 (2025) but whose remuneration was partially tax exempt (e.g. due to the application of the Dutch expat tax regime) with the result that their taxable remuneration was below the threshold, the position could be taken that the legislation did not apply (and hence no 75% levy would be applicable). Similarly, in- or excluding tax exempt components could impact the outcome of the calculation in other cases as well. Moreover, under this approach it was less complex for employers to calculate the impact, as the data included in the individual payroll of the employee was sufficient (and not, for example, the components included in the Work Related Cost Scheme).
Due to the ruling of the Dutch Supreme Court of 4 April, there is more clarity on what income components should be considered relevant for the calculation of the excessive employer’s levy. Due to the fact that all wage components, i.e. including the tax exempt reimbursements and benefits in kind, are considered relevant, this will mean that more employees will fall within the scope of the legislation. This means that employers will have to further increase the monitoring of the potential impact of this legislation, to mitigate the risk of unforeseen, costly terminations.
Action for employers
It is good to note that due to the ruling of the Supreme Court, the Dutch tax authorities could, under circumstances, issue a corrective assessment (“naheffingsaanslag”) in case of a previously filed return in which an excessive employer’s levy was declared (if the tax exempt components were previously not taken into account). Similarly, the Dutch tax authorities could potentially impose an assessment in cases where no return to declare this levy was filed previously. It is recommendable for employers to validate the potential financial impact in this respect.
While the Supreme Court ruling of 4 April provides clarity on what income components should be included, i.e. including the tax exempt reimbursements and benefits in kind, this decreases the flexibility of employers under this legislation even further while increasing the administrative burden. Even more than before, it is therefore crucial to review the potential impact of this legislation as early as possible in the (termination) process, especially for senior employees and high earners.
As Vialto Partners, we can assist you with the required steps to obtain insight into the impact, risks and opportunities to mitigate, how to communicate this with internal stakeholders and to take action.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Niek Schipper
Partner
Richard van Steenwijk
Director
Daan Hajer
Manager
Joey Bontrup
Manager
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