If you expand your business operations to another country, there is a good chance that you will also employ personnel there or deploy your Dutch employees in that country. Such situations involve unique tax obligations - in the Netherlands and abroad - that require your attention as an employer. In this article we discuss a number of key points you need to consider when sending employees resident in the Netherlands to work in another country, either temporarily or in the long term.
Income: where is it taxed?
When your employees work abroad, it is crucial to determine the country in which they are liable to pay tax. Employees usually pay tax on their worldwide income in their country of residence (i.e., the country in which they are a resident for tax purposes). If wages are also received from another country (the country of work), that country may also wish to levy tax. To prevent double taxation, tax treaties determine which country may levy tax. Incidentally, the Netherlands has not concluded treaties with every country. If there is no applicable treaty, a unilateral (Dutch) regulation can sometimes be invoked to prevent double taxation.
183-day rule
Most tax treaties stipulate that the employee’s country of work is entitled to levy tax on the wages earned in that country. An exception to this is the 183-day rule. If this exception is included in the tax treaty, then the employee’s country of residence holds exclusive rights to levy tax on that income, as long as the following three cumulative conditions are met:
The employee spends no more than 183 days in the country of work within a specific period (usually 12 months). This period may be a calendar year or another 12-month period, depending on the treaty with that specific country. All days, including non-working days such as weekends or holidays, count towards this;
The employer that pays the wages or bears the wage costs is not established in the country of work and the wages are not paid by - or on behalf of - an employer in the country of work. There is therefore no ‘material employer’ in the country of work;
The employee’s wages are not charged to the profits of a permanent establishment or permanent representative of the employer in the country of work, for example a branch, or of a fixed base of the employer in the country of work, such as a manufacturer’s outlet.
To successfully invoke the exception, it is essential to be able to prove that all three conditions have been met. If one of the three conditions is not met, the country of work has the right to levy tax. It is possible that this portion of the income does not need to be included in Dutch wage tax return and in such cases the Netherlands will often also offer a way to avoid double taxation in the (personal income) tax return. Incidentally, the 183-day rule does not necessarily apply automatically to directors and supervisory board members. Separate rules may apply to them, depending on the applicable treaty.
It is therefore crucial to keep track of your employee’s working days by recording these in a working days calendar if your personnel work in another country. It can otherwise be difficult to provide compelling evidence of the working days in retrospect. Moreover, a number of specific rules apply that cover aspects such as travel and sick days. Please do not hesitate to contact one of our advisors if you have any questions about these specific rules or wish to receive a standard template for a working days calendar.
Obligation to withhold tax
Once you have determined where your employee’s income is taxed, you must determine whether you have an obligation as an employer to withhold tax in this country / these countries. This determination is based on local national legislation. It is therefore wise to seek specialist advice on this. As part of the global Baker Tilly International network, we have short lines of communication with trusted local advisors. This means we can almost always put you in touch with a network partner who can advise you on your specific situation.
Wage conversion
Each country has its own tax provisions. These have a direct impact on your employer’s contributions and the employee’s net wages. What may be paid out tax-free in the Netherlands could potentially be considered a taxable wage element in the country of work. While social security premiums can be paid tax-free by employers in the Netherlands, these may be considered taxable wages in the country of work. Company cars are frequently also taxed differently in other countries. It is therefore essential to convert the wages according to the tax rules of the country of work. This ensures that the correct taxable wages are taken into account and that neither too much nor too little tax is withheld and paid.
Salary split
The total wages for tax purposes are split between the countries involved, based in part on the number of days worked. This division of taxation on your employee’s income is also called a salary split. Whether you need to apply a salary split depends on the factual circumstances and local laws and regulations. This is not optional. Whether a salary split works in the employee’s favour or not depends on local legislation. When tax needs to be withheld and paid in different countries, an advantage may arise from exemptions and the lower starting rates of progressive tax rates in several countries. However, if the starting tax rate in the other country is higher, the average rate at which the employee is effectively taxed will result in lower net wages. If the employee is liable to pay tax in Belgium or Germany, they may be able mitigate the lower net wages in their personal income tax return, by using the compensation arrangement for frontier workers.
Implications for employees: be prepared
Working in another country can affect an employee’s net income. This may, for instance, be caused by the interaction between different tax rules and rates and the salary split. The tax treatment of wage elements by different countries has implications for both the employer’s wage costs and the employee’s net wages. This may give you cause to review the employment conditions. It is important to consider this in advance to avoid any unpleasant surprises for your personnel.
As an employer it is prudent to identify matters such as foreign wage tax obligations and salary splits in advance. This will enable you to meet your international obligations and structure the situation in the best-possible way. You can also make working abroad more appealing to your employees by, for example, agreeing a net salary and mitigating the impact of foreign tax (tax equalisation/tax protection). We would be happy to discuss the options with you.
Keen to find out more about expanding abroad?
If you would like to know more about employment and international growth, our Global Mobility specialists can help you identify important aspects of labour law, administrative obligations and your tax liability here and abroad. You can also count on us for national and international coordination of your HR matters and salary administration. Together with our global network partners of Baker Tilly International, our Global Mobility specialists can advise you on prevention of double taxation, obligations to withhold foreign tax, salary splits and social security.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
