Immediate action required if you have employees residing abroad!
The 2018 tax law changes (“Belastingplan 2018”) were adopted at the close of 2017. Effective 1 January 2019, these tax law changes will have significant implications on Dutch employers with employees residing outside the Netherlands, which I shall address first. Thereafter, I will address the consequences for foreign taxable persons specifically with regard to the general tax credit and the employed person’s tax credit. Other tax credits are beyond the scope of this publication, such as the young disabled person’s tax credit, the (single) elderly person’s tax credit or the income-related combination tax credit.
Foreign taxable persons no longer have the right to tax credits
Effective 1 January 2019, employees not residing in the Netherlands can no longer claim the taxable income-based component of tax credits. As a result, the withholding levels on gross wages for foreign taxable persons will rise, resulting in lower (in some cases considerably lower) net wages compared to an employee with the same gross wages residing in the Netherlands. Around 350,000 employees will lose their right to tax credits entirely.
Employees covered by the Dutch social security legislation will retain the right to the national insurance component of the tax credit.
Exemptions for certain foreign taxable persons
Residents of the EU/EER, Switzerland and the Caribbean Netherlands will remain eligible for the employed person’s tax credit (maximum of € 834, depending on their worldwide income). Employers can include this tax credit in payroll withholding taxes.
Employees considered to be foreign taxable persons by the Dutch tax authorities residing in the above-mentioned jurisdictions who earn 90% or more of their income in the Netherlands can claim an additional amount of up to € 608 from the tax component of the general tax credit. This credit must be claimed by employees when filing their income tax returns. This filing can only take place a few months after the end of the fiscal year for which the tax credit is being claimed. Only under strict conditions can an employee request a provisional refund. The State Secretary (for Finance) has indicated that there are 120,000 taxpayers who will need to claim this tax credit – the tax component of the general tax credit – via their income tax returns!
In addition to claiming this credit on their income tax returns, employees will also need to provide a personal income statement from their country of residence. This statement appears to be quite difficult to obtain in practice. Furthermore, it is difficult to assess whether a particular employee actually meets the 90% threshold. The determination is made according to Dutch income measurement criteria, which, for example, includes notional (fictitious) income on “box 3” financial assets. Even when this notional income is applied to, for example, Dutch bank balances, it is counted as foreign income for the 90% threshold.
For employees residing in Belgium, the rules are less stringent. These employees are able to claim the general tax credit on their income tax returns even if they earn less than 90% of their income from Dutch sources.
Employers: Action required
The tax law changes require action on behalf of employers with foreign taxable persons on their (Dutch) payroll. First of all, employers need to determine where their employees actually reside. A simple submission of a foreign address is not adequate to establish non-Dutch residency. At the very least, employers need to inquire whether an employee listing a foreign address actually resides outside of the Netherlands. Additionally, employers need to substantiate this with information provided by employees claiming foreign residency. This can be done by means of, for example, an employee’s travel expense statements, an “A1 form”, or an employee’s bank account and/or private phone number. Employers are responsible for the payment of income taxes withheld, making accurate record-keeping necessary for employers.
Good communication with employees affected by these changes is necessary to assure they comprehend the reasons for any drop in net wages from 1 January 2019 onwards as a result of these measures. If, as an employer, you have agreed to pay an employee a specific net wage, then the corresponding gross wage will need to be raised accordingly.
Finally, it is important to inform affected employees that they can potentially claim an income tax refund.
The Dutch tax authorities, the Social Insurance Bank (SVB) and the various benefits agencies will inform employers and employees about these changes during the last quarter of 2018. It would be more pleasant, however, for employees to receive this information from their employers directly.
Effective 1 January 2019, the net wages of a large number of employees residing abroad will decrease. This will result in differences between residents and non-residents. Employers are advised to inform their employees of these changes in due course.
It is crucial for employers to ascertain in advance where their employees actually reside to ensure that the proper amounts are withheld from employees’ wages (according to the official wage tax table) from 2019 onward, and to assure that relevant IT systems can be adapted in a timely and correct manner.
In contrast to the legislators’ intentions, things will become considerably more complex for cross-border workers. We are, of course, available to provide assistance to you or your employees regarding any queries and/or implementation measures.
For additional information or further questions please contact: