Dutch severance payments in cross-border situations
What happens if your Dutch employment contract is terminated and you receive a severance payment from your employer? Will the severance payment be taxable in the Netherlands and / or abroad because you worked cross-border for the employer? In this article, Marjolein Boer from BDO informs you about the Dutch wage tax consequences of receiving a severance payment from your employer.
Severance payment definition
In the Netherlands, employers are required to pay a severance payment to an employee whose Dutch employment contract is terminated upon the employer’s initiative. Sometimes, the severance payment is provided as a (bridging) pension. In this article, only severance payments provided as compensation for the loss of income in the future are covered and no other forms of severance payments.
Based on Dutch wage tax law, the severance payment qualifies as taxable wage from employment. It constitutes compensation for the loss of income that would be received if the employee would be able to continue to work in the employment relationship. This indicates that you need to look into where you would have worked in the future to determine where the taxation of the severance payment will take place. However, based on Dutch wage tax law, the severance payment qualifies as a wage from previous employment (instead of current employment, like a regular wage).
Which country has the right to levy taxes when you have worked cross-border?
When you are a tax resident of the Netherlands, the Netherlands will levy taxes on your severance payment as part of taxation on your worldwide income. However, you might qualify for double taxation relief when a double tax treaty provides the right for another country to levy taxes on the severance payment.
When you have worked cross-border (i.e. physically spent workdays in several countries), the tax treaty with that specific (work) country determines which country has the right to levy taxes on your income, including the severance payment. Consequently, the severance payment might also be taxable in the work country.
Based on the interpretation of international (model) treaties, it is important to determine whether a severance payment relates to activities physically performed in another country (or countries). If this is the case, the right to levy taxes on the severance payment should be allocated between the home country and the work country / countries.
If there are no facts and circumstances indicating otherwise, the severance payment should be considered to relate to the last 12 months of employment (reference period) and allocated on a pro-rated basis to the country where the employment was exercised during that period. This reference period of 12 months was also confirmed in the Netherlands by the Dutch Supreme Court and the Dutch tax authorities.
Recent update on reference period
However, a recent update from the Dutch government expresses the view that the reference period for the allocation of taxation of the severance payment should be the complete employment period. In case it is not possible to determine the allocation based on the complete employment period, the previous 12 months of employment can still be used.
Reasons for this changed view are:
- Usually the amount of the severance payment is based on the complete employment period
- Other countries also apply this reference period
Although not applying the interpretation of international (model) treaties for the reference period, it is argued that applying the same reference period as other countries avoids double taxation or double non-taxation of the severance payment. Please be informed that the updated reference period applies as of February 5, 2022.
Please note that the allocation to a work country will not automatically lead to taxation of that part of the severance payment in the work country. This will only be the case if that country had the right to levy taxes on the regular wage of the employee that related to the working days in that country. If the work state had the right to levy taxes, a relief for double taxation in the Dutch income tax return can be claimed.
Ms A lives in the Netherlands and receives a severance payment from her Dutch employer. During the main part of her employment (total duration of five years – i.e. 60 months) she worked in the Netherlands. In the last year of her employment, she worked in Germany for eight months. During that period her wage was taxable in Germany based on the tax treaty between the Netherlands and Germany. Given the fact that there is sufficient clarity about the work period in the total duration of her employment of five years, the severance payment will be allocated based on the complete employment period.
From a Dutch tax perspective, she will receive relief for double taxation of 8 / 60 part of her severance payment to be claimed in her Dutch income tax return.
No application of 30% ruling on a severance payment
If a 30% ruling is granted by the Dutch tax authorities, a maximum of 30 percent of your Dutch taxable wage can be provided by your employer tax-free. The 30% ruling can only be applied to wages from current employment received during your employment in the Netherlands. Meaning that if your employment is terminated, the 30% ruling is no longer applicable. However, Dutch wage tax law determines that the 30% ruling ends one pay period after the termination date (e.g. one month).
Normally, the severance payment will be paid in this pay period (before the termination date or within one month of the termination date). Although that being the case, the 30% ruling cannot be applied, as the severance payment qualifies as wage from previous employment (and not current employment). Consequently, (the part of) the severance payment taxable in the Netherlands will be taxed based on the wage tax table for special payments from previous employment (in Dutch: groene tabel voor bijzondere beloningen).
When you receive a severance payment from your employer and you have worked cross-border during your employment contract with this employer, it is important to determine in which country and for which part the severance payment is taxed to be compliant with (local) tax legislation and avoid being double taxed.
In case you received a severance payment before February 5, 2022, and your Dutch income tax assessment is not yet irrevocably determined, there is a possibility that you can use the updated reference period. This requires a request to the Dutch tax inspector and you need to prove that this will not lead to double non-taxation.
Still need some help? BDO are on-hand to help with any questions you might have regarding your severance pay, as well as any questions about tax in the Netherlands.