Employee or contractor? Important advice for freelancers in the Netherlands
As of May 2016, the Declaration of Independent Contractor Status (VAR), which defines the relationship between a freelancer and a client in the Netherlands, was replaced by model agreements.
There are now general and individual agreements as well as model agreements per sector and/or profession. There is currently a transitional period to implement the new legislation and for all parties to adjust to the new system.
Important changes freelancers must understand
The new legislation is of importance for self-employed individuals because they must prove that they are independent from their clients, if not they may be considered employees.
Being self-employed, you do not want the company hiring you to withhold wage taxes and social security contributions on your payment. Also, you would like to benefit from deductions which apply to entrepreneurs.
The old VAR system
Before May 1, 2016, you could make use of the VAR system to prove your independence. There were four different types of VAR declarations, some of which freed a client from any tax-withholding obligations.
Under the old system, if you provided the client with a VAR-WUO "income from business" declaration, the hiring party would have no obligation to withhold payroll taxes or social security contributions.
In addition, you yourself would be able to claim the entrepreneur’s deductions in your Dutch income tax return.
Changes in the system
As of May 1, 2016, these VAR declarations are no longer valid, meaning it is the responsibility of the hiring party to check whether the contractor is self-employed or if he or she is actually an employee based on Dutch legislation.
In practice we have noticed that a lot of businesses who use contractors are now wary of working with them as they do not want to pay social security contributions nor want to be faced with fines.
Why the new system?
By discontinuing the VAR system the Dutch government is hoping to put an end to hidden employment (verkapt dienstverband or schijnzelfstandigheid).
Previously the VAR could be obtained by answering a series of questions and filing a request. This was relatively easy and was leading to abuse of the system.
People who were in fact employees would obtain a VAR for "income from business" leading to them being incorrectly (beneficially) taxed, thus undermining the social security system.
The new model agreement
There are now different model agreements per sector and profession which freelancers and clients can use. The Dutch tax authorities have reviewed these agreements and published several on their website. In order to find them, you need to fill in the following:
› Doelgroep: Ondernemer
› Onderwerp: Modelovereenkomsten
› Belastingjaar: Jaaronafhankelijk
› Published model agreements
Regarding the published agreements, the Dutch tax authorities are of the opinion that if both contracting parties follow the conditions of the agreement, there is no employment relationship.
It is important to realise that the model agreements should always be compliant with actual practice. If so, the model agreements then give certainty about the employment relationship and the risk that you will be considered an employee will be limited.
› Personal agreements
Another possibility is to conclude a personal agreement. The agreement can then be submitted to the Dutch tax authorities for approval.
The tax authorities will review the agreement and state whether, based on its conditions, they feel the agreement indicates an employment relationship.
Again, the agreement should always be compliant with actual practice. Of the 3.500 agreements submitted to the Dutch tax authorities so far, only 200 have been approved, which is less than 10 percent!
Three essential criteria you need to know!
Under the new system there is no absolute certainty anymore. It is therefore important to check for yourself whether you are at risk of being deemed an employee of your client(s).
Based on the Dutch legislation there is an employment relationship if three cumulative conditions are met:
1. Provision of personal labor. Do you personally have to perform the work or just that the assignment has to be completed?
2. Obligation to pay wages. If the compensation you receive for your work can be seen as wages.
3. Authority. Can the client tell you how to do your work or just what to do?
Whether these conditions are met depends on the facts and circumstances of each specific case.
How can I show I'm not an employee?
We advise you to review your assignments and client relations based on the aforementioned three criteria and put the agreements in writing. Please find below some circumstances freelancers may consider:
› Sending a personal agreement to the Dutch tax authorities is not obliged. If you are certain you are not an employee, this is not needed.
› Make sure that your client can only give instructions regarding the work (result) to be performed, not about how you do it.
› Make sure that your replacement (for example when you get sick) is arranged by you yourself and not by the company you work for.
› Do you receive travel allowance or other allowances? In that case it is advisable to review these benefits and determine whether these are also provided to employees of the client.
› Note that it is of importance that your situation, benefits and working conditions differ from the employees of the client. If you are treated the same by your client, you will be treated the same for tax purposes.
By proving the above circumstances you can prove to the Dutch tax authorities, if necessary, why your relationship with a client is not employment.
Understand your individual situation
You can make use of a model agreement if desired but there is no obligation to have it checked by the Dutch tax authorities.
Whether there is an employment relationship will always depend on the facts and circumstances of the case. The above considerations are not limited.
Unsure about the new freelancer contract system? Need help to draft a model agreement as a freelancer or client? Contact BDO for supportive advice and assistance.