Tax relief through a salary split

Broadstreet has been advising professionals, entrepreneurs and expats on reaching their personal and financial goals for over 25 years. In this article, they explain how tax works on your worldwide assets.

Dutch tax residents

If the center of your social and economic life is in the Netherlands, then you are considered a resident for income tax purposes. As a consequence, you need to declare your worldwide income in the Netherlands. Unlike some other countries, the number of days spent in the Netherlands per year is not decisive on your residence status.

If you receive income from other countries, the Netherlands will levy tax on your worldwide income. If tax treaties, or Dutch unilateral provisions, are applicable the Netherlands will provide an exemption or a tax credit on the foreign-earned income to prevent double taxation.

If your employer is a tax resident in the Netherlands, then your salary, as an employee or director, is taxed in the Netherlands via the monthly payroll tax. If you also perform work for your employer in another country, it is interesting to examine if a salary split can be applied in order to lower the total tax burden.

Salary split for employees

A salary split may be relevant for an employee who spends time working abroad and one of the following requirements is applicable:

› The employee works abroad for 183 days or more per year.

› There is a permanent establishment of the Dutch employer present in the other country or countries, and the salary is borne by the permanent establishment.

› The employer is present in the other country, and the employee is paid by, or on behalf, of this employer.

It is important to note the following:
› The employer should be considered the "actual employer", meaning that it is the business carrying the relative risks and responsibilities of the work involved.
› The employee needs to physically work in the other country.

Salary split for directors

Under most of the Netherlands’ treaties, the right to levy income tax on a statutory director’s salary or remuneration is assigned to the country where the entity is resident.

How does a salary split work?

If the employee works in another country for two days, for example, the part of the salary that can be allocated to those two days will be taxed in the other country. The Netherlands will grant an exemption or a credit.

In the Netherlands the income tax rates are progressive; the higher the salary, the higher the rate is on the extra salary. At present the maximum tax rate is 52 per cent.

Most countries also use a progressive tax rate system with brackets; usually the part of the salary attributed to the other country starts at the first bracket, thus benefiting from a lower rate in that bracket.

The Netherlands bases the exemption on the average tax rate that would have been due if no tax treaty were applicable.

It is important to note that for a director the international tax treaties of Netherlands usually provide for a credit rather than an exemption. If it can be proven, however, that the director is taxed under the same regime as an employee, an exemption can be claimed instead.

An example of a salary split

Here is an example of how a salary split works.

It is based on a gross salary of 90,000 euros, and on the following assumptions:
› The employee is a Dutch tax resident.
› The employee is paid via the Dutch payroll.
› The employee works 60 per cent of his time in the Netherlands, 20 per cent in the UK and 20 per cent in Germany.
› The salary is allocated on a pro rata basis and is invoiced to the company’s British and German branches.

Non-resident taxpayers

In the situation that the employee works only for a Dutch employer, but is not resident in the Netherlands, then a potential advantage can also be obtained, depending on the tax system in the country of residence.

As a non-resident tax payer the payroll tax withheld on the full employment income will most likely be higher than the income tax to be paid.

The work days spent outside the Netherlands are not taxable in the Netherlands, unless you are a statutory director. In this situation it is worthwhile filing a tax return in order to claim part of the withheld tax back through income taxes.
 

Patricia van der Hut is a partner at Broadstreet, providing specialist tax and accountancy services to expats.