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The 30% ruling and other tax incentives for expatriate individuals

A major tax refom has taken place in the Netherlands and came into force effective January 1, 2001. This article emphasizes on a major tax incentive, the 30% ruling, for foreign expatriates who are going to work in the Netherlands. This 30% ruling replaces the 35% ruling which had been in place from 1995.

30% ruling

The 30% ruling has its origin in the early 1950’s, the post Second World War period, and was intended to reduce the costs for persons with special skills especially from the United States and to make the Netherlands a more attractive country for business development. Due to its importance the ruling has been changed and clarified many times. The 35% ruling was officially published firstly in 1986. From 2001 the 35% ruling changed into a 30% ruling and is now enacted in the Dutch wage tax act and wage tax implementation decree.

Under the “old” 35% ruling roughly 35% of the total remuneration could be paid tax free to the expatriate. The percentage of the expatriate’s remmuneration that can be reimbursed tax free by the employer is reduced to 30% from January 1, 2001. However, due to the general reduction of the tax rates with effect from January 1, 2001 it is unlikely that the net income of the expatriates will be substantially effected. The new tax rates run from 32.35% (including social security premiums) to 52%. The effective tax rate on salaries under the 35% ruling was a maximum rate of 39% (60% top rate of 65% of income) and is a maximum rate of 36.4% (52% top rate of 70% of income) presently under the 30% ruling. The 35% ruling is automatically converted into the 30% ruling.

The basis for the calculation of the 30% tax free disbursement is the regular employment income. In principle, bonuses, stock option income and severance pay do not fall under the scope of the 30% ruling if the employer and expatriate did not agree on these remunerations in advance.

To qualify for the 30% ruling the expatriate must have specific expertise and/or experience that is not or scarcely available on the Dutch labour market. For example the expatriate is highly qualified, has had a specialized education and/or has experience in a certain field that Dutch individuals do not have. An other criterea can be whether or not the foreign net income relating to this or a similar function abroad is higher than the net income in the Netherlands. The specific expertise and/or experience must be proven by way of diploma’s and resumes. A top manager of an international group, who has at least 2 ½ years working experience within this group, is considered to have specific expertise that is not or scarcely available on the Dutch labour market. The 30% ruling is intended to import know how to the Netherlands, therefore it is essential that the expatriate is hired abroad. Expatriates who are already living in the Netherlands are not eligible to the 30%-ruling. However, if the 30% ruling has already been granted, it is possible to change employement and remain eligible for the 30% ruling. In case of change of employer, e.g. after dismissal or voluntary redundancy, a new employment must be effective within three months. The company hiring the expatriate is obliged to run a pay-roll administration and to withhold Dutch wage tax.

The 30% ruling will be valid for a maximum period of 120 months. An oficial application needs to be made. If the 30% ruling is applied before the expatriate starts his or her employment or if it is applied for within 4 months after the start of the employement, the 30% ruling shall be effective from the beginning of the employement. If the 30% ruling is applied for after 4 months the 30% ruling shall be valid from the first day of the month following the month in which the request was made. The total duration of the 30% ruling will be reduced with previous periods of Dutch employment or stay in the Netherlands. Previous periods are not taken into account if a period of more than 10 years has elapsed between the starting date of the new empoyment and the date of previous departure. If the expatriate stayed or worked in the Netherlands during this ten year’s period, the total duration will not only be reduced with this period, but also with other periods of previous stay or employment in the Netherlands if a period of less than 15 years has elapsed between the starting date of the new employment and the date of previous departure.

Generally, Dutch tax resident status is based on the place of residence; place of domicile or origin is not relevant. It is determined by facts and circumstances, e.g. whether or not family is accompanying the expatrtiate, the nature and lenght of stay in the Netherlands and centre of social and economic interest. However, under the new income tax act the expatriate can opt for a partial resident status. The expatriate must file a request for this option with the tax inspector and his or her status can be revised annually. If opted for this status, the expatriate is considered as non-resident for box 2 and box 3 income. In box 2 profits from a substantial shareholding (> 5%) are taxed. Passive investment income is taxed in box 3. This means that generally the partial resident status will exempt passive investment income as well as profits from a substantial shareholding in a company not resident in the Neherlands.

Under the 30% ruling, contrary to the rules under the 35% ruling, the employer cannot reimburse extraterritorial costs, for example double housing costs or costs for family reunion, as tax-free allowances besides the 30% tax free reimbursement any more. However, the 35% ruling and the 30% ruling both allow school fees for childeren attending an international school to be reimbursed tax free by the employer. Furthermore, the expatriate is entitled to personal deductions such as alimony and premiums for certain annuities.

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