Highly skilled employees who were recruited to jobs in the Netherlands or transferred to Dutch branches of multi-national corporations may qualify for a significant tax reduction under the Netherlands’ 30% Ruling.
Under the 30% law, Dutch businesses can grant qualified employees 30% of their salary in untaxed allowance for a period of 5 years. The qualifications are strict, including a minimum salary threshold. But the tax savings can be significant.
Employees benefit by having a large portion of their total pay untaxed. The plan also lowers their tax base to 70% of their gross pay, which could keep them out of a higher tax bracket, lowering their overall tax rate even more.
Employers also benefit from offering the plan to qualified employees. The tax break allows companies to compete for highly skilled foreign employees, making the Netherlands a more attractive location. It also allows Dutch companies to save on their salary offers since the tax break with 30% Ruling allows them to reduce salary and still provide employees more take-home compensation.
Employers are not obligated to offer their qualified employees the tax break and may, depending on salary, only be able to offer part of the tax break. But in a competitive environment, the 30% Ruling gives Dutch businesses an edge over competitors in neighboring countries offering similar positions at similar salaries.
There is no minimum time an employee must work at a business to qualify, and if an employee is qualified, it applies equally to full-time and part-time work.
How the 30% Ruling Works
The 30% Ruling allows Dutch businesses to use a salary structure for qualified employees that makes only 70% of earnings taxable while 30% remains untaxed.
In essence, under the 30% Ruling, the employee’s salary is only 70% of his or her total pay. The other 30% is classified as a reimbursement – ostensibly for the high costs of relocating to a foreign country – and therefore not taxed.
Employees must earn enough to cover the minimum threshold within the 70% – an important fact to consider when applying for the tax break. If the employee is above the threshold in total earnings but under when calculated at 70%, the employee will only enjoy a fraction of the untaxed amount.
To put it in practical terms: In 2021, the threshold is €38.961 ($47,500) for people for people over 30 without an advanced degree. If a foreign employee earns a total of €80,000, 70% is €56,000 – which is above the threshold. The remaining €24,000 are therefore not taxed. But if an employee earns a total of €40,000, 70% is €28,000, which is below the threshold. The difference comes out of the 30%, leaving just €1,039 untaxed.
To take full advantage of the 30% Ruling, an employee would have to earn about €55,700 per year.
There are also other tax advantages for the employee. People who qualify under the 30% ruling also have the option of requesting partial non-resident status. That allows the employee to avoid paying taxes on financial interests in a company and various investments other than real estate (box 2 and box 3 on the Dutch tax return).
Qualifications
To qualify for the 30% Ruling, an employee must meet all of the following requirements:
- The candidate must an employee for a Dutch company.
- The candidate must be recruited from abroad or transferred from a foreign branch of the company and must have lived outside the Netherlands at the start of the employment period with the company.
- The candidate must not have lived within 150 kilometers (93.2 miles) of the Netherlands for more than 8 months over the past two years.
- The candidate must earn at least €38,961 in 2021. If the candidate is under 30 and completed a master’s degree or higher, the minimum salary is €29,149. For people engaged in scientific research or training as medical doctors, there is no minimum salary. The minimum salary levels are adjusted annually and have been raised in each of the past four years.
- The candidate must have skill and experience in areas that are uncommon in the Netherlands. The skill level is determined by a combination of age, experience, education level, and other factors. At present, those who meet the minimum salary requirement are deemed to possess sufficient skill and experience.
- An application to the Dutch tax authorities must be filed jointly by the employer and employee and must contain an agreement in writing by both parties to implement the tax break.
Ramifications of Implementing the Tax Break
The deeper ramifications of the plan revolve around the fact that an employee’s salary is listed at 70% of the pre-tax pay. In many cases, that serves as the amount used to calculate benefits such as pensions or insurance payments such as disabilities or unemployment. That means pensions will grow at a slower pace and unemployment benefits, if necessary, will be based on a lower amount.
Because of those implications, Dutch tax authorities demand that the employee actively agree to the 30% salary. An application on behalf of the employee must include a written agreement between the employer and the employee to implement the arrangement.
For some employees, especially those who barely meet the minimum threshold within the pre-tax pay, may opt out of the plan because the tax savings will be small and the difference in benefits will be significant.
In addition, those who plan to remain with the company for more than five years will suddenly see a dramatic increase in taxes. The change may force some employers to raise the pay rate of highly skilled employees in order to compensate for the drop in net pay after the 30% Ruling runs out.
For a complete guide see to hiring and paying workers in Holland see our Netherlands payroll and employment wiki
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