I may earn an income in two countries. Can I reduce tax rates this way?
Article ID: 123 | Last Updated: Tue, Dec 6, 2011 at 5:15 PM
I am wondering how it would affect my tax situation if I began to work in both England and Holland. Would I be able to keep myself in a low tax bracket in both countries, or are there rules about this kind of thing? I know that the tax rate steps up in Holland when you start earning 30-40K, am I better off doing some months in England every year?
Your suggestion sounds good, but it doesn't work this way.
First it must be determined which country is your principle residence. This country will have the right to tax your world wide income. This includes the income you have earned in another country. Currently you are living in the Netherlands. This means that the Netherlands has the right (or claims the right) to tax your income earned in the Netherlands and in the UK. The UK may also tax the income earned in the UK. Or even decide that the UK is your principle residence and tax your worldwide income. In that case there will be a discussion in which country you have the centre of your life. But let's assume that the UK will treat you as a non resident and accepts that you are living in the Netherlands.
In that case they may tax your income under the tax treaty between the Netherlands and the UK. Different rules apply to employment income and business income. If they do have the primary right to tax your UK income the Netherlands will have to grant an exemption to prevent double taxation. This exemption will however not exclude the income entirely, but only the tax related to this income. The UK income will be used to determine the tax brackets for your total income. So the progression in tax rates will remain. As a result you will still be confronted with a higher tax rate. You may benefit if the tax rate in the other country is much lower than the tax rate in the Netherlands. Important is that we first check whether a tax treaty is applicable and if so how taxation of certain income is divided and how exemptions to prevent double taxation are calculated.
Above that you will have to consider the premiums for the social security/national insurance which remain to be paid in the Netherlands since you are living and also working in the Netherlands at the same time.
Be aware that if foreign income is not reported to the Dutch tax authorities while you should report it, the fines (and interest) can be high if the tax authorities find out about this income later. The tax authorities can go back 5 years and if foreign income is involved even go back 12 years (which difference has been accepted by the Court of Justice).