If you are working in the Netherlands as an expat your employer can reimburse several costs of your temporary stay in the Netherlands tax free under certain conditions. These costs are known as the extra territorial costs. If applicable the employee can also be granted the so called 30% ruling. If the 30% ruling is granted the employee doesn't have to prove that he made costs up to the amount of the 30% allowance. It will then be approved that the allowance covers the extra territorial costs.
The employer can however decide to reimburse the real extra territorial costs. This can be done if the costs are higher then the 30% allowance or when the 30% ruling is not granted. Besides the allowance for the extra territorial costs the employer can still use the other possibilities regarding the normal labourcosts.
The State Secretary of Finance has announced in February 2004 which costs can be reimbursed tax free as extra territorial costs and which costs will be treated as normal labour costs. If the 30% ruling is granted and included in the payroll administration then the extra territorial costs can't be reimbursed again separately, but the normal labour costs can (under certain conditions).
Employees qualifying for the 30% ruling may receive a fixed tax-exempt expense allowance of no more than 30/70 of their pay. However, ET expense allowances paid separately are deducted from the maximum fixed expense allowance in cash. Consequently, compared with the situation prior to 1 January 2001, employees qualifying for the 30% ruling often experience adverse consequences if a given expense allowance qualifies as a reimbursement of ET expenses. In effect, in the majority of cases, an employee qualifying for the 30% ruling pays 36.4% additional tax on an ET expense allowance (on top of tax on the normal wage). If the assignment is on a net basis, the additional tax, after grossing up under the 30% ruling, mostly amounts to 57% of the ET expense allowance. Under legislation in force prior to 1 January 2001, many of the allowances referred to below were free of tax. The exact consequences of the order for individual employees and/or their employers need to be determined on a case-by-case basis. As an employer, you would be well served by reviewing your payroll accounts for the following points.
We point out below how the tax authorities qualify a number of allowances; we will also outline our opinion on some of them.
Under the order, cost of living allowances are classified as covering ET expenses, i.e. these costs cannot be reimbursed free of tax over and above the 30% ruling. Therefore, the allowance is usually taxable at the effective rate of 36.4% for an employee coming under the 30% ruling. After grossing up, the employer usually makes an effective remittance of 57% of this allowance to the tax authorities.
These allowances qualify as taxable salary.
The tax authorities do not classify relocation allowances as covering ET expenses. Therefore, this allowance is effectively exempt from tax for employees qualifying for the 30% ruling, provided that the relocation is business-related.
In the order, the Ministry of Finance allows an employer to pay a tax-free relocation allowance for an employee's relocation back to the country of origin when an assignment terminates. The following conditions apply here:
Costs incurred by an employee while travelling to the country of employment within the scope of getting acquainted with the company may also be reimbursed free of tax to an employee qualifying for the 30% ruling. These costs do not qualify as ET expenses. Costs incurred for an acquaintance trip to the country of employment, often with the family, e.g. to go house hunting or look for schools, qualify as ET expenses under the order.
Costs incurred in applying for or legalising official documents, e.g. residence permits, visas and driving licenses, as well as costs of medical examinations and vaccinations qualify as ET expenses, provided that they are related to the assignment outside the country of origin. Costs incurred within the scope of applying for or legalising work permits do not qualify as ET expenses. These costs can, therefore, be reimbursed free of tax, even to employees coming under the 30% ruling.
Costs incurred for the temporary storage of household effects while awaiting final accommodation in the country of employment qualify as relocation costs within the meaning of the Wages and Salaries Tax Act. These costs can, therefore, also be reimbursed free of tax to employees qualifying for the 30% ruling, with due observance of the provisions of the Act. The storage costs for household effects that will not be moved to the country of employment but remain in temporary storage in the country of origin qualify as ET expenses under the order.
Allowances paid to cover for these losses qualify as taxable salary.
The Ministry of Finance qualifies double accommodation costs as ET expenses. According to the tax authorities, costs incurred for hotel accommodation outside the country of origin, which are reimbursed by the employer, qualify as ET expenses. It should be noted that the two-year rule applicable to residents of the Netherlands does not apply here. The tax authorities therefore qualify double accommodation costs as ET expenses for up to ten years.
When an employee moves to the country of employment and the employer reimburses the accommodation costs, a maximum of 18% of the employee's wages for tax purposes is added to his or her taxable salary. The excess qualifies as an ET expense allowance. For an employee qualifying for the 30% ruling, the effective rate of tax on the full rent is usually 36.4%, or 57% if it is grossed up.
Reimbursements such as these qualify as salary. The grossed-up rate for these expense allowances may be reduced in certain circumstances based on tax at source regime in the Dutch wage tax act.
Based on the order issued by Ministry of Finance, part of the costs incurred for utilities qualify as ET expenses.
Where an employee lives in one country and works in another, the costs incurred within the scope of travelling to and from the country of residence and the country of employment qualify as ET expenses under the order. This means that airfares incurred by an employee coming under the 30% ruling who lives outside the Netherlands and flies to the Netherlands on Monday and back home again on Friday, which are reimbursed by the employer, are usually taxable at a rate of 36.4%.
Travel expenses relating to home leave (e.g. an employee living in the Netherlands who takes his or her family on holiday to their country of origin) qualify as ET expenses. Employees qualifying for the 30% ruling are usually liable to pay the effective tax rate of 36.4% on these expenses. From a tax perspective, this allowance is of particular interest to employees not coming under the 30% ruling.
According to the order, allowances paid to cover the costs of personal tax services and preparing tax returns (in the country of or igin as well as the country of employment) qualify as salary, or as coming under an ET expense allowance. Employees qualifying for the 30% ruling are, therefore, usually liable to pay 36.4% tax on the tax consulting fees billed to the employer. If grossed up, the employer usually remits 57% of the invoiced amount in tax to the tax authorities.
Tax equalisation allowances qualify as taxable salary.
Costs of language courses in the language of the country of employment for the employee as well as for family members residing with the employee in the country of employment qualify as ET expenses under the order.
Telephone costs generally do not qualify as ET expenses. A specific rule applies here. Telephone costs do qualify as ET expenses if they are reimbursed for additional, private calls made by the employee to persons in his or her country of origin.
Costs incurred for meals generally do not qualify as ET expenses. A specific rule applies to meals of more than a marginal business nature. On an annual basis, the first 80 such meals can be reimbursed free of tax. Only a small portion of the allowance for other meals of more than a marginal business nature is taxable. The criterion 'of more than a marginal business nature' is therefore decisive. In respect of foreign assignments, the order stipulates that meal allowances can apply to meals enjoyed during a short stay in a hotel when an employee is not in a position to prepare a meal him or herself. These meals can, therefore, also be reimbursed free of tax to employees coming under the 30% ruling, or subject to only a small amount of tax.
If an employer pays a discretionary fixed expense allowance to an employee qualifying for the 30% ruling, the base for this fixed expense allowance cannot, under the order, include ET expenses.
As emerges from the above, the introduction of the concept of ET expenses has made the 30% ruling slightly less favourable since 1 January 2001. The order issued by the Ministry of Finance has fleshed out this concept. As you have employees that qualify for the 30% ruling, we urge you to review your payroll accounts in order to ensure compliance with the order.
Source: Ministry of Finance, 11-2-2004, no. CPP2003/641M (released for publication on 20-02-2004).