Employees are increasing being sent over the Dutch border to carry out a project abroad or to work a number of days a week in a foreign office. However, many employees fail to consider that this could have implications for the way in which an employee’s salary may be dealt with for tax purposes. Alternatively, as an employer you may be aware of such risks but you may wonder what exactly the consequences would be and what arrangements may need to be made.
Foreign tax and social security obligations may arise in the case of an employee due to various situations. Physically working abroad will usually give rise to tax obligations there. This will probably seem to be a logical conclusion when you enter into an employment contract with a foreign employer. Nevertheless, a tax obligation may also arise in another country where a Dutch employer pays a salary. In the case of a director a tax obligation may arise abroad even though they do not physically work in that country. The regulations governing this are highly detailed and depend to a large extent on the particular circumstances. This is because every country has its own rules in this respect, amongst other things. Countries have also entered into tax and social security treaties with each other. Such conflict rules may also differ from one treaty to the next.
So in what situations is it highly likely that a tax obligation will arise abroad or in which a foreign social security system will become applicable?
It is extremely important to draw a distinction between taxes and social security.
A. Risk of a foreign tax obligation
There is a significant risk that an employee may have tax obligations abroad in the following situations:
• the employee spends more than 183 days a year or every 12 months working in the relevant country;
• the employee works (partly) in a foreign office. They are not party to an employment contract with a foreign business. The employee’s work nevertheless benefits that foreign business;
• the employee woks (partly) in a foreign workplace which (actually) constitutes a permanent establishment of their Dutch employer;
• the employee works abroad and is also entitled to enter into foreign agreements on behalf of their employer.
• a (statutory) director of a foreign enterprise performs all of their work in the Netherlands.
B. Risk of a foreign social security system being applicable.
There is a significant risk that an employee may be insured for social security abroad in the following situations.
1. Within the EU
• The employee spends less than 25% of their working hours working in the Netherlands. In the case of normal full-time employment this would amount to homeworking for one day in the Netherlands. In addition, the employee is party to an employment contract with a foreign employer.
NB. This does not apply in the case of secondment or a temporary placement.
• The employee spends less than 25% of their working hours working in the Netherlands (again, in the case of normal full-time employment this would amount to homeworking for one day in the Netherlands). In addition, the employee is party to two employment contracts, one of which with a foreign employer.
NB. This does not apply in the case of secondment or a temporary posting.
2. Outside the EU
• This involves a country with which the Netherlands has entered into a social security treaty, for example, Australia, India, Japan or the United States of America AND it does not involve secondment or a temporary posting.
Consequences of foreign tax obligations
Part of their salary must be taxed abroad. A so-called ‘salary split’ occurs. It is highly like that a Dutch employer would have to maintain payroll administration in the relevant country for any employee who has foreign tax obligations. In this respect, Dutch remuneration components would need to be transposed to correlate with the salary tax regulations of the relevant country. A gross-net discrepancy may occur as a result of working abroad due to the various tax regulations applicable in other countries. This could have a favourable or unfavourable effect. Arrangements have been made with some countries as part of a tax treaty to eliminate such unfavourable consequences.
In principle, any remuneration component that is taxed abroad may be disregarded for the purposes of Dutch payroll administration. Finally, an obligation may arise in the case of a Dutch employee to file an income tax return in the relevant country.
Implications of the application of a foreign social security system
The withholding and payment of Dutch contributions may be halted. No old-age pension entitlements will accrue to the employee any longer and the latter will not be insured under the Unemployment Insurance Act (WW) and the Sickness Benefits Act (ZW). As far as benefits are concerned, the applicable social security system may be less favourable than the Dutch one. The costs of a foreign social security system may be higher or lower than in the Netherlands. The difference in costs often mainly involves the employer’s contributions, for example, in Belgium. It is highly like that a Dutch employer would have to maintain payroll administration in the relevant country for any employee who is insured for social security abroad. It may be possible to deduct foreign contributions from any income subject to a Dutch tax levy.
We should not fail to mention that the employee may also no longer have health insurance in the Netherlands.
There may also be implications for the accrual of pension entitlements to the employee.
Applicable labour law
Finally, it is important to mention that in the case of (temporary) cross-border work there may also be a change in the labour law which governs the employment contract that has been concluded. The general rule in the case of an employment contract within the EU is that the parties may agree on a choice of law, although the latter may not lead to the employee losing any protection afforded by the law which would have been applicable if no choice of law had been agreed to. To put it briefly, the following rules apply for the purposes of determining the applicable law:
- in principle, an employment contract is governed by the law of the country in – or where this is not the case – from which the employee usually performs their work for the purposes of the execution of their employment contract (‘their normal country of work’);
- where it is impossible to determine the applicable law in accordance with the preceding rule, the contract is governed by the law of the country where the relevant business that employs the employee is located;
- where all the circumstances reveal that the contract apparently has closer ties to a country other than those mentioned above, the law of such other country applies.
In the case of temporary cross-border work one’s normal country of work is deemed not to have been changed. For the purposes of determining apparent closer ties, all of the circumstances play a role, including where the employee is liable for tax, is insured for social security and so forth. This means that the above-mentioned tax-related points also play a role under labour law. Naturally, we can also examine cross-border situations to assess the applicable law.
Do not underestimate the implications of the above-mentioned situations and examine the consequences. Proper preparation can prevent many problems from occurring.
Naturally, we look forward to helping you in this respect. If you have any questions, please feel free to contact us.