On 29 September 2015, the Advocate General to the Dutch Supreme Court delivered opinions about the 30%-ruling in four ongoing proceedings:
- 150-km limit (Sopora case)
- Reduction rule (Dutch nationals)
- Application of 30%-ruling in the compensation scheme for cross-border employees Belgium
- Three-month requirement when changing employer
On 14 August 2015, the District Court of Zeeland-West-Brabant issued a ruling in proceedings on whether, following the termination of employment, the 30%-ruling applies to salary paid during a “garden leave” period.
1. 150-km limit (Sopora case)
Following the judgment of the European Court of Justice last February in the proceedings on the 150-km requirement (see L&A E-flash no 143), the case returned to the Dutch Supreme Court. In his opinion dated 29 September 2015, the Advocate General recommended the Supreme Court to rule against the person concerned. The Advocate General concludes that, although certain groups of incoming employees including groups in the higher income categories have been overcompensated, there has been no systematic and clear overcompensation of the group of incoming employees as a whole.
If the Supreme Court adheres to the Advocate General's opinion, the 150-km requirement will remain in place: for an employee to qualify for the 30%-ruling he must have been living over 150 km from the Dutch border for over two-thirds of the 24 months preceding the start of the employment.
2. Reduction rule (Dutch nationals)
In April 2014 we reported on the ongoing proceedings involving a Dutch national who was not eligible for the 30%-ruling by reason of the reduction rule of 25 years (see L&A E-flash no 137).
- In these proceedings the Advocate General has concluded that the test in the Sopora- judgment on whether there had been systematic and clear overcompensation cannot be applied to the review of the reduction rule against the free movement of employees within the meaning of the TFEU.
- For the review of the reduction rule against the prohibition of discrimination under Articles 14 ECHR and 26 ICCPR, the Advocate General has concluded that, on the basis of previous case law of the Dutch Supreme Court, the 25-year period can withstand the required test of proportionality and reasonableness because the arguments justifying the 10-year term are still valid.
The Advocate General has recommended that the Dutch Supreme Court reject the appeal of the person concerned.
If the Supreme Court follows this recommendation, the reduction rule will remain valid as well: the term of the eight-year 30%-ruling will be decreased by periods of previous residence or employment in the Netherlands: only previous periods that ended more than 25 years prior to the commencement of renewed employment in the Netherlands will be disregarded.
3. Application of 30%-ruling to the compensation scheme for cross-border employees Belgium
The tax treaty between the Netherlands and Belgium provides a compensation scheme for residents of the Netherlands who work (or work partly) in Belgium and who face higher taxes in Belgium and/or lose out on tax deductions. To determine the loss, a notional calculation is performed. The compensation is equal to the difference between the taxes and national insurance contributions (in as far as comparable) that are actually due in the Netherlands and Belgium, and the taxes and national insurance contributions that would be due in the Netherlands if the salary were earned and taxed in the Netherlands. In a case brought by a resident of the Netherlands who worked in the Netherlands and Belgium and who benefited from the 30%-ruling, the question was whether the 30%-ruling could be applied to the Belgian part of the salary when performing the notional calculation. In his review the Advocate General examines, among other things, the legislative history of the new tax treaty with Germany (which will enter into force in 2016 and also contains a compensation scheme) and concludes that the fiction in the compensation scheme does not extend to the 30%-ruling.
If the Supreme Court follows the Advocate General's advice, the 30%-ruling may not be applied to the Belgian salary in the notional calculation of the compensation. This implies that in the notional calculation the Dutch tax, which would have been due, will become higher so that the compensation will be lower.
4. The three-month requirement when changing employers
If an employee to whom the 30%-ruling applies changes employers, the 30%-ruling may continue to apply under the new employment if certain conditions are met. For example, the period between the end of employment and the conclusion of the new contract must not exceed three months. If this period is longer, the requirement of scarce specific expertise will come into play. An Indian employee who failed to find a new employer within the three-month period (partly due to personal reasons) was of the opinion that a longer period should be allowed under certain circumstances. The Advocate General concludes that exceptions to the three-month period must be restricted to exceptional cases, for instance if the employee is unable to find new employment for a prolonged period of time due to circumstances beyond his control. This was not the case in the proceedings concerned.
As determined previously in case law (including that of the Dutch Supreme Court), the three-month period is strict; after terminating an employment contract, an employee must find a new position with a new employer within three months. Note: to establish this term, the last day of actual work is considered the last day of employment (see below) and the new position commences on the date of conclusion of the new contract!
5. The 30%-ruling does not apply to “garden leave” following termination of employment
On 14 August 2015, the District Court of Zeeland-West Brabant ruled that the 30%-ruling does not apply to salary paid to an employee who, following termination of employment, is no longer required to work in the period up to the official date of termination of the employment contract (“garden leave”).
An important question in this matter was whether the salary was from current or former employment. The 30%-ruling may only be applied to salary from current employment. Because severance pay is considered income from previous employment, the 30%-ruling does not apply to a severance payment.
The court determined that the salary was indeed from current employment, but ruled that the 30%-ruling did not apply for a different reason. The fact is that, for the 30%-ruling to apply, actual work should be performed for the employer. That was not the case.
The 30%-ruling ends on the last day of the month following the month in which the employee stops working.
This judgment will also have consequences for employees who wish re-avail themselves of the 30%-ruling in a new position. Their new employment contract must be concluded within three months (see section 4 above). The three-month period commences on the first day of “garden leave”, not on the official date of termination of the employment contract!
The consequences of this judgment are worth bearing in mind when terminating an employment contract.
No appeal has been filed against this judgment.