The European Court of Justice recently ruled that the Netherlands may restrict the 30% fixed tax-free allowance for expatriate costs to employees living more than 150 kilometres from the Dutch border. The 150-kilometre restriction does not restrict the free movement of employees within the European Union. Consequently, an employer and employee only would be allowed to use the 30% allowance if the employee lives more than 150 kilometres away from the Dutch border.
The 30% ruling
Generally, reimbursements made by a Netherlands resident employer to an employee are included in the employee’s taxable income from current employment. The 30% ruling deviates from this general rule by providing for a flat-rate, tax-free allowance that is intended to reimburse certain foreign employees for extraterritorial costs and expenses. These are the additional costs and expenses that a foreign employee incurs as a result of being employed in or seconded to the Netherlands and having to reside in the Netherlands when working for a Netherlands resident employer.
The 30% ruling is a tax free allowance as it effectively exempts reimbursement for extraterritorial costs and expenses from Dutch wage tax up to 30% of an employee’s aggregate remuneration from current employment. Remuneration from current employment includes not only the fixed salary or wages, but also bonuses and stock options. Once a Netherlands resident employer applies the 30% ruling to an employee, the extraterritorial costs and expenses of this employee may not separately be reimbursed free of tax.
Although the allowance has to be granted for the purpose of reimbursing the additional costs of residing in the Netherlands, neither the employer nor the employee is required to prove the existence or amount of these costs. Instead, the employee is presumed to incur the costs as a result of being employed in or seconded to the Netherlands. Consequently, the employer may provide a tax-free allowance of up to 30% of the aggregate remuneration from current employment.
The 30% ruling is available to employees who:
- have been recruited outside the Netherlands by a Netherlands resident employer or sent to work for an employer by a non-resident group company;
- have specific expertise that is not or is scarcely available in the Netherlands labour market; and
- have not resided within 150 kilometres of the Dutch border during two-thirds of the 24 months preceding their employment in or secondment to the Netherlands.
The 30% ruling is not available to employees who do not meet one or more of these requirements. However, if an employee only fails to satisfy only the 150 kilometre restriction, he or she still may obtain an exemption for extraterritorial costs and expenses provided that the existence and amount of these costs are demonstrated.
The Sopora case
In Sopora, the Dutch Supreme Court referred the question of whether the 150 kilometre restriction was compatible with EU law to the European Court of Justice. In its response, the ECJ held that the 150 kilometre restriction does not limit the freedom of movement of employees residing within 150 kilometres of the Dutch border, who cannot make use of the 30% ruling.
The ECJ started from the basic notion that employees employed in or seconded to the Netherlands are no longer able to commute on a daily basis beyond a certain distance between their place of work in the Netherlands and their place of residence in another member state, while the resulting extraterritorial costs and expenses are significant. The ECJ then noted that all non-resident employees may benefit from a tax-free reimbursement of extraterritorial costs and expenses, irrespective of whether they reside more than 150 kilometres from the Dutch border. According to the ECJ, the 30% ruling only provides for an administrative simplification inasmuch as it results in a tax-free allowance regardless of the existence and amount of those costs and expenses.
On this basis, the ECJ ruled that the 150 kilometre restriction as well as the 30% cap do not amount to indirect discrimination or an indirect impediment to the free movement of employees.
Although the ECJ found the 150 kilometre restriction to be compatible with EU law, it went on to consider that its ruling would have been different if this restriction and the 30% cap were set as to systematically cause a net overcompensation for extraterritorial costs and expenses. But the ECJ did not say whether the 30% ruling causes such overcompensation. Instead, the ECJ left this issue for the Supreme Court to decide.
For now, the Supreme Court must issue a decision before it becomes clear whether the 30% ruling is indeed unavailable to employees who are employed in or seconded to the Netherlands but reside within a distance of 150 kilometres of the Dutch border.