Expat Desk: Expats from within 150 km of border not eligible for tax free allowance

The Netherlands is popular among expats, not least because of the tax incentives it offers. Under Dutch tax law employers are able to reimburse expats with a tax free allowance of 30% of their gross taxable salary during the first eight years of employment in the Netherlands. This so called “30% ruling” is available to expats with specific expertise who have been recruited from abroad to work in the Netherlands. Expats are regarded as having specific expertise if their gross annual taxable salary exceeds EUR 36,899. As of 2012, the 30% ruling also requires that, at the time of recruitment, qualifying expats must live more than 150 km from the Dutch border.

The Supreme Court of the Netherlands, with input from the Court of Justice of the EU (“CJEU”), recently upheld the use of the 150 km criterion. The case involved a German expat from the border region who after being recruited by a Dutch company in Rotterdam remained living in Germany but rented an apartment in the Netherlands where he spent Monday through Friday. The employer applied for the 30% ruling but the request was denied on the ground that the expat lived within 150 km of the Dutch border and therefore did not fulfil the distance criterion. The expat argued that this criterion constitutes an obstacle to free movement of workers and therefore should be deemed discriminatory.

In a preliminary ruling, the CJEU dismissed the expat’s arguments, holding that only if the 30% ruling would lead to clear and systematic overcompensation would it be deemed discriminatory. The Supreme Court subsequently decided that even though, in practice, the application of the 30% ruling could lead to "overcompensation" in individual cases (because the reimbursement is received regardless of the actual costs incurred and therefore can exceed actual expenses), this would not automatically constitute clear and systematic overcompensation. This decision was based on an examination conducted by the Advocate-General, which revealed possible overcompensation for expats with a high income but, taking into consideration the small size of this group, this did not lead to clear and systematic overcompensation. In general the costs incurred by the expats roughly matched the tax free allowance.

Following the Supreme Court judgment, the 150 km criterion is now a hard and fast rule. However, under Dutch law, an employer can choose to reimburse expats for their actual extraterritorial expenses free from tax, as long as the expat provides proof of the expenses and that such reimbursement was agreed beforehand in the employment terms. This possibility applies to expats who do not meet the 150 km criterion, as well as to expats who fall under the 30% ruling and whose expenses exceed the tax free allowance.

The CMS Expat Desk covers all CMS jurisdictions and assists international companies with their expat employment matters including, immigration, tax, social security, pension and housing.

For more information on the 30% ruling or other expat employment matters, please contact Katja van Kranenburg-Hanspians or Gilbert Joskin.