Things to Consider: International Payroll in the Netherlands
The Netherlands, which translated to “low laying country” during the Holy Roman Empire, is aptly named, as the country is indeed quite flat and scattered with countless rivers, canals, and lakes. Though it is a modestly sized country, it is one of the most densely populated countries in the world. In fact, The Netherlands is quickly becoming one of the most advanced economies in the world and has much to offer any company looking to expand to the Dutch market. The following are a few things to consider for resident and non-resident international employers and employees:
Requirements of New Employers
As a non-resident employer, before employing staff, one must register the entity with the Dutch Tax and Customs administration. Upon registration a payroll tax number will be issued and sent along with a set of information that covers the allocated business sector, payroll periods, filing deadlines, and authority contacts.
The payroll tax number is important because it is used for both submitting payroll tax returns and all other relevant communications with the authorities, such as the Dutch Tax Authorities (Belastingdienst) and Unemployment Office (UWV).
In certain, and generally rare instances, the authorities may require a company to submit a first day notification for new employees for a period of up to three years. With non-resident employees it is always advisable to verify their work status beforehand. Regardless of the employee working status, an employer will receive a notification from the Dutch Tax Authorities if there is an obligation to do make any such reports upon hiring, and in this case, there will be no obligation to submit first day notifications.
Hiring New Employees
A SOFI-number or BSN (burgerservicenummer) is mandatory for an employer to have on file for each employee for tax purposes because it is used by all Dutch civil service authorities. This number must be obtained by the employer within three days of the employees start date at the company.
The employee must present an official form of identification, other than a driver’s license, complete a wage tax form (loonbelastingverklaring) in full detail, and elect whether or not they will participate in the payroll tax credit before the first payroll calculation upon their start date. All of this information submitted to the employer, must be kept on record for up to five years after the employee-employer relationship has ended.
Additionally, it is important to have the fiscal residence of the employee on file. If the fiscal residence is not in The Netherlands, this needs to be administered and because it has an influence on the amount of payroll tax credits the employee and employer are entitled to.
Dutch 30% Tax Ruling
In some cases, employees and employers may benefit from a tax exemption of up to 30% on taxable wages for up to five years, this is known as the 30% ruling. This exemption is reserved for Dutch companies and highly skilled employees hired from abroad.
To qualify for this exemption the employee´s annual taxable compensation must be at least €37.743 per year. Other requirements are as follow:
- The employee has lived at last 150 km from the country´s border for the last 16 months for at least the last two years.
- The employee is 100% liable for any wage tax that remains
- A 30% tax ruling form must be completed in full and submitted to the Dutch Tax Authorities.
Only upon approval from the Dutch Tax Authorities will the 30% tax ruling exemption go into effect. It is recommended that the form be submitted as soon as possible, because there is often a lengthy wait for documentation processing,
International Payroll Tax and Social Security
Any company, resident or otherwise, that assigns workers to the Netherlands is, in principle, subject to wage tax and social security. If a foreign company hires workers within Dutch jurisdiction, they become what is considered a “virtual resident” and the employer will need to comply with the Dutch regulations for calculating international payroll.
Dutch payroll consists of many basic elements and like most payroll regulations the employer is subject to certain withholdings on behalf of the employee. Namely, payroll tax that consists of a combined percentage for wage tax, which is between 9-10,45% and national insurance contributions which are around 35,65%. Payroll tax rates are withheld from the taxable wages during each pay period by the employer using either a fixed or progressive rate. The highest payroll tax rate is 51,75% and is applicable to annual income above €68.508. Employers are also responsible for withholding the statutory social security contributions; the percentage of which is variable per type of employment per sector.
Payroll tax returns are submitted per pay period for each type of return. There is one return for both payroll tax, which includes wage tax and national insurance, as well as a return submitted for social security contributions. This, along with over 100 other types of individual data elements for each employee are submitted electronically to the Dutch Tax Authorities and a payment is made based on the amounts communicated on the payroll.
A slightly more complex part of payroll tax is the Dutch three-pillar pension scheme. The Dutch pension system is a combination of a pay-as-you-go scheme where benefits are covered in full by the working population, like that of the public pension system in the United States, and a privately funded pension similar to Hong Kong´s, where employees contribute to their pensions individually. The three pillars are state, supplementary collective pensions, and private individual pensions.
The first pillar is meant to provide a basic income and it is linked to the mandatory federal minimum wage. The second pillar, also to be withheld from employees’ earnings, is the collective pension scheme, these funds are managed by non-profit organizations on behalf of the employee. Lastly, the third pillar is for employees who work in sectors without collective bargaining agreements. All these contributions are deducted from tax revenue at a rate of up to 17,9%, which is levied as a part of the payroll tax in the form of national insurance.
Lastly, there is also a scheme called the Work-Related Cost Scheme (wekkostenregeling). This scheme dictates the way that work-related costs must be administered and taxed. It is important to note that all costs are wage by nature, with a specific exemption permitting tax-free payments. There is also a Work-Related Cost Budget of 1.2% on the annual taxable wage per employee that can be paid tax-free if certain costs are clearly allocated to that budget. If this budget is exceeded, the employer is obligated to pay 80% of the final wage levied by the Dutch Tax Authorities during the tax return process.
Record Keep and Reporting
Any Dutch company that employs at least one employee is subject to mandatory record keeping with specific conditions that must be met to remain in compliance. Even if the company keeps their payroll records in another country, they must be easily accessible by the Tax and Customs Administration upon request at any time.
All employers must keep annual wage statements on file for every employee for up to seven years after the employee-employer relationship has ended. These statements, or pay-slips, must include basic employee information with the gross to net calculations of their renumeration and can remain in a digital format. All employers must issue an annual income statement at the end of the calendar year, though the employee may be furnished with it upon request or termination.
Transition Fee for Dismissals / Terminations
In the Netherlands there are no reporting obligations on the employer’s side for terminations. Naturally, the best course of action is an amicable dismissal by mutual consent. In other cases, when an employer seeks to terminate an employment agreement that has existed for at least two years, the employer is subject to pay a “transition fee” known as “transitievergoeding”. Though no amount needs to be paid if the termination is a result of the employee acting culpably, the fee is calculated by considering the number of months of salary due, the age of the employee, and the number of service years. Any final salary payments for leavers are due on, or before, the next pay date following the end of the employee contract.
Payroll experts with local knowledge and experience are perfect to contract when hiring after moving into a new market. With their expert local knowledge, they will make sure you and your business are always in compliance with local regulations.