The taxation of Dutch executives working from abroad
Jian-Cheng Ku and Roland Kleimann of DLA Piper Netherlands analyse the trend of executives working from abroad.
Persons qualifying as Dutch tax residents who are executives/directors of Dutch companies are subject to Dutch personal income tax on their worldwide income. Persons with such high-profile functions at a Dutch company often have seats on the boards of foreign companies as well.
Double taxation relief – Dutch residents
The method for relief on board remuneration included in tax treaties concluded by the Netherlands typically refers to the Dutch provisions for the prevention of double taxation.
Until December 2022, a Dutch decree provided unilaterally for an exemption that applied a progression method to director remuneration derived from abroad (Decree of the Dutch Secretary of Finance dated July 18 2008, No. CPP2007/664M). However, this decree has been withdrawn, through the Decree of the Dutch Secretary of Finance dated July 8 2022, No. 2022-178650. As a result, the Netherlands no longer unilaterally applies the exemption method for the elimination of double taxation in respect of foreign-source board remuneration for individuals who are residents of the Netherlands.
Hence, for persons who also fulfil directorships of foreign companies, the credit method now applies on foreign-source remuneration received, because nearly all Dutch tax treaties include the credit method for director remuneration. This often results in (significantly) higher taxation in the Netherlands than in previous years.
Non-Dutch residents Non-Dutch resident individuals are in principle only subject to tax in the Netherlands with respect to certain categories of income originating from sources in the Netherlands. Unless otherwise stated, a non-resident taxpayer is, for Dutch tax purposes, subject to the normal personal income tax rules and the same progressive tax rates as for residents.
Tax treaties concluded by the Netherlands typically include a provision stating that remuneration derived by an employee and/or a director who is a resident of a foreign jurisdiction in respect of employment on behalf of a Dutch employer may also be taxed in the Netherlands. There are exceptions to this rule. The employee’s income should in principle only be taxable in the Netherlands if the employment is generally exercised in the Netherlands and the employee is in the Netherlands for a period exceeding in aggregate 183 days in the taxable year concerned.
Developments in the location of executives
Board remuneration or other remuneration derived by an individual who is a tax resident of a lower-tax jurisdiction in their capacity as an executive and/or a director of a Dutch company may typically be taxed in the Netherlands based on the article on directors’ fees in tax treaties concluded by the Netherlands. In this respect, the remuneration would be subject to Dutch progressive income tax rates. It would be up to the jurisdiction of residence of the individual to provide for the prevention of double taxation.
Under certain circumstances, such individuals who are tax residents of another jurisdiction could also qualify for the beneficial ‘30% ruling’ Dutch personal income tax incentive in relation to remuneration derived as an executive and/or a director of a Dutch company. No need to be a Dutch tax resident!
It could be tax efficient for foreign individuals who become executives/directors of Dutch companies to remain resident abroad. This could prevent them from becoming subject to Dutch taxation on their worldwide income, including directorships of foreign group companies. These individuals only become subject to Dutch taxation through progressive Dutch tax rates on their income relating to employment in the Netherlands or their remuneration as a director of a Dutch company.
In addition to the above-mentioned case of executives who travel frequently between group companies and who can partly work remotely, another topic of discussion is how remuneration should be split between functions (for example, nil-remuneration directorships may be challenged by tax authorities).
Although it is generally recommended for Dutch companies to meet the Dutch substance requirements, including the requirement that 50% of their directors are residents of the Netherlands, this requirement only needs to be adhered to in certain situations; mostly where a Dutch company is primarily engaged in intercompany financing, licensing, and/or holding activities, and not for companies with sufficient operational activities in the Netherlands.
In practice, for companies with operational business activities in the Netherlands, there is a trend where (part of) the directors and executives are, or remain, tax resident abroad and only spend part of their time in the Netherlands. For such directors and executives of Dutch companies who fulfil foreign directorships and receive significant overall compensation, living abroad could result in significant tax savings.