Wage withholding tax is an advance tax payment on income tax. Anyone deriving an income from employment in the Netherlands is liable to pay income tax on the income. In addition, employees in the Netherlands are generally covered by social security. The employer withholds the social security premium and wage tax due from the wages as a single amount and subsequently pays this to the tax authorities. The combined amount is referred to as wage tax. The wage tax is subsequently settled against the amount of income tax due.
The Wage Tax Act links the withholding obligation with the presence of an employment relationship, whether or not a notional one. One of the characteristics of an employment relationship is the employer-employee relationship. With the big increase in the labour market of freelancers and self-employed sole traders (ZZP), the importance of delimiting ‘whether or not’ there is an employment relationship and the associated withholding obligation and social security obligation has grown considerably. To this end, the Government has come up with the draft law on the Deregulation of the Assessment of Employment Relationships (DBA) to replace the so-called Declaration of Independent Contractor Status (VAR). The planned commencement date of the DBA system is 1 May 2016. The VAR in principle indemnifies the client from the risk of a withholding obligation. Under the DBA the client can only still get an indemnification for the absence of a withholding obligation when using the (model) agreements assessed and approved by the tax authority. With the introduction of the DBA there will be a habituation period up to 1 May 2017, within which the client and contractor must endeavour to adapt their employment relationship to the new regulations.
The wage tax rates in 2016 are:
- On the first € 19,922 of taxable income: a percentage of 36.55% is withheld (8.40% wage tax and 28.15% social security premium);
- On the next € 13,793 of taxable income: a percentage of 40,40% is withheld (12.25% wage tax and 28.15% social security premium);
- On the next € 32,706 of taxable income: 40,40% is withheld;
- On all additional income: a percentage of 52% is withheld.
When withholding the wage tax, the employer must also take into account the general tax allowance and the labour allowance.
The latter discounts are discussed above.
For wage tax a broad wage definition is used. Dutch tax legislation allows numerous options for rewarding personnel in fiscally friendly ways. Wage tax is calculated on the full value of the remunerations received by the employee based on the employment contract. The remuneration may take the form of cash, such as a salary, holiday allowances, overtime, commissions and payments for a thirteenth month. Employees can however also receive remuneration ‘in kind’, such as products from the company or holiday trips. The concept of remuneration also includes various other claims, compensations and provisions.
All compensations and provisions from the employer to the employee form the taxable wages. Exceptions to this are:
- fringe benefits (e.g. attention in case of illness);
- intermediary costs, being costs incurred by the employee on behalf and for the account of the employer;
- exempt claims and benefits (e.g. pension claims and benefits on death);
- benefits with payment of reasonable compensation.
The other compensations and provisions in principle form part of the taxable wage. Depending on the category of the compensations and provisions the employer has the option to include compensations and provisions in the final levy payment. Wage tax is then paid by the employer.
Work expenses scheme
Compensations and provisions to employees are subject to the work expenses scheme. Through this scheme an employer may in 2016 spend a maximum of 1.2% of the total wage for tax purposes (the ‘free scope’) on untaxed compensations and provisions for employees. On the amount above the free scope, the employer pays wage tax in the form of a final levy of 80%.
Not all compensations and provisions are or can be included in the free scope. Under the work expenses scheme compensations and provisions are only included in the free scope and successively qualify as final levy payment (taxed at 80%) where and insofar as the compensations and provisions do not belong to the following categories:
- Compensations and provisions that are exempted from final levy payment.
This includes among other things private use of company car and reimbursement of fines.
- Compensations and provisions belonging to another final levy payment.
This category includes for example gifts and provisions to a third party and additional assessments not recovered from the employee.
- Specific exemptions of work expenses.
Exempted work expenses include compensations and provisions for business travel expenses by public transport (100% compensation), travel expenses by own transport (max. € 0.19 per km), course costs, study and training, meals during overtime and business travel (see below), extraterritorial costs (e.g. 30% rule; see below), costs of tools and ICT equipment (see below) and products from the company’s own sector (see below). For some of the specific exemptions a lump sum applies (see below).
- Provisions to be valued at zero
This includes provision of work clothing, provisions in the workplace, refreshments provided in the workplace.
If and insofar as compensations and provisions do not fall under the above-mentioned exemptions, the employer then has the choice of regarding the (remaining) compensations and provisions as final levy payment or as regular wage (with the deduction of wage tax from the employee). The employer may indicate compensations and provisions as a component of final levy payment on condition that these do not differ substantially from what is usual in similar circumstances. This means that depending on the nature it is usual to indicate the relevant compensation or provision as a component of the final levy payment. A compensation or provision relating to costs incurred by the employee in relation to the proper exercise of the employment relationship will be qualified as usual rather than the indication of pure salary elements, such as bonuses. With regard to the scope of the compensation or provision this may not be substantially (30% or more) higher than are indicated as usual in comparable circumstances. The additional amount shall be included in the levy as regular wage. For some work expenses such as meals at the workplace, which are taxed by the employer as regular wage different lump sum valuations apply in addition. The final levy payment is then first deducted from the free scope and the additional amount taxed by the employer at 80%.
The final levy under the work expenses scheme is in principle calculated per employer, With effect from 2015 there is the option to calculate the final levy at group level. For an employee who works for more than one group member, groups no longer have to calculate the compensations and provisions per group member (employer). In addition under this scheme the use of the free scope can be optimized for all group members by paying all compensations and provisions designated as final levy payment from the total free scope. The final levy payable on the total amount that exceeds the collective free scope is then paid by the group member with the highest pay taxed for the employees.
Tools and ICT equipment
Compensations and provisions relating to this equipment are exempt if they meet the ‘necessity criterion’. This means that the exemption applies if in the opinion of the employer the compensation or provision is necessary for proper performance of the work. The costs must be paid by the employer without being charged on to the employee. In addition the employee must return the equipment used or pay the employer the residual value once the equipment is no longer necessary for the work.
Employers are entitled to offer their employees discounts or compensation for purchasing products produced or manufactured by the company. This can be done tax-free subject to the following conditions:
- These must be products that are not from another sector;
- The maximum discount or compensation per product must be 20% (2016) of the market value (including VAT) of the product;
- The total value of the discount or compensation may not exceed € 500 (2016) per calendar year.
This may also extend beyond the termination of the employment contract due to disability or retirement.
If an employee is required to relocate for work purposes, the employer is entitled to compensate the employee free of tax for the moving costs for his household goods. In addition the employer may give a tax-free moving expenses allowance of a maximum of € 7,750 (2016). The condition is however that this is a move that is entirely related to the employment. This in any case applies if the employer gives the allowance within 2 years after the employee accepts the new employment (or after transfer) and the employee lives more than 25 kilometres from his work and moves, as a result of which the distance between his new home and his work is reduced by at least 60%.