The 183 day rule
Tuesday, September 6th, 2016 by Arnold Waal
Questions about the 183 day rule. We are often approached by a tax payer that has a focus on the 183 day rule. What is the 183 day rule?
Most countries have tax treaties between each other and in such a tax treaty is determined which country can tax what. Among those articles is the article about employment. Employment is taxed in the country where the employment is actually done. In the event the employee is send for a short period of time to another country, that would imply this employee is taxed in that other country. Moreover, for that period of time the employee is socially insured in that country.
The employee however is not very keen on that situation. Being send out can be exiting, but not all employees find the tax consequences exciting. For that purpose the 183 day rule as been invented.
For the 183 day rule three conditions need to be met:
- The employee cannot have been physically in the other country for more than 183 days during a twelve month period. In some countries this is equal to the calendar year in some countries like the United Kingdom it is twelve months equal to the tax year which is not the calendar year.
- The employee is not considered being an employee of the other company in the other country
- The employer sending out the employee does not have a permanent establishment in that other country.
Number 2 and 3 conditions are nearly never taken into account, but those conditions make that the 183 day rule nearly never can be applied.
Example 183 day rule
A UK tax resident who happens to have his or her own UK Ltd won a contract with a big bank in the Netherlands. However, such companies like big banks, or big multi nationals do not want to be bothered directly with these contractors for legal reasons. Hence an in between company is the contracting party and the work is done on the site of this big bank. The period of the contract is 6 months.
Does the 183 day rule apply?
The answer is no. Even though the period is shorter or equal to 183 days and the UK Ltd does not have a permanent establishment in the Netherlands, the UK contractor is assumed to be a deemed employee of the in between company. That is caused by the anti exploitation legislation.
Anti exploitation legislation has been active since a couple of years to prevent people working on the land plucking fruit to be exploited. But this legislation has been set up in such a manner that is applies to all types of contracting work.
The in between company is aware of this anti exploitation legislation and will run a payroll for this UK contractor. Moreover, for this type of anti exploitation legislation deemed employment situations a collective labour agreement exists. This implies social premiums and pension premiums are being withheld. Pension premiums you cannot get back, you need to wait till you reached the pension age in order to benefit from these premiums.
Running a payroll for this UK contractor makes that the tax treaty between the UK and the Netherlands will rule that the employment is taxed in the Netherlands. A this is a clear situation, the 183 day rule mentioned in the tax treaty cannot be addressed anymore.
Of course the UK contractor can ask the in between company not to run a payroll. But the penalties for not complying with anti exploitation legislation start with EUR 12.000 up to EUR 36.000. That is EUR 12.000 for the UK contractor and EUR 12.000 penalty for the in between company. The in between company will therefore not meet such a request.
The deemed employment makes that the 183 day rule is not applicable.
Would the situation be different in the example above when there was no in between company?
No. The answer would be the same, as the definition of employment determines where it is taxed. If a UK Ltd company send a person, most of the time the shareholder/director, to the Netherlands to work on the site of a client for a limited period of time, then the tax office will determine if there is an employment. The employment is caused by the person following instructions for which a reimbursement is being paid.
This makes that the 183 day rule nearly never applies.
Dutch tax resident and 183 day rule
Most expats are a bit taken aback of the 52% tax bracket we have so we even get requests for the 183 day rule when this tax payer is a Dutch tax resident. That is the wrong way around and not possible. Moving your tax residency by simply registering yourself abroad does not work. Your tax residency is determined by facts and circumstances. Your employment is an important indication where you are a tax resident.
When does the 183 day rule apply?
If your UK employer sends you abroad to install for instance a machine or application on the site of a client. The difference is that the work done is not work the company of the client does, nor can the client give instructions, as if he could, he would have been able to have the job done himself.
The above situation does not work for the 183 day rule when for instance a big multi national company sends over employees to their other offices to install anything, because one of the conditions is that the employer cannot have a permanent establishment in that other country.
30% ruling and 183 day rule
So you see, the 183 day rule is a rule that nearly never applies. If you take this into consideration in connection with the 30% ruling, you might be relieved to learn the 30% ruling might solve part of your issues with Dutch taxation.
Orange Tax Services
We cannot assist you when you work as contractor for a company in the Netherlands send out from abroad. For that you need to comply with anti exploitation legislation which involves an umbrella payroll. An umbrella payroll is a payroll where you will be on our company payroll and we invoice your client to cover the costs and our fee.
We do provide regular payroll administrations and we can inform you about the 183 day rule, but if you read the above you might come to conclusion it is not for you.