A common situation is that a foreign company hires a Dutch resident person to work for them. The work is actually done by the employee from his home. He or she either works at home or starts his work from home and visit business relations in the Netherlands and or close to the Netherlands. The foreign employer has an employee in the Netherlands.
Dutch employee in foreign tax system
Numerous companies solve the above situation by simply paying this employee under their local tax system. For instance a UK company pays the Dutch employee a UK taxed salary, or a German company German taxed salary, US USA taxed salary etc. This of course initially does not present any issues. The employee works, receives his salary to pay the rent and the employer pays the local taxes.
Dutch tax treaty and Dutch social premiums
The Netherlands has with a lot of countries a double taxation tax treaty. In this tax treaty is clearly stated which country can tax what income. With respect to employment income the taxation is allocated to the country where the work is actually being done. There is a 183 day rule exemption, but for a person living in the Netherlands that does not apply.
That implies the correct situation should be that the foreign employer pays Dutch tax and Dutch social premiums for the employee. We, Orange Tax Services, can easily assist in this situation, not umbrella payrolling, but a payroll where the employer is still in charge fully over the employee and the situation.
Consequences of wrong payroll
The consequence of the Dutch employee being paid a foreign taxed income will show over time. The employee will encounter him or herself that the Dutch system has been closed for him. As he is no longer earning an income, for the Dutch Government no income details are known, this employee can also not use any of the Dutch tax benefits. Benefits such as the mortgage deduction, or if he can qualify, of the 30% ruling.
More intense is to experience that also the social system has been closed for this employee. This employee is for instance not insured for Dutch health care. If you know a little about the costs involved in being ill, or being transported by an ambulance, you know you need to have insurance. Living in the Netherlands and having a foreign insurance for a foreign country whereas that should have been a Dutch insurance, implies substantial issues. If it is not actual health care costs, it will be the Dutch social institute (SVB) that will issue a EUR 400 fine per month the employee was not properly insured.
Moreover, as the employment is subject to Dutch employment rules and as we assume a foreign employment has been agreed to, the Employer will experience how much the Dutch employee is protected by law if no agreements have been made. A foreign employment contract will undoubtedly contain agreements that are void under Dutch legislation.
In other words, the Dutch employee will soon feel uncomfortable in the situation he or she is and the employer will learn it is at the weakest position from a legal stand point.
Time to take action.
Making the employee a freelancer
Some creative minds came up with the solution of making the employee a freelancer. This is an impossible solution from a tax point of view. Employment is not created by the name or the registration, but by the contains. The employer instructs the employee, the employee commits to work for the employer, the employee gets paid, also holiday pay, paid during holidays and paid when ill. Those are criteria that make him or her an employee.
Registering the employee as a freelancer in the Netherlands makes him an entrepreneur who needs to file VAT returns (sales tax) and has a different income tax obligation. Moreover, you basically ask the employee to commit a bit of fraud as you can only be a free lancer when you have at least three clients, which this employee does not. He or she has no clients at all, it has an employment agreement that the employer would like to have stickered freelance to solve the issue the employer has.
Basically the employer does not have an issue, it is easily solvable, but the employer simply does not know and creates a undesired position for this employee.
Setting up a BV company and hire this employee
Another creative idea is the foreign employer incorporating a Dutch BV company and then hire the employee. The basic rule is that a limited liability company is situated in the country where the managing director is living. We can only assume the employee is not the managing director, so who is? We think a person not living in the Netherlands. Hence the problem is not solved.
Making the employee the managing director is rather a risk you take as foreign employer. Being a managing director implies you have access to all financial data, you can make all payments, but even worse you can sign contracts in which you represent the BV company with any party.
Both the employee who suddenly is in charge of a BV company with all its obligations and the employer who cannot control the employee will experience this as non desirable situation.
What is the solution? Non resident employment ship
There is a solution for the above situation and it is actual a rather pleasant solution for all parties. The employer costs for the employee are part of the foreign entity result, the employee receives a Dutch taxed salary over which have been due Dutch social premiums. The employee has access to all Dutch facilities. Should the employee have a 30% ruling, or can have a 30% ruling, this can be applied for. The employer needs to set up a Dutch employment contract.
Orange Tax Services team
Orange Tax Service can assist you with the set up of a non resident employer in connection with a payroll for this employee you have. We can also help with the registration of a branch company in case your company would like to provide an office space to your employees.
The non resident employer registration situation we often set up for one employee situations. Our fee includes questions and emails the employer or the employee might have. We can arrange for the funds to be transferred, salary and tax to be paid. Provide the foreign company with the Dutch salary costs in a journal with your journal numbers.
We also provide global payroll services. You will be offered a one contact person agreement where we can provide in any country of the world the payroll for your company.