Split payroll and taxation

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Every country has its own tax system. Most countries have a progressive tax rate. This implies a lower tax rate is applicable for the lower income, and as the income increases so does the tax rate. Some countries have a flat tax rate. Experts have the opinion that this is the future.

As long the flat rate is not the present, you could try to obtain the best of both worlds:

Split payroll

If you are in the position to become employed by two employers, both in different countries, then you can benefit from the lower tax rates in each country and the tax free amounts in each country. You can also be employed by one employer, but paid in two countries.

The tax departments are aware of this possibility as well, so they will argue a split payroll. Jurisprudence has learned that a split payroll is possible only in a genuine split payroll situation. What is a genuine split payroll situation? That is when you actually physically work a couple of days of the week/month in one country and actually work physically the remaining days in the other country. Then a split payroll is possible.

Split payroll orange tax

Tax treaty

A split payroll is not only possible, it is also a necessity. The tax treaties state in their articles that labour is subject to tax only in the country where the work is actually being done. There are a limited number of exceptions to this rule.

For instance the teacher and student article. If you are a teacher or student/researcher and you are performing during a maximum period of two years research or teaching abroad, you are regarded a tax resident of the country that send you to the other country.

Social premiums

The tax treaties that make split payroll a necessity are tax treaties. For social premiums this does not apply. The main rule for social premiums is that you are socially insured in the country where your employer is registered. If however, you work for at least 25% of your time in another country, you could make a request to become socially insured in that other country.

Example: You work for a company in Belgium and your wife and children still live in the Netherlands. You negotiated that you could work two days at home in the Netherlands and three days per week in Belgium. Two days is 40% which implies you can be subject to social premiums only in the Netherlands. This employee needs to obtain a so called A1 or E101 statement from the Dutch Government to the Belgium company bookkeeping, so they are free guarded from levying social premiums over the Belgium part of the income.

Income tax return

The down side of the split payroll is the income tax return. In the income tax return you need to report your world wide income. That implies both split payrolls come together in this income tax return. The double taxation relief provided for the other country is pro rata. The two income amounts added on top of each other can make you climb in the progress rates to the next tax rate. So we expect you will be due additional income tax.

When the social premiums have only been levied over your Dutch income and that income was under the maximum amount for social premiums, you will need to pay additional social premiums for the salary of that other country until the maximum income has been reached.

There are three methods to approach this:

You can do nothing and then in the income tax return you learn what you need to pay extra.

You can have your Dutch income charged at the higher (52%) tax rates and claim back in the income tax return what was withheld too much, if any.

You can file a preliminary assessment for the pending year based on the assumptions of income and already pay the extra tax while you are earning the regular taxed salary income.

Orange Tax Services

One of our main activities is assisting companies with employees located in the Netherlands. Other than that the company has no presence in the Netherlands. We are able to process the salary administration in the Netherlands in such a manner that the employee is paid a Dutch taxable salary and the company receives a journal for their bookkeeping. Moreover, we can apply for the 30% ruling and assist with the payment obligations to the Dutch tax office and social institute.