30% ruling – minimum salary requirement

The minimum salary requirement is one of the four requirements you need to meet to qualify for the 30% ruling. What is the minimum salary.

30%  ruling – minimum salary requirement

The minimum salary requirement is EUR 37.296. This is the 70% part of the salary. So the gross salary needs to be at least EUR 53.280.

The exception to this rule is that when you are younger than 30 years old and you hold a master degree, then your salary can be EUR 28.350 instead. Again this is the 70% part of the salary. The gross salary needs to be at least EUR 40.500.

The ultimate exception to the rule is when you work for a Dutch university, then no minimum salary is required. If that would be different, with the budgets of the universities no employee would qualify anymore, but we do need the researchers.

minimum salary requirement
minimum salary requirement

When do you need to meet the minimum income requirement?

There are more answers to this one question. The most important answer is on the moment you were attracted from abroad by the Dutch employer, you should earn the minimum required salary.  In other words, if you get a raise later that makes you meet, then this raise is too late.

The multiple answer to the question is in the minimum income constantly being monitored. You need to keep earning this salary, otherwise you still lose the ruling the moment you no longer meet the minimum income requirement. This is checked in the income tax return and wage tax returns.

Example minimum income requirement:

  • You have been attracted by a Dutch employer from abroad that offers you a EUR 60.000 gross salary.
  • You meet all the requirements, so the ruling is applied for and granted.

But nearly immediately you make less hours than the hours agreed in the employment agreement. Hence your salary drops in line with the lower amount of hours and suddenly you no longer meet the minimum income requirement. From that moment you have lost the ruling forever.

Example 2 minimum income requirement:

  • You were attracted by a Dutch employer when you are 28 years old.
  • You hold a master degree, hence the lower EUR 40.500 income requirement was applicable to you.
  • You were offered a EUR 50.000 salary, hence the 30% ruling was issued to you.

Then you turned 30 years old without a significant salary increase and you are under the EUR 53.280. That implies you have lost the ruling forever.

No more ruling – how is that communicated?

That is not communicated. It is the obligation of the employer to apply the correct rules to the salary. If that implies the 30% ruling needs to be examined if still applicable, then this is part of running the payroll.

No more ruling but ruling is still applied

If the employee no longer meets the requirements. Either the employee’s salary was too low or the employee took a garden leave exceeding 3 months, then the ruling no longer applies. If the employer does not acknowledge this and continues processing a salary with applying the ruling, the employer has a problem.

The problem is that not enough tax was calculated, hence the employer is to pay the difference plus a penalty of at least 25%. Then the employer needs to collect from the employee the too much salary paid. Any employer that ever tried to collect too much salary with the employee knows that the money is no longer available, so to say. Hence the employer waives that amount. But waiving the amount is in fact salary as well, that needs to be grossed up, plus social premiums and if not done correctly, with a penalty of at least 25%.

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We do come across these situations where the employee holds in their hand the 30% ruling statement issued by the tax office, but less hours were worked, hence the ruling is void. That is often difficult to digest by the employee.

Or the employer that finds out too late that the employee was not entitled anymore or the ruling lapsed. The question asked is often, what is the chance on an audit. The answer is: really small. But that is not the correct question to ask. The question is: will the tax office find out in the coming 12 years. The answer is then: probably. Do you then have issues? Indeed you have.

Now the period of the 30% ruling is shortened to max 5 years, you can expect that the tax office will make this a pin point investigation for next year. Plus due to all the news about this change, no employer can shield a mistake with the words: we did not know.

Dividend versus salary

The most frequent asked question is about dividend versus salary in a BV company. How to correctly weight this question in the corporate income tax return.

Dividend versus salary

We notice mainly clients from the United Kingdom have the strong opinion that paying out dividend instead of salary is much better tax wise.

Whether that is true depends.

The issue in the question dividend versus salary is not so much the alleged tax advantage,  but the rules we have in the Netherlands. The rule is that the salary of the managing director of the limited liability company cannot be less than 75% of the profit. This rule is more elaborate, but for the purpose of this article we focus on the 75%.

Dividend versus salary
Dividend versus salary

Is dividend cheaper tax wise?

Let us assume you make a EUR 100.000 profit. If you do not take out any salary, then this profit is taxed with 20% corporate income tax, being EUR 20.000. The after tax profit of EUR 80.000 that is open for dividend is subject to 25% dividend withholding tax, being EUR 20.000. Hence net in your pocket is EUR 60.000.

To be clear, the above situation is not legal, you cannot have no salary, so this is only for calculation purposes.

Is salary cheaper tax wise?

In 2018 EUR 100.000 salary is EUR 45.965 wage tax/social premiums and EUR 54.304 net salary. As now the profit is fully consumed, no corporate income tax is due. This is a legal salary. But not cheaper than dividend.

However, if we introduce the so called 30% ruling in this story and the criteria have been made, the application made, then suddenly the wage tax / social premiums amount to EUR 29.047 and the net salary is EUR 70.952. This is a legal salary. It is very much cheaper than dividend.

Why can we not pay a dividend instead of salary?

There is a very logical answer to this question. If you pay 100% of the profit as a dividend, you have not earned a salary. In the Netherlands you are regarded poor when you have no salary income. If you are poor, you are entitled to benefits. Benefits such as the healthcare benefit, rent benefit, higher child care  benefit etc.

But, are you poor? You were paid EUR 60.000 in dividend, then you are not poor. And if you are not poor, you should not be open to facilities that are for the true poor. Hence rules have been installed.

Minimum salary requirement

The rule, to prevent managing directors / shareholders to benefit from tax credit that are not entitled to them, implies that all managing directors in the Netherlands need to have a minimum salary of at least EUR 45.000. Of course if the company does not make this amount of profit (excluding salary costs managing director), then a lower salary is to be paid.

Besides this EUR 45.000 the salary cannot be less than 75% of the profit. This is automatically checked by the Dutch tax office when the corporate income tax return is processed. If it does not match, the tax office will demand you to have it matched plus increase the amount of wage tax due with at least 25% penalty.

But do you want to have dividend versus salary?

We think not. Not only you need to be in line with the rules and regulations. For the formal dividend payout there is an additional rule. That rule basically states that should the limited liability company be liquidated due to shortage of money. In other words, the company goes bankrupt as it cannot pay its invoices anymore. Then the liquidator appointed will state that the dividend paid in earlier years was an act causing this bankruptcy. Such a process makes you become personal liable for the debt and that is exactly what the liquidator is after, because then your house can be sold to pay mainly his invoice.

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We are often asked about dividend being paid, instead of salary. When no 30% ruling is in place, it is very tempting. However, most people in the Netherlands know that purchasing a house is cheaper to maintain, then renting a house. The bank that provides you with a mortgage will look at the employment income over the past three years. Not at the dividend payments. If then the salary was not high enough for the loan that was applied for, you cannot purchase the desired house. So the question dividend versus salary is a much more intense question, but the answer nearly always the same. Salary can be experienced as being better, but also more costly tax wise.

 

 

UK Ltd subject to Dutch wage tax rules

In the Netherlands we have wage tax rules for major shareholders directors in a BV company with respect to the minimum salary they need to earn. Some think that if the legal entity is incorporated and kept abroad, these rules do not apply. This is the wake up message for them.

 

Wage tax rules (Gebruikelijk loon)

In the old days the managing director of a BV company was instructed by his tax advisor not to take any salary from the company which is taxed under the progressive tax rate (max 52%), but to take out a dividend instead (max 25%).

The side effect was that this person  was regarded poor. If you have no salary, you are poor. If you are poor, then you can get the health care benefit, rent benefit, child care benefit. The Netherlands is a socialistic country, which implies the strong have to carry more than the weak. The weak needs assistance.

But this managing director is not weak at all, a substantial dividend was paid to him to support his private life and yes, he enjoyed the tax benefits on the side.

The Dutch Government put a stop to that many years ago. A managing director cannot earn less than 75% of a person in a similar position. If this cannot be proven, then the managing director earns at least 75% of the profit of the company. A profit excluding the salary costs he already received. In this framework the salary of the director cannot be lower than the best paid employee, unless the best paid employee has an exceptional position nobody can match.

 

Wage tax rules – is it a bad thing?

Maybe not. If you have all your income as dividend, there is no employment income, hence no income to set off against the mortgage deduction. That said, with the current low interest rates, the tax advantage is minimum already.

What is the math?

You earn EUR 180.000 profit per year. Will you make that a salary or a dividend (should you have the choice)?

The EUR 180.000 dividend implies that the EUR 180.000 is first taxed with 20% corporate income tax, being EUR 36.000, hence the after tax amount is EUR 144.000. That can be paid as dividend at total 25% tax, being EUR 36.000. The result is that you have EUR 72.000 tax paid and EUR 108.000 cash to spend.

The EUR 180.000 salary implies that EUR 85.236 wage tax is collected more or less. Hence you have EUR 94.764 cash to spend. A EUR 13.236 difference.

However, most of our clients have the so called 30% ruling, which makes not EUR 180.000 is taxed but EUR 126.000 is taxed. Then suddenly ‘only’ EUR 57.156 tax is due and you have EUR 122.844 cash to spend.

UK Ltd subject to Dutch wage tax rules

UK Ltd subject to Dutch wage tax rules

A clever Dutch resident tax payer incorporated a UK Ltd, had the shares hold by a trust, something British, which works in some countries abroad, but the Netherlands does not recognize the concept of such a trust.

The UK Ltd participated in a Dutch open CV (a legal entity). This open CV provided fiscal advise (!!).  The services were provide by a couple that also both were the director of the UK Ltd.

First point of discussion is the fiscal residence of the UK Ltd. Of course the couple stated the UK, but the rule is that a legal entity is situated for fiscal purposes in the country where the managing director is a tax resident. The couple worked in the Netherlands, lived in the Netherlands and were the only managing directors of the UK Ltd, hence the UK Ltd was a Dutch resident company.

The next point was the salary income.  The UK Ltd subject to Dutch wage tax rules. The case does not publish details about where the proceeds of the company went, but I think they thought to hide that in the trust vehicle. As we know no trust vehicle in the Netherlands, as this UK Ltd is a Dutch resident company, as they hold a majority of the shares in that company, Dutch wage tax rules apply. This was ruled by the court. The couple tried to argue the verdict, but there were no grounds for an argument. The appeal to the high court was dismissed as well.

What is the result? The case does not state this, but the profit of the past 5 years will be regarded salary, for which wage tax is due. A penalty for not complying with the rules will be added to that. The fact that they run a fiscal advise company, implying they should have known the rules, will make the penalty higher than for a regular tax payer. Such a penalty can make the company bankrupt.

 

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Sometimes we feel like Don Quixote. Often we are approached by a foreign tax resident who would like to incorporate a Dutch BV company. We ask if he will move to the Netherlands, but that is not the case. Then we inform this person about the consequences of him not moving to the Netherlands for the fiscal position of the Dutch BV company. The only response we receive is disbelieve. That we can make even worse to inform that person, that no Dutch bank will open a bank account for that company, as long as the director/shareholder is not a Dutch resident tax payer.

Bottom line is that you can have a foreign legal entity in the Netherlands, but Dutch rules apply. If you would like to apply the foreign rules or not the Dutch rules, you need to become a tax resident of that country. However, moving your residence is