This is not the tax rate you expected I can only imagine. In both countries there is no tax withheld on employment income generated in these countries, how can it be taxed at 52%. And why is this the identical rate to the Dutch top income tax rate? Basically because it is the Dutch rate levied over Dubai or Brunei income.
How can Dutch tax be levied over Brunei income?
Actually that is an easy answer: bad advise. Bad advise or outdated advise is difficult for us tax professionals to make objections against. The reason is that the message we send is the one they do not want to hear. Dollar signs in their eyes are blocking the full picture, but those signs will be washed away by tears. Tears due to the blue envelop or fancy message box assessment from the Dutch tax office.
How can Dubai or Brunei income be taxed in the Netherlands?
If you are going to work in a tax free country, you need to make sure that your tax residency moves with you to that country. When that is not done, it basically has no use working in a tax free country. The tax rate in Dubai and Brunei is nil.
Your tax residency is in the country with whom you have the strongest connection. Your connection is determined by your partner, your place of work, where your house is situated. We learned that if you own a house in the Netherlands that is regarded your main residence. A so called Box 1 house of which you can deduct the mortgage interest, that this is the strongest connection the tax office can determine. This makes you are a Dutch tax resident, even if you can proof to have lived the full year abroad.
Engineer working in Brunei
A Dutch engineer worked in Brunei while he kept his main residence in the Netherlands. In his income tax return he reported the EUR 105.060 Brunei income for the year 2009, but claimed a Double taxation relief for the same amount. A double taxation relief implies tax was indeed levied in Brunei. As Brunei is known as a tax free country, the Dutch engineer could not have made the double taxation claim. The Brunei country does not know income tax on employment income. Hence the Dutch tax rates apply, up to the max of 52%.
The Dutch tax inspector triggered by the 2009 income tax return of this engineer also checked previous years and yes, the engineer had earned EUR 130.000 in 2008 in Brunei as well. Also for this income a double taxation relief was claimed, whereas that could not be possible. Fortunately the court was in favour of the engineer on technicalities.
One of the technicalities is that if you complete the digital income tax return, there was no country code for Brunei. Hence the famous XXX was completed. This was a risk the Dutch tax office took while creating the 2008 program. The Brunei address details were mentioned in the income tax return, so the Dutch tax office could have known about the Brunei income. The rule is that the Dutch tax office can only adjust the 2008 income tax assessment, if not final yet, when a new fact came to their attention. The court ruled that the incompetent program cannot be seen as a new fact, hence the 2008 tax free income cannot be taxed after all with the Dutch tax rates.
The other claim the Dutch tax office made was that they were not aware of the Brunei tax regime, hence they assumed tax was being withheld on income, as a result the double taxation relief was applied. But it has come as a new fact to their knowledge that Brunei does not know income tax on employment income. Therefore the tax office is updating the final 2008 income tax assessment. Also in this instance the court ruled that the tax office should have known, since there does not exist a double taxation treaty between the Netherlands and Brunei simply by the lack of Brunei levying tax. Plus the tax office has enough knowledge in their system to look up the tax details of Brunei.
Orange Tax Services
We often receive questions with respect to the tax implications of working in a tax free country such as Dubai or Brunei. Our simple answer is to move the fiscal residency to those countries and then the income is indeed tax free. But life is not as simple as we know it. Children could be in school still in the Netherlands, the tax partner has a Dutch career or the house they own is too nice to be sold for the purpose of saving tax money.
Then again, if you would like to prevent paying Dutch income tax on tax free income from abroad, you need to go all the way.