A tax resident of the Netherlands who starts working (temporarily) outside the Netherlands as either an employee or as a self-employed individual could get faced with the income tax, the social security and – in case of activities as self-employed – with the VAT of the Netherlands as well as of the foreign country concerned. Below we describe the consequences of a tax resident of the Netherlands who starts working as an employee or as a self-employed outside the Netherlands
1. Income tax
We assume that the individual is and remains a tax resident of the Netherlands. Tax treaties determine to which country the right to levy income tax is allocated. The Netherlands taxes the worldwide income in the Dutch income tax return but at the same time allows for a tax deduction to avoid double taxation if the right to tax the income is allocated to the other country. This applies to employees as well as to self-employed individuals.
Tax treaties and income as an employee
The main rule in tax treaties is that the right to tax employment income is allocated to the work country. The 183-day rule is the exemption to this rule: if an employee stays less than 183 days in the work country ánd the wage costs are not born by an employer in the work country then the country of residence, i.e. the Netherlands, has the right to tax the employment income after all. Some tax treaties use a period of 183 days in a calendar year, other tax treaties 183 days in a 12 month period.
Most tax treaties have deviating rules for activities as director, artist/sportsman, pension etc, government activities and teachers, educators and students. These activities are not described in this article.
Tax treaties and income as a self-employed individual
Activities as a ZZP, freelancer or any other non-legal term, are dealt with in tax treaties in the article regarding ‘independent personal services’ (mostly article 14). Some recent tax treaties no longer have a separate article for independent personal services but qualify these services as ‘business profit’ (normally article 7).
In both cases the tax treaties allocate the right to tax the income to the country of residence, i.e. the Netherlands, even if the activities are performed outside the Netherlands (exactly the other way round as with employees therefore).
This is only different in case in the other country there is a ‘fixed base’ or – in case of business profit – a ‘permanent establishment’ from which the activities are performed. In that case the other country may levy tax in as far income / profit is attributable to the fixed base / permanent establishment.
The tax treaties describe the permanent establishment as a fixed place of business from which the activities are wholly or partly carried on. As far as a ZZP is concerned the permanent establishment could for example be a space in an (office) building or a workshop. Ownership or rent is not obligatory, but the space should actually be at the disposal of the person. Also the space should be somewhat durable, i.e. should be available for a certain period. The permanent establishment should in some way be equipped for the activities of the business.
A place does not qualify as a permanent establishment if it is merely a storage place, a goods depot or a place where merely supporting activities take place.
The term fixed base is not defined in tax treaties, however the requirements are less substantial than for a permanent establishment. For a permanent establishment there should at least be a physical construction, but for a fixed base a centre of activities of a fixed or permanent character could suffice. Circumstances like the duration, the activities (not) being repetitive and the nature of the activities play a role. Some tax treaties assume a fixed base to be present in case the self-employed individual is present in that country 183 days or more (in a calendar year or in a 12 month period).
Employees / self-employed individuals: tax deduction to avoid double taxation
If the other country is allowed to tax the income, then – as said – the Netherlands allows for a tax deduction to avoid double taxation. Both in case of employment income as in case of income as a self-employed, the tax deduction is calculated in proportion to the income.
If the tax rate in the other country is lower than in the Netherlands, then this could lead to a lower total tax burden as if the total income would have been taxable in the Netherlands.
2. Social security
A tax resident of the Netherlands is compulsorily insured for national insurance (AOW, Anw, Wlz, AKW) and, in case of activities as an employee, also for employee insurance (ZW, WW, WIA).
In case of activities outside the Netherlands in principle the individual becomes subject to the foreign social security system. In case of activities in two or more countries the individual could therefore become subject to two or more social security systems.
In case of activities within the EU this is prevented by European Regulation 883/2004. The main rule of this Regulation is that the social security system of the work country applies. Subsequently, however, the Regulation contains ‘allocation rules’ which prevent that – in case of activities in multiple countries – a person is not subject to any legislation at all or simultaneously subject to several legislations.
A person that normally works as an employee or as a self-employed in more than one EU country, will remain insured for the total income under the social security legislation of the country of residence, i.e. the Netherlands, in case at least 25% of the activities is performed there. It is wise, but not obliged, to apply for a so-called A1-statement with the Dutch Social Security Authority (SVB) in which this is confirmed. This statement can be shown to foreign authorities.
Also in case of a secondment, i.e. a temporary posting abroad of maximally 24 months which can under conditions be prolonged to a maximum of 5 years, the social security legislation of the country of residence can remain applicable.
In case of activities outside the EU the Regulation does not apply. If a social security treaty was concluded with the respective country, this will determine which legislation will apply. In case of activities in another country (i.e. not EU ánd not a social security country) the individual could possibly be insured for social security in both countries or in no country at all.
The self-employed individual also has to deal with VAT. Assuming a self-employed individual who is a VAT entrepreneur and who provides services (so not delivering goods), the ‘place of service’ determines which country’s VAT system applies. In case of services to an entrepreneur outside the Netherlands the place of services is, save in exceptional circumstances, the country of the client which means that the VAT of that country applies. As a consequence in principle the self-employed individual would have to register for VAT in that country and pay foreign VAT.
However, if the client is established in another EU country, then the self-employed individual ‘shifts’ the VAT to the client. Following this the self-employed does not have to register for and/or pay foreign VAT. The self-employed must, however, mention the services in the Dutch VAT return ánd in the so-called ICP statement. It is furthermore obliged to mention the shifting of VAT on the invoice ánd to mention the VAT number of the client on the invoice.
In case of services to an entrepreneur outside the EU (like Norway, Switzerland) the VAT cannot be shifted to the client so the VAT legislation of that country applies.
In case of services to a foreign individual (i.e. non-entrepreneur) in principle simply Dutch VAT applies, save some exceptions.
The above can be summarized as follows:
|Tax resident of NL||Working in the Netherlands and abroad|
|Income tax of which country applies?||Social security of which country applies?||VAT of which country applies (in case of services)?|
|Employee||Main rule work country; exception country of residence||Main rule work country, exception country of residence||not applicable|
|Foreign country: allowed to tax unless 183 day rule||Within EU: NL in case at least 25% activities in NL, otherwise foreign country, unless secondment|
|NL: world income taxed -/- tax deduction to avoid double taxation if foreign country is allowed to tax||Outside EU: determined by social security treaty or national legislations|
|Self-employed||Main rule country of residence; exception work country||Main rule work country, exception country of residence||To entrepreneur, ‘place of service’ decisive: country of client (unless exception). To individual: NL (unless exception)|
|Foreign country: not allowed to tax unless ‘fixed base’ or ‘permanent establishment’||Within EU: NL in case at least 25% activities in NL, otherwise foreign country, unless secondment||Within EU to entrepreneur: VAT shifted to client (unless exception)|
|NL: world income taxed -/- tax deduction to avoid double taxation if foreign country is allowed to tax||Outside EU: determined by social security treaty or national legislations||Outside EU to entrepreneur: foreign VAT (unless exception)|
5. Closing remarks
Working abroad as an employee or as a self-employed has consequences for the Dutch as well as the other country’s income tax, social security and VAT. As far as income tax and social security is concerned the outcome depends on a number of factors which can possibly be guided by the tax subject him/herself. If this is possible before the start of activities, substantial disadvantages can be avoided. Or, depending on how you look at it, advantages can be gained…