Netherlands: Important guidelines from the Ministry of Finance issued regarding the concept of ‘factual employer’ in double tax treaties

January 3, 2010

New approach following Supreme Court ruling

On 20 January 2010, the Dutch Ministry of Finance published
guidelines regarding the concept of ‘factual employer’ in double tax
treaties.  Earlier guidelines from 2004, which applied solely to foreign
companies with employees in the Netherlands, have also been withdrawn.

Double tax treaties broadly allocate the right to tax employment
income between the state in which the individual works (the “working
state”) and the state in which the individual is resident. In
principle, the state in which the employment is undertaken can tax
employment income earned there.  In contrast, the state of residency may
tax employment income earned in the working state only if all of the
following conditions are met:

1. the employee stays in the working state for a period not
exceeding an aggregate of 183 days per 12 month period;

2. the remuneration is paid by, or on behalf of, an employer which
is not resident in the working state; and

3. the remuneration is not paid by a permanent establishment of the
employer in the working state.

As such, it is necessary to determine what is meant by the term

Who is the employer?

The Netherlands used to consider employer to mean the formal
employer, i.e. the entity with which an employment agreement was
Supreme Court decision alters established position

However, on 1 December 2006, the Supreme Court ruled, for the
purposes of the double tax treaty only, to abandon the concept of formal
employer in favour of the term ‘factual employer’. The Supreme Court
considered that the employer is the entity with which the individual has
a supervised employment relationship with during the period of
cross-border employment.

In order to determine which entity this is, the following must be
taken into account:

(i) the entity which has the authority to instruct; and
 the entity which bears the benefit and risk of the employment being

The entity which bears both the benefit and risk of the employment
points to this entity being the ‘factual employer’.  Salary costs for
the individual employee being borne by an entity is also indicative of
that entity being the factual employer.

However, in practice, the concept of factual employer is extremely
ambiguous and it has caused difficulties, particularly in relation to
cross-border assignments of employees within group companies.

New guidelines

These determine when authority to instruct exists.  In particular,
this will arise where an entity can directly instruct how the employment
is to be conducted.  The guidelines also set out some examples.

The underlying purpose of the guidelines is to note that a factual
employer will not be recognised in the Netherlands in the following

– Situations involving intra-group assignments; and

– Where a foreign employee undertakes an employment assignment in
the Netherlands for a period not exceeding an aggregate of 60 days per
12 month period (including, where appropriate, any sick days).

If the assignment extends beyond the 60 day threshold, the criteria
adopted by the Supreme Court are to be used to determine whether a
factual employer is present in the Netherlands.  If such a factual
employer is present, than the employee will be subject to tax in the
Netherlands on all of the remuneration he earns from his employment

Wage tax withholding obligations

Even in circumstances where a factual employer in the Netherlands is
recognised for the purposes of the double tax treaty, this does not, by
association result in a wage tax withholding obligation in the
Netherlands.  A wage tax withholding obligation may arise for either the
assigning or the recipient company, depending on the particular
circumstances, or there may not be any wage tax withholding obligation
at all.

If the 30% tax ruling has been granted (see Resources below for an
explanation of the 30% ruling), the receiving company in the Netherlands
is permitted to act as a wage tax withholding agent, even though the
employee assigned is formally employed by the foreign, assigning
company. This is specifically permitted under guidelines on the 30%
ruling. The current guidance also indicates that a similar approach
will be taken for employees who are not subject to the 30% ruling and
change in the Wage Tax Act will be made to give effect to this.

The new guidelines apply with effect from 12 January 2010 but do not
cover any social security legislation.


In the Netherlands, if an employee meets a certain number of
requirements, he has a right to a predetermined, fixed amount of
reimbursement for extraterritorial expenses, amounting to 30% of his
wages. This is referred to as the “30% tax ruling”.

For further information or to discuss any of the issues raised,
please contact Peter Bos (
on +31 20 578 57 85 or Marieke de Vries (
on + 31 20 578 51 76.

This article was produced by, and re-produced with kind permission
of, our correspondent firm in The Netherlands, Loyens & Loeff N.V.

Loyens Leoff


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