New income tax treaty between the Netherlands and Germany impacts cross border workers
After a slightly longer than expected ratification process in the Netherlands, the new income tax treaty with Germany became effective from 1 January 2016. Created to prevent double taxation, the treaty provides guidelines for determining which country has the right to levy taxes on taxpayers’ income. The new treaty, signed in April 2012, has replaced the 1959 treaty and reflects changes to the taxation of income for employees and directors working cross border.
Key changes to the tax treaty
In line with the wording provided in the OECD Model Treaty, employment income can be taxed in the country where the duties are performed unless the employee meets all the 3 conditions of the exemption rule, often referred to as the 183 days rule. If all the conditions are met within a 12-month period starting or ending in the relevant year, an exemption from taxation in the employment country can be claimed. The previous treaty had a reference period of a calendar year rather than the full 12 months, meaning it will now be more difficult to claim the exemption.
A separate article (article 15) has been introduced specifically for providing rules regarding directors’ fees (there was no separate article in the previous treaty). In accordance with the OECD Model Treaty, directors’ fees may be taxed in the country where the company is established.
Dutch cross-border workers
Unlike the previous treaty, the new treaty provides a compensation rule for cross-border workers, similar to the tax treaty between the Netherlands and Belgium. With this, Dutch residents will be compensated by the Dutch authorities for a tax loss due (partly) to working in Germany.
The allocation of taxation rights of termination payments under the new treaty is unclear. Both countries have their own national rules for the taxation of these payments, potentially resulting in double taxation. There was a special agreement on the termination payments between the two countries regarding the allocation of taxation rights, but since the previous treaty no longer applied, it was automatically revoked. The Dutch Ministry also revoked a Directive that had previously approved this agreement. For now, the Netherlands will use the Commentaries from the OECD Model Treaty to determine taxing rights.
Specific rules and transitional regulations apply for allocating pension benefits between the Netherlands and Germany. Pension benefits (excluding those of civil servants) will generally only be taxable in the recipient’s country of residence, but if the sum exceeds € 15,000 in any calendar year they may also be taxable in the source state.
There is also an option to continue to apply the former treaty for a further year (tax year 2016) if it is more beneficial for the individual.
How will this affect me and my business?
Employers and employees must carefully review how the new treaty will impact their tax situation for both countries and act accordingly.
A different interpretation in applying the 183 day-rule between the two countries may result in either a double taxation or double exemption. The same applies to termination payments. Therefore, each situation will need careful monitoring. When filing their personal income tax return, Dutch residents will need to check whether they should invoke the compensation rule.
We will address the consequences for German taxation of the new treaty in our next newsletter.
(Gerechtshof ‘s Hertogenbosch 30 November 2015, ECLI:NL:RBZWB:2014:373)
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