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

Posted on 3rd January, 2010

Estimated reading time 5 minutes

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guidelines from 2004, which applied solely to foreign companies with employees in the Netherlands, have also been withdrawn.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 ‘employer’.

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 concluded.
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
(ii)    the entity which bears the benefit and risk of the employment being undertaken.

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 circumstances:

- 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 here.

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