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Dutch tax treatment of foreign remuneration board members: changes announced


On 29 May 2020, the Dutch government published the 2020 Tax Treaty Policy Memorandum (in Dutch: Notitie Fiscaal Verdragsbeleid 2020). This document describes the Dutch policy with respect to the concluding of tax treaties to prevent double taxation. The aim of tax treaties is to stimulate economic cooperation between countries by eliminating double taxation. The conclusion of tax treaties supports an attractive business climate. On the other hand, tax treaties can create opportunities for tax avoidance. Preventing tax avoidance is one of the Dutch government's policy priorities.

The updated policy includes the position that for the remuneration received as a board member of a foreign based company (“directeuren en commissarissen”), the exemption method for relief of double taxation will no longer be available. For many Dutch resident board members of foreign companies, this will lead to a higher tax burden on their foreign income. For the other points in the Dutch 2020 Tax Treaty Policy Memorandum, please refer to this Tax News Release.

Relief of double taxation - exemption method

In most bilateral tax treaties as concluded by the Netherlands, a distinction is made between income from employment (employees) and directors' remuneration (executive and non-executive board members). For income from employment of employees who physically work in another country for a foreign company, the Netherlands in principle grants an exemption in order to avoid double taxation. If the exemption method is applied, the foreign income is exempted from Dutch income tax.

The Netherlands applies the so-called exemption method with progression reserve. More specifically, this means that the Netherlands first include the foreign income in the taxable base (as part of the worldwide income). Thereafter, a proportional reduction of the income tax in the ratio between the foreign employment income for which double taxation relief exists (numerator) and the total (box 1) income (denominator) will be granted.

In short, this leads to an exemption at the average Dutch income tax rate (box 1) that applies to this employee. The amount of actual tax paid in the other country is of no importance for determining the relief of double taxation, this can of course be higher or lower.

Relief of double taxation for board members’ remuneration

Under most tax treaties, the income received as a board member of a foreign company is normally taxed in the country where the company is based. For board members’ remuneration, most tax treaties prescribe the credit method in order to avoid double taxation (by the state of residence). When applying the tax credit method, a deduction is given on the Dutch income tax for the income tax actually paid abroad (up to a maximum of the attributable Dutch income tax). If the tax paid abroad is lower than the attributable Dutch tax, there is a disadvantage compared to the exemption method. If the tax credit method is applied, an additional amount of Dutch tax is levied up to the Dutch income tax level.

However, based on the Decree of the State Secretary of Finance of July 18, 2008, it is currently possible, subject to certain conditions, to apply the exemption method to board members' remuneration instead of the tax credit method (unilateral approval).

The conditions for applying the exemption method (in contrast to the tax treaty) are (i) that the board members’ remuneration is actually subject to taxation in the other country and (ii) that no favourable regime applies to such income than for ordinary employment income. If these conditions are met, a taxpayer can still use the exemption method in its income tax return (similar as for income of 'ordinary' employees).

The beneficial policy will be withdrawn

In the Dutch 2020 Tax Treaty Policy Memorandum it has been announced that the above unilateral approval for applying the exemption method will be withdrawn. As an explanation on this, it is indicated that board members’ activities do not always have to be performed at a fixed location (in the source state), nor is it always clear how the income abroad will be taxed.

For many Dutch resident board members of foreign companies, the announced change will result in a higher tax burden on their income. By applying the tax credit method, the remuneration of such board members will be taxed at least as high as board remuneration received from a Dutch company. This new approach clearly deviates from the previous (existing) policy of creating equality in the source state for this type of income.  

What can this possibly mean for you?

As of when the approval on the exemption method will be withdrawn has not yet been published. It is possible that this will be effective January 1, 2022. From the moment of withdrawal, this may have an adverse effect on the net income of many Dutch resident board members of foreign companies. In anticipation of the formal revocation, we recommend to determine the impact this change will have on the board members / directors within your (international) organisation.

In some cases, the announced policy change will not have any income effects, because some (older) tax treaties specifically prescribe the exemption method for board members' remuneration. In that case, the application of the exemption method follows from the tax treaty itself and therefore the withdrawal of the unilateral approval does not affect the tax treatment of this income (e.g. the tax treaty between the Netherlands and Luxembourg). Under the majority of the existing tax treaties concluded by the Netherlands, however, the credit method will apply for board members’ remuneration.

Contact us

Daniël Sternfeld

Daniël Sternfeld

Partner, PwC Netherlands

Tel: +31 (0)61 089 28 89

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