Changes to tax treatment foreign executive remuneration

Background

If you work abroad, the Netherlands grants avoidance of double taxation on your foreign income via the exemption method or the credit method. Please note that it also matters in this regard whether you received the remuneration as employment income (in the capacity as an employee) or as a directors' fee (in the capacity as an executive or non-executive director). For salary income of employees, the Netherlands in principle grants an exemption of the income, insofar as the work was physically performed in another country. For director’s remuneration, the situation is different and the prevention of double taxation depends on the tax treaty. Most Dutch tax treaties prescribe a credit method for the avoidance of double taxation for executive and non-executive board remuneration. 

The credit method may be more disadvantageous for directors in case the Dutch tax is higher than the income tax actually paid abroad (please also refer to "Difference between exemption method and credit method" below). However, based on the Decree of the State Secretary of 18 July 2008, it was approved that the exemption method could also be applied as a method to avoid double taxation for director’s remuneration. In short, the following conditions had to be met: 

• The director’s remuneration must be actually subject to taxation in the other country; and

• No favourable regime should apply in the other country for such income compared to ordinary employment remuneration.

If these conditions were met (and evidence should be available), a taxpayer could still use the exemption method on request in the income tax return, even if, based on the bilateral tax treaty, the Netherlands would only allow a credit of the tax on the foreign income. 

In the Notitie Fiscaal Verdragsbeleid 2020 (Tax Policy Document, 2020), which was presented to the Chamber of Parliament on 29 May 2020, it was already announced that the approval with regard to the application of the exemption method for director’s remuneration would expire. This approval will thus expire on 1 January 2023. 

Difference between exemption method and credit method

The reason that the exemption method often works out more favourably than the credit method is that with the credit method, the Netherlands only allows a deduction from the Dutch income tax for the income tax actually paid abroad (up to a maximum of the imputed Dutch income tax). In case the Dutch tax rate is higher, there is an obvious disadvantage because the Netherlands will 'top up' the levy to the Dutch level.

The Netherlands may also grant relief from double taxation on foreign income on the basis of the exemption method with progression reserve. The taxpayer reports the worldwide income in the income tax return. Subsequently, the Netherlands grants a proportional reduction of the income tax in the ratio between the foreign income for which the double taxation relief is granted and the total (box 1) income. The amount of tax actually paid abroad is then irrelevant. If the tax paid abroad is effectively lower than the exemption granted by the Netherlands, an advantage arises for the taxpayer compared to the credit method.