The government plans to abolish the tax exemption for directors' fees of directors and supervisory directors abroad. The abolition is one of the measures from the Fiscal Treaty Policy Memorandum 2020, which State Secretary Hans Vijlbrief sent to the House of Representatives.
In most bilateral treaties that the Netherlands has concluded with other countries, income from employment and director's remuneration are treated differently. To avoid double taxation, the Netherlands generally grants an exemption for income from employment that is fulfilled in another country. The exemption method with progression therefore applies in these cases.
The method entails a reduction of the Dutch tax related to the foreign income. The exemption on the income tax is calculated per income tax box. The application of the exemption method with progression leads to an exemption at the average Dutch income tax rate that applies to the employee. This method does not take into account the tax rate levied on this income in the other country.
Normally the income of a board member is taxed in the country where the company is based. To avoid double taxation, in most of the tax treaties, the credit method applies. The credit method works as follows: a deduction is made on Dutch income tax for the income tax actually paid abroad. If the tax paid abroad is lower than the attributable Dutch tax, this will lead to a disadvantage compared to the exemption method. After all, the Netherlands will levy according to Dutch standards. This leads to an additional amount of Dutch tax compared to the application of the exemption method.
Nevertheless, there has been the possibility to apply for the exemption method for board members’ remuneration. Based on the decree of the State Secretary of Finance of July 18, 2008, it’s possible to apply for the exemption method, if the following conditions are met:
The remuneration of the board members is actually subject to taxation in the foreign country;
And in the foreign country there isn’t a more favorable regime for such income than for normal employment income.
The Secretary of State has announced in the Tax Treaty Policy Memorandum 2020 that the unqualified decision of July 18, 2008 will be revoked. As a result, board members can no longer use the exemption method, but the credit method will apply.
Board members residing in the Netherlands and working for a foreign company will receive a lower net fee as a result of this change. As result of the application of the credit method, foreign board members’ remunerations are taxed at least as heavily as board members’ remuneration received from a Dutch company. The exemption method will continue to apply if it is explicitly included in a tax treaty. Review of tax treaties is therefore required.
It is still unknown when these changes will actually take effect. We advise companies to provide insight into the impact of the announced withdrawal on the position of the board members. If you have any questions about the announced change, please contact us.
