Current system of relief of double taxation: exemption method
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.
Taxation of board members’ remuneration
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.