Netherlands – Change of tax allocation rules for severance payments in cross-border situations
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After 5 February 2022, the right to levy tax on severance payments in cross-border situations will no longer be based on the allocation of taxation rights over the last twelve months of the employment. Instead (in principle), it will be based on the work pattern over the total period of service in cross-border situations, this policy change may impact the Dutch wage tax withholding on severance payments.
New allocation of taxation rights
These changes follow a revised view from the State Secretary for Tax Affairs in paragraph 2.7 of the OECD Commentary on Art. 15 of the Model tax convention. According to the state secretary, other countries do not apply the 12-month rule to determine taxation rights on severance payments.
Double taxation considerations
In order to determine which country holds the ultimate taxation rights, the allocation of taxing rights should be based on:
- The total period of service the severance payment relates to; however, if no data is available for the full period of service, then a different method can be used;
- A reasonable estimate of the tax allocation, based on the locations the employee has worked in for the relevant total period of service, or, if that is not possible then;
- The twelve months prior to the end date of the employment.
To apply an exemption in the Netherlands for wage withholding tax on the severance payment, the regular salary must be taxable in the state the employee has worked in the relevant period.
Risks of these new taxation rules
The revised policy may result in new mismatches with other tax treaty countries (based on the idea that avoiding double taxation and double non-taxation should lead, it would be logical to choose the allocation rule to fit the specific situation). Therefore, consideration should be made to ensure that allocation is made correctly in all jurisdictions.
Dutch income tax rates in 2022
Please find below the Dutch income tax and social security percentages, applicable from 1 January 2022.
| Taxable income bracket |
Income tax rate (%) |
National
Insurance
Contribution rate (%) |
| Bracket |
EUR |
EUR |
|
|
| 1 |
- |
35,472 |
9.42 |
27.65 |
| 2 |
35,472 |
69,398 |
37.07 |
- |
| 3 |
69,398 |
- |
49.50 |
- |
Find out more
This article was produced by Karin Chung, Tax Adviser at Loyens & Loeff, the Netherlands, a CELIA Alliance member firm.
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