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. For further information or if you have any queries relating to the content of this communication, please contact us. CELIA Alliance CELIA Alliance members are identified here. Members of the CELIA Alliance are each independent law firms and do not practice law jointly with any other member of the CELIA Alliance. "CELIA Alliance" and "CELIA" are not trading names. For more information about the CELIA Alliance click here. Disclaimer Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this newsletter. For further legal information click here. Circular 230 disclosure To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Copying If you would like to copy or otherwise reproduce this article then you may do so provided that: (1) any such copy or reproduction is for your own personal use or if it is made available to any third party it is done so on a free of charge basis; and (2) the article is reproduced in full together with the contact details, disclaimer and any logos as they appear on each article.