The Hidden complexities of the Dutch 30%-Ruling

Estimated Reading:  4-5 min

The Dutch 30%-ruling is a fantastic tax advantage for expats, reducing taxable income and increasing take-home pay. While this benefit is significant, there are also some lesser-known complexities that expats should consider before applying for the ruling. In this article, we will explain these complexities in simple terms, so you can make an informed decision about your situation.

1. How the 30%-Ruling Works

The tax-free benefit under the 30%-ruling is achieved by separating income into two parts: a tax-free expense allowance (30% of total gross salary) and taxable salary (the remaining 70%). While this provides immediate tax savings, it also means that various benefits, which are calculated based on taxable salary, may be lower as a result.

2. Reduced Unemployment and Disability Benefits

One of the key aspects of the 30%-ruling is that 30% of your salary is paid out tax-free. However, this also means that your taxable salary is lower than your actual compensation package. This can have consequences if you ever need to claim unemployment (WW) or disability (WAO) benefits in the Netherlands. These benefits are calculated based on your taxable income, so if your reported salary is lower due to the ruling, your benefits will also be lower in case you lose your job or become unable to work.

Example 1: Unemployment Benefits

Sarah, an expat working in the Netherlands, has a gross salary of €85.000 per year. Under the 30%-ruling, her taxable salary is reduced to €59.500.

• Without the 30%-ruling, Sarah’s unemployment benefits would be calculated based on €85.000 or €6.558 per month excluding vacation pay. For the first two months, she would receive 75% of his taxable salary, capped at €4,741.50 per month. Thereafter, she would receive 70% of his taxable salary, capped at €4,425.40 per month.

• With the 30%-ruling, Sarah’s unemployment benefits are calculated based on €59.500 or €4.590 per month excluding vacation pay. For the first two months, she would receive 75% of her taxable salary of €3.443 per month. Thereafter, she would receive 70% of her taxable salary of €3.213 per month. There is no tax free supplement in addition to this payment.

This means her benefits are significantly reduced as a consequence of the 30%-ruling. Nevertheless, the employability of most expats is very high, so chances are that Sarah would find a new position within one or two months. In that case, the benefits of 5 years of the 30%-ruling outweigh the reduced unemployment benefits.

Example 2: Disability Benefits (WAO)

John earns €75.000 per year, but due to the 30%-ruling, his taxable salary is reduced to €52.500 under the 30%-ruling. WAO disability benefits are based on taxable earnings and the level of incapacity. If John were to become fully disabled:

• Without the 30%-ruling, his benefit could be up to 70% of €75.000, resulting in a maximum annual benefit of €52.500.

• With the 30%-ruling, his benefit would be based on €52.500, resulting in a maximum annual benefit of €36.750.

This significant reduction in financial support highlights the potential downside of the 30%-ruling when it comes to long-term disability protection. To mitigate (part of) this risk, John can look into a private disability insurance or a so-called WIA insurance with his employer. If the cost of such an insurance is less than the benefit of the ruling, then opting for the 30%-ruling is still a benefit.

3. Pension Accrual and the 30%-Ruling

Dutch employee pension schemes generally calculate pension contributions and eventual payouts based on taxable income. Because the 30%-ruling lowers your taxable salary, your pension accrual may also be lower.

However, some pension providers allow expats to voluntarily accrue pension on the 30% tax-free portion. This means paying extra contributions to compensate for the reduced taxable base, ensuring a higher pension upon retirement.

How It Works:

• Some pension providers allow employees to contribute based on their full gross salary, including the 30% tax-free part provided the employer has updated the pension scheme to the so-called WKR -regime.

• This typically requires an additional employee contribution to compensate for the tax-free portion not automatically included.

• The employer may also need to allow to these extra contributions.

Expats who plan to stay in the Netherlands long-term should check with their employer and pension provider to see if they can opt in for pension accrual on the full salary.

4. Risk of Additional Taxation in Your Home Country

The 30%-ruling tax-free exemption is based on Dutch tax rules. However, these rules are not necessarily recognized by other country and exempt you from tax obligations in your home country. For some expats, especially U.S. citizens who remain subject to U.S. taxation on their worldwide income, the tax-free portion of their salary may not be recognized as tax-free by their home country. This could lead to additional tax liability.

Example 3:

David, a U.S. citizen working in the Netherlands, benefits from the 30%-ruling, reducing his Dutch taxable income to 70% of the agreed compensation package. However, since the U.S. taxes its citizens on worldwide income but does not recognize the Dutch tax rules, the IRS may consider the full 100% salary taxable, effectively reducing the benefit of the ruling.

Final Thoughts

While the 30%-ruling offers a great financial benefit, it is not without complexities. Expats should carefully consider the impact on their unemployment benefits, disability benefits, pension accrual, and potential tax obligations in their home country. If you are unsure about your specific situation, it may be wise to consult a tax professional such as Exterus B.V. to determine the best approach for you.