Severance Payments for Cross-Border Employees – What Employers Should Know

Severance pay is a familiar concept — but when the employee has worked across borders, things quickly become more complex. Terminations involving internationally mobile employees often raise tricky questions about taxation, payroll, and compliance.

Where should tax be paid? Who is responsible for withholding? And what if the employee has already relocated?

In this blog, we break down the key considerations when severance is paid to employees with a cross-border work history. Whether it’s an expat returning home, a remote worker who moved mid-contract, or an international transfer that didn’t work out — here’s what HR should know to avoid tax surprises.

When Does Severance Become a Cross-Border Tax Issue?

Severance becomes a cross-border tax issue when the employee’s tax residency or work history spans multiple countries. Depending on the facts, the payment may be taxable:

• In the country where your company is based,

• In the country where the employee now lives,

• In another country, in which the employee has worked in the past,

• Or all of the above, depending on the treaties and local laws involved.

Some of the key factors:

1. Employee’s Tax Residency at the Time of Payment
If the employee has moved abroad, their severance may be taxed under the new country’s domestic law. But some countries — including the Netherlands — may still tax the severance if it relates to previous local employment.

2. Where the Income Was Taxable
Most tax treaties allocate taxing rights based on where work was physically performed. Severance is often treated as deferred compensation. That means multiple countries might claim taxing rights — especially if the employee worked across borders during their contract.

This can lead to:

• Pro-rata tax calculations based on prior workdays;

• Double taxation, unless tax treaty relief applies.

3. The Agreed form of the payment
In case of continued pay during garden leave, the payment is often treated as regular salary. Payments during garden leave are usually considered taxable in the country in which the employee would have worked if active. If the payment is made after the contract termination, the tax treatment may differ — and so do the reporting or withholding requirements.

4. Is There a Tax Treaty in Place?
If so, Article 15 (income from employment) usually governs the tax treatment of severance. It’s typically taxed where the employee worked. No treaty? Then tax exposure — and the risk of double taxation — increases. In addition, the year in which the tax treaty was agreed to can lead to different outcomes.

Who Is Responsible for Withholding Tax?

When it comes to expat severance, withholding obligations can be unclear. But if no tax is withheld — and tax is due — the employer may still be held liable.

Here’s how to assess the risk:

1. Employer Obligations in the Netherlands (or Country of Establishment)
The starting point is always where your company is based. Even if the employee has left the country, local tax authorities (e.g. in the Netherlands) may still expect you to withhold termination tax — unless it’s clear the taxing rights have shifted.

Dutch employers should:

• Confirm the employee’s new tax residency;

• Request clearance from the Dutch tax authorities if no withholding is needed;

• Document everything carefully.

2. Employee’s Country of Residence
If the employee has become a resident elsewhere, that country may expect:

• The severance to be reported in the employee’s personal return;

• Payment of income tax without employer involvement;

• Credit for Dutch tax withheld, if applicable.

3. Is There a Local Foreign Payroll?
If your company operates a payroll or shadow payroll in the new country, local authorities might expect the severance to be processed there — particularly if:

• The employee was transferred before termination;

• A local entity is named in the contract;

• The severance was paid after the employee became tax resident abroad.

It’s also possible that one of the foreign group entities – especially if the employee has been working for that group entity on an assignment – is responsible for foreign payroll processing.

4. What If No One Withholds Tax?
In some cases, neither side withholds. But if the payment is taxable, this can backfire — especially in the Netherlands, where the employer may still be liable for missed tax, penalties, and interest.

Common Mistakes with International Terminations

Cross-border severance cases are full of hidden risks. These are the most common pitfalls we see in practice:

1. Not Verifying Tax Residency or Work History
Assuming that severance is only taxable in the Netherlands? That may not hold true. If the employee relocated or worked abroad, multiple countries could claim taxing rights — and the payment may need to be apportioned accordingly.

2. Incorrect use of the 30%-Ruling
The 30%-ruling cannot be applied on severance payments. In addition, limitations also apply in case of garden leave payments. In addition, the 30%-ruling is only applicable on income taxable in the Netherlands. Of course, other foreign expat schemes may apply, this should be investigated beforehand.

3. Not Coordinating with Foreign Advisors
Without local advice, severance may:

• Cause compliance issues,

• Push the employee into a higher tax bracket,

• Be taxed differently than expected,

• Lead to reputational risk if the indicated net outcomes differ.

4. Contract Clauses That Don’t Fit Mobile Employees
Many contracts assume a one-country scenario. But if the employee became mobile, severance clauses may:

• Conflict with local labor law;

• Trigger confusion about gross vs. net payouts;

• Lead to unexpected gross-up obligations.

How We Can Help

Severance payments for cross-border employees require coordination across HR, payroll, and tax — in multiple jurisdictions. We support companies like yours in managing the risks.

Our team helps with:

• Mapping the employee’s tax residency and treaty position;

• Assessing exposure in the Netherlands and abroad;

• Advising on withholding and filing obligations;

• Preventing double taxation through coordinated tax planning;

• Clarifying how severance affects the 30%-ruling;

Need help navigating severance payments for internationally mobile employees? Let’s discuss your situation.