Will the 2023 changes to the 30%-ruling be reversed
On Prince’s Day this 17th of September, 2024, the King will announce the key legislative changes for the coming years. Hopefully, these changes will also include reversal of the 2023 changes to the 30%-ruling, specifically the so-called 30/20/10 rule.
What are the 2023 changes to the 30%-ruling?
As you may be aware, at the end of 2023, the Dutch Parliament passed two significant amendments to the 30% ruling. These changes include a phased reduction in the tax-free allowance percentage for new users and the abolition of the partial non-residency status. These changes, together with the 2022 amendment to the 30%-ruling which capped the eligible salary to the so-called WNT-norm, came into effect on January 1, 2024. A detailed summary of these changes can be read in our previous blog.
In short, the phased reduction (or the 30/20/10 rule) of the 30% Ruling no longer allows expatriates to benefit from a tax-free allowance of up to 30% of their salary for a full 60 months. But instead, the new rules introduce a gradual reduction:
First 20 months: up to 30% of their salary as a tax-free allowance.
Next 20 months: up to 20% as a tax-free allowance.
Final 20 months: up to 10% as a tax-free allowance.
Additionally, from 2025 onward, the partial non-residency status will be abolished. This change means that expatriates will no longer be able to benefit from certain tax exemptions in Box 2 and Box 3. Please read our blog for more details.
Concerns from the Senate
The Dutch Senate expressed significant concerns about these latest changes, which were implemented without thorough research into their potential effects. The Senate fears that these amendments could negatively impact the Netherlands' attractiveness as a destination for international talent. The Senate requested an evaluation of the existing ruling and the impact of the 2023 changes. In response, the State Secretary expedited the planned evaluation of the 30% ruling, and the results were released this summer in a 156-page rapport.
Key Findings from the Evaluation
The evaluation provided several important insights:
That the 30%-ruling has proven its effectiveness as it stimulates the influx of highly skilled migrants.
The 30% ruling generates more tax revenue than it costs to implement; approximately 128,5 million net tax revenue per annum. This is excluding the indirect effect from higher spending resulting in additional VAT revenue and economic effects of the higher spending.
The phased reduction of the 30%-ruling: the 30/20/10 rule, could lead to a 10-15% decrease in the influx of highly skilled migrants. Abolishing the 30%-ruling in totality could lead to a 40% decrease in the influx of highly skilled migrants. It is unlikely that either of these gaps can be filled by the domestic workforce.
Reducing the benefits of the 30%-ruling and multiple changes to the 30%-ruling effect the perceived stability of the Dutch tax climate and could harm the country's ability to attract international talent.
The 30%-ruling is meant to compensate expatriates for their extraterritorial costs (et-costs): costs incurred as a result of living outside their home country. The 30/20/10 rule assumes that these costs taper over time. Evaluation shows that there is no evidence that the extra costs incurred by expatriates decrease the longer they stay in the Netherlands.
Implementing a deemed allowance of 30% to compensate for the et-costs is meant as an alternative to accounting for actual et-costs and thus reducing the administrative burden for employers and the tax authorities. It is expected that tapering the deemed allowance to 20% and 10% will see many employers switch to reimbursing the actual et-costs instead of the deemed allowance.
Approximately 25% of the current 30%-ruling population benefits from the partial non-residency status. The partial non-residency status does not effectively attract high net-worth skilled migrants as most users are not deterred by possible Box 2 and box 3 taxation.
The abolition of partial foreign tax liability is unlikely to reduce the influx of highly skilled migrants, as the benefits of the 30% ruling offset the increased tax burden.
The current salary standard remains an appropriate measure for determining specific expertise.
The next step for the 30%-ruling?
The State Secretary has forwarded the evaluation to the Dutch Parliament and left further substantive responses to the new cabinet. If these findings are taken seriously, it seems likely that the phased reduction of the 30% ruling may be reversed. However, the evaluation does justify the abolition of the partial non-residency status. On the 17th of September we will hopefully find out if and how the conclusions of the evaluation rapport have been addressed.
