Working Across Borders? How to Avoid Double Taxation

Double taxation in international employment: how can you avoid it?

For HR managers with internationally mobile employees, taxation is a recurring issue. Employees who work across borders or are temporarily posted abroad may be subject to double taxation: taxation on the same income in two countries.

Dutch tax treaties contain clear rules to prevent this. In this blog, we explain how double taxation arises, what prevention methods the Netherlands uses, and how this can potentially be avoided.

When does double taxation occur?

Double taxation can occur when two countries simultaneously have the right to levy tax on the same wage income. This happens, for example, when:

• An employee lives in the Netherlands but works (partly) abroad

• An expatriate works temporarily in the Netherlands but remains a tax resident in their home country

• An employee performs work in multiple countries (salary split)

Without a tax treaty, both countries could levy full tax. That is why countries, including the Netherlands, conclude bilateral tax treaties to determine which country may levy tax and how double taxation and tax evasion is prevented.

Tax treaties: who is entitled to levy tax?

Tax treaties generally distinguish between:

• Country of residence: the country where the employee is a tax resident

• Country of employment: the country where the work is actually performed

The key rule for wages from employment: the country of employment may levy tax on wages earned there, unless, for example, the 183-day rule is met or there are other specific exceptions that apply under the treaty.

Therefore please see also our blog about the 183-day rule as well as our blog about permanent establishments.

The two main prevention methods

Even if both countries have the right to levy tax, a tax treaty can prevent the employee from being taxed twice. This is achieved through two common prevention methods, namely the exemption method and the credit method.

1. Exemption method

Under the exemption method, the Netherlands grants exemption for income that may be taxed abroad. However, the income continues to count towards the progression determination (determining the rate on the total income).

Example: exemption method (employee)

The above shows that, in practice, the exemption method is often perceived as favorable by employees. Income taxed abroad is effectively exempt from taxation in the Netherlands. This effectively prevents double taxation.

However, it is important to emphasize that foreign income is not completely ‘invisible’ to Dutch taxation. Due to the progression clause, foreign income can lead to a higher tax rate on the remaining Dutch income. This effect is particularly relevant for higher incomes and for employees who only work abroad for a limited part of the year.

From an HR perspective, this may mean that employees are sometimes surprised to find that their Dutch net salary has decreased, despite the exemption. Clear communication in advance about this progression effect helps to manage expectations and prevent questions afterwards.

2. Credit method

Under the credit method, the Netherlands taxes the full worldwide income, but credits the foreign tax already paid against the Dutch tax liability.

Example: credit method (employee)

This example illustrates that the credit method is generally less favorable than the exemption method, particularly when the foreign tax rate is lower than the Dutch rate. In principle, the Netherlands levies tax on the full amount of income and only allows a credit for the foreign tax actually paid.

For the employee, this means that, on balance, he or she still pays Dutch tax on foreign income, even though this income has already been taxed in the country of employment. This is because the maximum credit is limited to the Dutch tax amount on that same income. In case the tax rates in the Netherlands are higher than the foreign tax rates, the Netherlands will levy addtional taxes up to the Dutch rates.

For HR, this is an important point to consider in the case of international positions, director or supervisory board roles, and expat structures. Employees often find this method complex and sometimes “unfair,” even though it is fully in line with tax treaties and Dutch legislation. A clear explanation of the difference between exemption and credit is therefore essential, especially now that, as of January 1, 2023, there is no longer any freedom of choice for certain types of remuneration.

Change for directors' and supervisory board members' remuneration

Until December 31, 2022, under an approval from 2008 (the so-called approval policy), the Netherlands could, under certain conditions, apply the exemption method to foreign remuneration of directors and supervisory board members, even if the tax treaty itself prescribed the set-off method.

Important since January 1, 2023:

This approval policy was withdrawn on January 1, 2023. This means that, from that date on, there is no longer any option to apply the exemption method to foreign directors' or supervisory board members' remuneration, unless the treaty itself explicitly provides for this.

Consequences for the tax burden

In practice, this means that many directors or supervisory directors residing in the Netherlands who receive remuneration from a foreign company are now faced with:

• The credit method instead of exemption for that remuneration

• Less avoidance than before, which may lead to higher taxes in the Netherlands than was previously the case under the approval policy

Under the avoidance method, only the tax actually paid abroad is deductible, whereas under the exemption method, the Netherlands could grant a proportional exemption (taking into account total income) that was often more advantageous.

How a salary split can help prevent double taxation

For employees working internationally, a salary split can be an effective tool for preventing double taxation. A salary split means that an employee's total salary is allocated to the countries where the work was actually performed, usually based on the number of days worked in each country.

Alignment with the country of employment principle

Most tax treaties follow the so-called country of employment principle: wages are taxed in the country where the work is physically performed. By splitting the salary correctly:

• each part of the wage is taxed in the correct country;

• income tax is levied in accordance with the treaty rules;

• it is prevented that one country taxes the entire salary while another country also has (partial) taxing rights.

This lays the foundation for the correct application of the exemption or credit method in the country of residence.

Below is a sample calculation that shows in practice how a salary split can help prevent double taxation and the resulting negative consequences. The amounts are simplified and intended for illustrative purposes, but the system is in line with daily HR and payroll practice. The example mainly illustrates why a correct salary split and timely coordination with payroll and tax are of great importance to both the employer and the employee.

Situation overview:

• Employee is an expatriate from Germany

• Tax resident of the Netherlands (permanent residence in the Netherlands)

• Annual gross salary: €150,000

• Works:

  • 70% of the year in the Netherlands

• • 30% of the year in Germany

• Germany and the Netherlands have a tax treaty. Based on this tax treaty, Germany levies tax on the work portion. The Netherlands applies the exemption method.

The above shows the final result of the tax due in a situation where a salary split is taken into account and in a situation where it is not taken into account. It indicates that a correctly applied salary split in combination with the correct prevention method is crucial for expats.

By allocating the salary to the countries where the work is actually performed:

• taxation is in line with the tax treaty;

• the Netherlands can grant exemption correctly;

• double taxation is prevented immediately rather than corrected retrospectively.

For HR, this means that a good setup of salary splits, time registration, and coordination with payroll is essential for a successful expat arrangement. This prevents financial surprises and contributes to a positive expat experience.

Want to know more?

International employment requires a customized approach. Every situation is different, and small differences can have major tax implications. For a practical overview of salary splits and their role in international payroll and compliance, see our separate blog on salary splits.

Do you want to be sure that double taxation is avoided and that salary splits, expat arrangements, and treaty rules are applied correctly? Then contact us for a no-obligation consultation. We are happy to help you find the right solution.