Evaluation of the 30% ruling
SEO Economic Research (‘SEO’) was commissioned by the Ministry of Finance to evaluate the extraterritorial expenses scheme, the 30% ruling and the partial foreign taxpayer status. This evaluation has now been completed. SEO analyzed, among other things, how effective and efficient these tax schemes are and subsequently detailed its conclusions in an evaluation report titled ‘Competency, costs and choices’. On June 14, 2024, the Deputy Minister of Finance presented the report to the Lower House of Parliament. The new government can use the evaluation report to make choices about potentially reversing the previous scaling back of the 30% ruling or opt to take other measures related to the 30% ruling that are less detrimental to the economy.
Introduction
At the end of 2023, the Lower House of Parliament used amendments put forward by MPs Peter Omtzigt and Pieter Grinwis to adopt two important changes to the 30% ruling in the debates on the 2024 Tax Plan. The first amendment provides for a gradual scaling back of the 30% ruling for incoming employees and ensures that the amount of the untaxed allowance is reduced from 30% during the first 20 months, to 20% in the next 20 months and then to 10% in the remaining 20 months. The second amendment abolishes the partial foreign taxpayer status as of 2025. Both amendments are subject to transitional rules applying to employees already receiving a 30% allowance in December 2023.
At the request of both the Upper and Lower Houses of Parliament, the evaluation of the 30% ruling was brought forward from 2025 to 2024 so that a substantiated decision can be taken in the 2025 Tax Plan before the scaling back of the 30% ruling and the abolition of the partial foreign taxpayer status actually takes place. A motion adopted by the Upper House therefore asked the government to bring the proposed evaluation of the 30% ruling forward and, based on that evaluation, present an alternative proposal in the 2025 Tax Plan with a less detrimental impact on the economy. The motion adopted by the Lower House asked that the skills requirement in the 30% ruling be tightened as soon as possible so that it better suits the needs of the economy and the labor market and also to explore how a training requirement for the admission of labor migrants from outside the EU could also contribute to this.
The 30% ruling
The 30% ruling is a scheme that offers employers the option to pay a tax-free allowance of no more than 30% of an employee’s salary to employees from abroad with specific expertise that is scarce in the Dutch labor market, and to do so for a maximum of five years. This allowance is intended to cover the additional costs these employees incur for their stay in the Netherlands, such as accommodation, travel, education and living expenses (i.e. extraterritorial (ET) expenses). An employee must meet certain conditions to be eligible for the 30% ruling.
The evaluation by the SEO shows that the 30% ruling has a positive effect in attracting highly skilled migrants, partly due to the tax benefit it offers. As such, the 30% ruling makes a positive contribution to the Dutch business climate. This is important because employers in the Netherlands expect that the domestic labor supply alone will not be sufficient to meet the total labor demand. The evaluation also shows that the salary threshold in the 30% ruling has a positive effect on the influx of highly skilled migrants by creating simplicity and clarity. The evaluation further states that the 30% ruling is budget-efficient. Admittedly, the scheme does, to a certain extent, cost the government tax revenue because some of the employees who use the 30% ruling would have come to the Netherlands regardless and in that case would have paid more tax. At the same time the scheme generates tax revenue because some of the employees who use the 30% ruling only came to live and work in the Netherlands because the scheme was in place and acted as an incentive for them. They therefore pay tax where otherwise they would not. The evaluation shows that the revenue generated from the 30% ruling exceeds the costs. The 30% ruling generates on average EUR 128.5 million in net tax revenue per annum. The evaluation also shows that scaling back the 30% ruling to a 30%-20%-10% allowance is expected to cause the costs of the ruling to exceed the revenue generated by it, because less employees will take advantage of a scaled back 30% ruling. According to the evaluation, in that case the influx of highly skilled migrants is expected to decrease by 15 to 20 percent. This will therefore have a negative effect on the business climate. The evaluation also recommends using a fixed percentage throughout the entire term of the 30% ruling and so reduce the administrative burden for both users of the scheme and the Dutch tax authorities. By scaling back the 30% ruling a significant number of those using the scheme will switch to the extraterritorial expenses scheme (reimbursement of the actual expenses incurred based on expense claims, see below), as that scheme will become more fiscally attractive in the event the fixed percentage is gradually reduced.
Finally, the evaluation shows that from the perspective of the scheme’s aim of creating a level playing field between employees who use the 30% ruling (ET expenses) and employees who do not (no ET expenses), the tax-free allowance to achieve that aim is excessive. In most situations the actual ET expenses are less than the fixed 30% allowance. It is worth noting here that according to the previous evaluation of the 30% ruling (in 2017 by research bureau Dialogic), the actual ET expenses incurred exceeded 30% of the income. The SEO report states that the difference is probably the result of the analysis method used in each evaluation.
Partial foreign taxpayer status
Under current legislation, employees who use the 30% ruling derive an additional benefit from doing so. This is because these employees can opt for the partial foreign taxpayer status in their personal income tax returns. If an employee opts for this, they will be treated as a non-resident for personal income tax purposes in Box 2 and Box 3.
The evaluation shows that abolishing the partial foreign taxpayer status is expected to have very little impact on the influx of highly skilled migrants, except for a small group of high-net-worth individuals. For most users of the 30% ruling, an additional tax in Box 2 or Box 3, which they may not be subject to in their country of origin, is not a tax disincentive for coming to the Netherlands. Even if the partial foreign taxpayer status is abolished, the Netherlands will still remain an attractive country to come to for the majority of (high-net-worth) employees due to the 30% ruling.
Extraterritorial expenses scheme
The extraterritorial expenses scheme is intended to reimburse the additional costs of staying outside the country of origin for employees who come to the Netherlands to work; the ET expenses referred to above. With regard to the reimbursement of ET expenses, employees can choose between having the actual ET expenses reimbursed on the basis of expense claims or by application of the 30% ruling (provided, of course, the conditions for this are met). The extraterritorial expenses scheme can be used for both employees who do not meet the salary threshold of the 30% ruling and employees who are eligible for the 30% ruling but choose not to use it.
The evaluation shows that the extraterritorial expenses scheme works well for reimbursing rent and living expenses. Since using the extraterritorial expenses scheme involves high(er) administrative expenses, it is not often used in practice. The analysis by the SEO shows that the scaling back of the 30% ruling is expected to result in the extraterritorial expenses scheme being used more often, which will then lead to higher implementation costs for both users of the scheme and the Dutch tax authorities. The report has therefore assessed the extraterritorial expenses scheme as ‘partly efficient’.
Conclusion
The evaluation by the SEO shows that the 30% ruling is efficient due to the positive effect it has in attracting highly skilled migrants to the Netherlands and thus also makes a positive contribution to the business climate. According to the evaluation, scaling back the 30% ruling will have a negative effect on the business climate and thus reduce the influx of highly skilled migrants. Additionally, it appears that the 30% ruling’s lack of predictability and stability poses a commercial risk for businesses. This will have a negative effect on investment decisions. The report shows that the partial foreign taxpayer status is neither efficient nor effective and that abolishing it will have very little effect on the numbers of highly skilled migrants coming to the Netherlands.
KPMG Meijburg & Co comments
The Deputy Minister of Finance has sent the evaluation by SEO to the Lower House of Parliament and has left any further substantive response to the new government. If the new government takes the evaluation to heart, we believe there is a good chance that the scaling back of the 30% ruling will be reversed. Based on the conclusions in the evaluation, abolishing the partial foreign taxpayer status is a less questionable measure and the expectation is that it will therefore remain in place. The government may also decide to adjust the percentage of the 30% ruling, given that the evaluation by SEO shows that the actual ET expenses are less than the 30% allowance. It can however be argued that a previous evaluation of the 30% ruling concluded that the actual ET expenses exceeded 30% of the income. In combination with the conclusion in the SEO report that the efficiency and effectiveness of the 30% ruling depends to a large extent on the scheme’s predictability and stability, we would recommend that the government exercise restraint in adjusting the fixed percentage of the 30% ruling.
