Approval exemption method for Directors will be revoked per 2023 | Deloitte Netherlands

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Approval exemption method for Directors will be revoked per 2023

On July 13, 2022 the Dutch government announced that the approval of applying the exemption method will be revoked per January 1, 2023.

17 July 2022

On May, 29 2020 the State Secretary of Finance has published the new tax treaty policy 2020 of the Dutch government. In this new tax treaty policy the State Secretary of Finance sets out the main policy principles the government should apply in all future tax treaty negotiations. Furthermore, it provides insight in the topics where the intended tax treaty policy deviates from the Model Treaty of the OECD.

In this newsflash we especially would like to address the position which the Netherlands has been taken in the new tax treaty policy with regard to Directors and Supervisory Board members (hereafter: Directors) fees and how this can affect the tax position of Directors who are tax resident of the Netherlands, but at the same time are statutory Director of an entity outside the Netherlands.

Basic principle

A tax resident of the Netherlands is taxed in the Netherlands on the worldwide income. If a tax treaty allocates the right to levy tax on (a part of) the income to another country, a relief for double taxation can be claimed in the Netherlands. The Netherlands applies two methods for providing such a relief, the exemption method and the credit method. Where the exemption method generally applies to employment income, the credit method generally applies to Directors fees.

Current situation

In the current tax treaties which the Netherlands has concluded the credit method applies for Directors fees. This means that the tax of the other contracting state on the directors fees is deducted from the Dutch tax, but not more than the Dutch taxes on the Directors fees.

In order to achieve an equal tax treatment between ‘regular’ employees and Directors, a Decree of the State Secretary of Finance (18 July 2008/Nr. CPP2007/664M) was issued. This Decree states that under certain conditions the exemption method can be applied on Directors fees, as while the applicable treaty contains the tax credit method. These conditions are - in short - as follows:

  • there is neither tax evasion; nor
  • a favorable tax regime for Directors fees in the other Contracting State compared to ‘regular’ employees.

Applying the exemption method means that effectively the Netherlands provides a relief against the average Dutch tax rate regardless of the level of taxation in the other Contracting State.

Change as proposed in May 2020

In the published update of the tax treaty policy the State Secretary of Finance states that the previously issued Decree (CPP2007/664M) will be withdrawn. The result of this withdrawal is that the exemption method can no longer be applied, but that the credit method applies.

For tax treaties which already contain an exemption method there will be no change, the exemption method is still applicable. Most of the countries which the Netherlands has a tax treaty with the tax credit method is included as the method of avoidance of double taxation on the Directors fees.

Update July 2022

On July 13, 2022 the Dutch government announced that the aforementioned approval of applying the exemption method will be revoked per January 1, 2023.

What does this mean in practice?

From January 1, 2023 onwards the tax exemption method can no longer be applied in case the respective tax treaty prescribes the credit method.

The difference between the exemption method and the credit method is that if the foreign taxes are lower compared to the Dutch taxes due on the foreign income, it is only possible to claim a tax relief (credit) to the amount of the foreign taxes to a maximum of the Dutch taxes on the Directors fees.

Considering the potential impact on the amount of tax to be paid in the Netherlands, we strongly recommend to review the tax position of the Directors, who are tax resident of the Netherlands in order to determine whether they may be affected as a result of the application of the credit method rather than the exemption method.

Of course we will be able to assist you in this respect. Feel free to reach out to your Deloitte contact person.

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