The Netherlands: Preferential Tax Rule for Highly Skilled Workers Likely to be Restricted from January 1, 2024

• The 30 percent tax rule. Under this rule, eligible foreign nationals do not need to pay tax on up to 30 percent of their income for five years.
• Proposed changes. The legislation proposes that eligible nationals who commence working in the Netherlands on or from January 1, 2024 will receive the following discount on their income tax:
  • A reduction of up to 30 percent for the first 20 months of working in the Netherlands;
  • A reduction of up to 20 percent for the subsequent 20 months of working; and
  • A reduction of up to 10 percent for the final 20 months of working.
  • After the end of 60 months, the foreign national will no longer enjoy any income tax reduction.
• Transitional period. Individuals who currently receive the ‘30 percent’ preferential tax treatment will be subject to a transitional arrangement – the details of which remain to be confirmed.
• Eligibility. To be eligible for the ‘30 percent’ tax break, applicants must be foreign nationals; have expertise that is unavailable in the Dutch labor market; and have lived outside Netherlands (more than 150 kilometers from the Dutch border) for more than 16 months in the two years before commencing work in the Netherlands. The recent legislation does not propose changing these eligibility requirements.
• Upper limit. Following separate legislative changes in September 2022, from January 1, 2024, the ‘30 percent’ tax break will no longer apply to that portion of a salary above the public sector pay limit (which in 2023 was EUR 223,000).

If these laws are passed, employers will need to play closer attention to each eligible foreign employee’s tax obligations under the ‘30 percent’ system, as these obligations will now be changing over the five-year period. This will likely require employer payroll services to amplify their internal monitoring systems, given a more complex regulatory landscape. Employees, meanwhile, will need to account for reduced tax benefits over the five-year period, which will ultimately reduce their after-tax position.

• Rationale for the rule. The Dutch government has explained the ‘30 percent’ tax rule as a reimbursement for costs incurred, and benefits lost, due to a highly skilled foreign worker’s departure from their country of origin. This includes travel expenses, housing costs and day-to-day expenses.
• Previous narrowing of the rule. In 2019, the duration of the ‘30 percent’ tax rule was reduced from eight years to five years.

The legislation must still be approved by the Dutch upper house of parliament, with a vote on the issue expected in December 2023.