In the absence of arrangements between states then employees carrying out cross-border work would pay double taxation, both in the state where they work (payroll/wage tax) and in the state where they live (income tax). This situation has been avoided by concluding tax conventions which prescribe which state may levy tax and when.
If no tax convention applies, Dutch legislation will provide whether you have to pay tax in the Netherlands.
Which state may levy tax: the 183 day rule
Most tax conventions prescribe that the state in which the employee works is entitled to levy tax on the wage the employee earns in that state. However, there is 1 exception: the state in which the employee lives is entitled to levy tax when the following 3 conditions are met:
- The employee does not stay in the country of work for more than 183 days during a certain period. Depending on the applicable tax convention, this period may be a calendar year, a consecutive period of 12 months or a tax year. For the calculation of the 183 days, you include all days on which the employee was in the country of work, so also weekends and holidays. Part of a day is regarded as a full day.
- The employee is paid by or on behalf of an employer that is not established in the Netherlands.
- The employee does not work in a permanent establishment of the employee in the state where the employee works.
These 3 conditions are jointly referred to as the '183 day rule'. If not all conditions are met, then the state where the employee works is entitled to levy tax.
Many international supply situations do not meet the 2nd condition of the 183 day rule. This is the case when the Dutch recipient is deemed to be the employer: the Netherlands may then, as the state in which the employee works, levy tax. You, as the formal employer, will then need to pay wage tax from the employee's 1st day of work in the Netherlands. However, the Dutch recipient will remain liable if you fail to do so.
The Dutch recipient is deemed to be the employer (what is referred to as the 'material employer') when the following 3 conditions are met:
- There is a relationship of authority between the employee and the recipient.
- The work is carried out at the recipient's expense and risk.
- The recipient bears the wage costs. This is the case if you charge the wage costs roughly per unit of time, for example an amount per hour or per day.