In December 2023 the Dutch State Secretary published a new decree with yet another change to the allocation of taxation rights on severance payments for employees with an international working history.

Based on the decree, the allocation of taxation rights between countries on a severance payment received from January 1^st, 2024 onward depends on whether the tax treaty between countries concerned was concluded prior to or after July 15^th, 2014. A change in the OECD commentary with respect to taxation on severance payments was introduced as per this date.[1]

1. Tax treaties concluded prior to July 15^th, 2014

The allocation of the taxation rights on the severance payment is determined based on the so-called “4+ method”: the allocation of the taxation rights on the salary in the year of dismissal and the 4 preceding years determine where the severance payment is taxable. Important for applying the 4+ method is that the severance payment is charged to an employer or permanent establishment in the other treaty state. If this is not the case then formally the severance payment is fully taxable in the working country.

1. Tax treaties signed after July 15^th, 2014:

The OECD commentary is applicable, which states that the allocation of the right of taxation on the severance payment between countries is based on the entire employment history with the employer concerned. In case the employment history information is unavailable, under certain circumstances it can be possible to refer to the last 12 months of the employment instead. Contrary to the 4+ method, it is irrelevant whether or not the severance costs are charged to an employer/PE in the other treaty state. What matters is where the employee’s salary during the employment history was taxed.

Example:

An employee has been working for an international company for 10 years, of which the initial 8,5 years were spent in the UK and the last 1,5 years in the Netherlands. The employee receives a severance payment of €100.000 on July 1^st, 2024 based on the 10 years employment history with the Group.

As the tax treaty between the UK and the Netherlands was concluded prior to July 15^th, 2014 and the treaty contains no specific provisions with respect to the severance payment, the 4+ method applies. The lookback period for determining the taxability of the severance is therefore January 1^st, 2020 – July 1^st, 2024. During the aforementioned period the employee’s salary developed as follows:

2020:   €75.000 – UK

2021:  €80.000 – UK

2022:  €85.000 – UK

2023: €95.000 – NL

2024: €50.000 – NL (until July 1^st)

In the event that the severance costs are (partially) charged to the UK company, then based on the 4+ method, the part of the severance that is in principle taxable in the Netherlands is:

(95.000+50.000)/(75.000+80.000+85.000+95.000+50.000)*€100.000 = €37.662,34

In case of Dutch tax residency at the moment of payment of the severance, this means that relief of double taxation can be claimed for the part of the severance (€100.000-€37.662,34) that is taxable in the UK.  If however the costs of the severance payment are not charged to the UK, then the severance payment is in principle fully taxable in the Netherlands.

In the event that for some reason the other treaty country applies the OECD commentary of July 15^th, 2014 instead where the Netherlands would apply the 4+ method, it is approved that the Netherlands can still apply the OECD commentary of July 15^th, 2014 provided that this does not lead to (full or partial) double non-taxation.

• Severance Payments Received Prior to January 1^st, 2024

The decree introduced effective January 1^st, 2024 may also impact severance payments that have been paid out prior to this date, in case the Dutch income tax assessment is not final yet.

Depending on the situation and timing, based on prior interpretations of the OECD commentary and the Dutch Higher Court on the taxability of severance payments with an international work history, the allocation of the taxation rights on severance payments prior to January 1^st, 2024 can be based on either:

• The full employment history; or
• The 12 month period prior to the year of redundancy; or
• The 4+ method.

In case you have received a severance payment prior to January 1^st, 2024 that has been partially/fully taxed in the Netherlands, it may be possible to claim back part of the Dutch wage/income tax paid if part of your employment history was spent outside of the Netherlands. This can be done through filing a(n) (additional) Dutch income tax return.

This means that you should either have not received a final income tax assessment from the tax office yet or you should have received a preliminary tax assessment (“voorlopige aanslag”) only. If this is the case then you can revise/file an income tax return and claim a refund for the overwithheld

OnestopTax can assist with the filing of/adjustment of your Dutch income tax return.

If you require our assistance in this respect please contact us on info@onestoptax.nl or call 020 8200657.

This overview is for information purposes only, no rights can be derived from this information.

[1] In case the tax treaty contains specific provisions regarding the application of the OECD commentary in the interpretation of the tax treaty, an exception on this general rule could apply.