Foreign employers hiring employees in The Netherlands
This article discusses legal aspects of the situation where a foreign employer wishes to hire Dutch employees in The Netherlands. Although there’s some degree of coordination within the EU (by means of regulation EU 883/2004), rules concerning social security, pension scheme and taxes vary considerably within the different EU member states. Having one or more employees working and/or living abroad or working for an employer who is situated abroad, for instance Cyprus, has a number of consequences for both employer and employee.
If the employee is both residing and working in the Netherlands (more than 25% of his activities will be carried out in the Netherlands), social security will be regulated by Dutch law. Social security premiums will have to be paid in the Netherlands. It is the employer who is obliged to pay these premiums.
Employer status and form A1/E101
Such a duty for the employer arises if (one of) his employee(s) falls within the Dutch social security framework (due to the 25%-rule). The employer will be obliged to pay social security premiums to the Dutch tax authority. There is no numerical threshold for this. As soon as the Cypriot employer hires a Dutch employee who is working and residing in the Netherlands, this obligation automatically occurs.
This applies to both temporary employment agreements as to permanent employment.
The employer will have to contact the Dutch tax authority to get a tax number in order to be able to pay for social security on behalf of the Dutch employee. Not doing so, will result in a fine. On top of that, it is paramount to fill in form A1/E101. This form provides evidence as to where social security premiums are being paid.
This means that in order to get employer status the foreign employer needs to do two things: fill in form A1/E101 and contact the Dutch tax authority.
Tax regimes, tax treaty, country of residence
I must say beforehand that this is quite a complex matter, due to the absence of regulation harmonizing tax rules within the EU. But in general, one could say that if the employee is residing in the Netherlands, he is under an obligation to pay taxes over his income in the Netherlands, wherever so earned. The country of residence of the employee is a decisive factor here.
It is also very likely that the employer is under an obligation to pay taxes in Cyprus. Possibly, an End Of Year (EOY) tax return form or monthly return scheme applies.
In these matters the first thing to do is to determine applicability of a signed and ratified tax treaty between the two countries involved i.e. The Netherlands and Cyprus. In this case there is no tax treaty that covers this kind of income (temporary worker wages) available.
By some, Cyprus is considered to be a tax haven. The reason for this are the favorable tax rules for corporations, such as low tax rates on labor income and the gain on sale of a company. Other tax havens - each for different reasons - are Andorra, Monaco, Gibraltar, Bermuda, Caiman Islands, Luxemburg, Panama, Nauru and Switzerland.
The Netherlands have concluded tax treaties with many countries. As a matter of fact, with all countries of the European Union except Cyprus (The Netherland and Cyprus tax regimes have too many differences). These tax treaties should avoid double taxation, amongst other things. The Netherlands also have concluded agreements on the exchange of tax information.
Cypriot tax regimes should be studied to determine whether the employer is also being charged in Cyprus. But there is potentially an obligation for both the employer and the employee. If tax is paid twice (double taxation), it is Cypriot law that determines whether exemption (for the employer) is possible or not. Furthermore, tax rates may vary. According to Dutch tax law, tax exemption is not possible because of the absence of a treaty with Cyprus. In that case, in The Netherlands the Decision to Avoid Double Taxation also applies.
Since the employee is residing in the Netherlands, he will receive a (state) pension here in the Netherlands (AOW) as soon as he reaches a certain age (67 now, probably 70 in the near future). Whether he will receive an additional pension (built up in Cyprus) depends on contractual agreements between employer and employee and- possibly- on Cypriot law.
Recommendations to both employer and employee:
1. Seek assistance in getting a tax number from the Dutch national tax authority.
2. Seek assistance in getting the right social security forms
3. It would be my strong advice to also have the employment agreement checked as well.
We are happy to help you with all of these things.