Court of Appeal deems employer not liable for income tax supplementary assessments

The Supreme Court made an important ruling in September 2023 on good employment practices. The Court of Appeal to which the case was referred back has now issued its judgment. 

Supreme Court (22 September 2023)

The essence of the case was that the Supreme Court had ruled that, under certain circumstances, as a matter of good employment practice, employers have a duty to make the employee aware of a change in the regulations which could affect their tax position. This is most particularly the case if the information concerned also affects the withholding and remittance of payroll tax. 

The case related to two pilots living in Switzerland employed by an airline since 1990 and 1991, respectively. Under the old tax treaty between the Netherlands and Switzerland, the employment income of these pilots was not taxed in the Netherlands. However, owing to the entry into force of a new tax treaty from 1 January 2012, from then on the employees in question became liable for tax in the Netherlands payable on the salary they received from the employer. This centred on the question of whether, in the context of good employment practice, the airline was required to warn the employees or inform them of the change in the tax treaty. 

After the Tax and Customs Administration imposed supplementary income tax assessments on the employees in 2017 and 2018, they held the employer liable for damages. The subdistrict court partially upheld the employees’ claims by setting the employer’s liability at 50%. On appeal, the Court dismissed the claims in full. 

The Supreme Court ruled that as such it is correct, as the appeal court had considered, that an employee is personally responsible for proper compliance with their tax obligations and that, in principle, the employer does not have an advisory role in that regard. However, under certain circumstances, as a matter of good employment practice, the employer may be expected to inform the employee of a change in the regulations which could affect the employee’s tax position. That is most likely to be the case if the information concerned is equally relevant to the employer’s duty to withhold and remit payroll tax. Since an employer should be aware of such information under that obligation. This was so in the present case, given that the employer should have started withholding the Dutch wage tax.

Whether and to what extent the employee may suffer adverse consequences as a result of being unaware of the information concerned, is also relevant in the Supreme Court’s view. The Court of Appeal either failed to properly recognise this, or gave insufficient reasons for its ruling. The Supreme Court therefore referred the case back to the Court of Appeal. 

The Hague Court of Appeal

The Hague Court of Appeal investigated the extent to which the employer is liable. In so doing the Court established that the income taxable in the Netherlands was only taken into account for Swiss taxation purposes when determining the applicable tax rate, while the employment income was not separately taxed in Switzerland. The position taken by the employees that they also had to pay tax on the earned income in Switzerland was therefore not correct. It could also have been assumed that - as everyone knows - employment income has to be taxed somewhere, if not in Switzerland then in the Netherlands. The employees’ claim was therefore dismissed by the Court of Appeal.

In conclusion, the ruling by the Supreme Court on good employment practices remains in place, however, the employees in this case were aware of the tax liability on income in the Netherlands and therefore the employer does not have to pay damages.