Supreme Court clarifies the application of specific exemptions by foreign employers

The Supreme Court has issued a ruling concerning the application of specific exemptions where there is no Dutch employer responsible for tax withholding. 

On 5 September 20205 the Supreme Court ruled in a case concerning a pilot living in the Netherlands but who works for an Irish airline via an Irish employment agency and two Irish companies. The airline pays the employment agency a fee per hour worked. Neither the Irish companies, nor the employment agency, nor the airline are liable for tax withholding in Netherlands for the purposes of wage tax. 

The case concerned the matter of whether or not the pilot is entitled to a specific exemption via income tax under the Wages and Salaries Tax Act 1964, for the expense allowances paid by the Irish companies on a claim basis. The ’s-Hertogenbosch Court of Appeal had previously ruled that the specific exemption can be used. But because the State Secretary had lodged an appeal in cassation, the Supreme Court now had to decide.

Three complaints by the State Secretary were heard in cassation, all of which concerned the application of a specific exemption for expense allowances. The first appeal in cassation was that the Court of Appeal should not have left open the matter of which foreign employer the interested party is employed by. The Supreme Court upheld this complaint. The Supreme Court stipulated that for this exemption to apply the amounts must have been granted to the employee in the context of his employment as compensation for certain expenses specified in the law. In this case it had been necessary, therefore, to determine which employment relationship of the interested party should be regarded as employment and thus establish by whom he was employed. The Court of Appeal therefore should not have left this question open.

The second complaint put forward was that the payments to the interested party for the claimed expenses could not be designated as a specific exemption because the employer had not designated them as such in advance. According to the Supreme Court this stance is not correct for a foreign employer who is not responsible for tax withholding for wage tax purposes in the Netherlands. In line with its judgment of 27 May 2022, the Supreme Court’s view is that even for the application of a specific exemption it cannot reasonably be expected that the employer will fully comply with the Dutch payroll tax system. Therefore, for income tax purposes, it is not a requirement that a foreign employer designates allowances as a specific exemption in advance. The second complaint in cassation was therefore not upheld.

The third complaint was that the Court of Appeal has failed to apply the customary criterion under the Wages and Salaries Tax Act 1964. This complaint was also rejected. In the Supreme Court’s view the application of the ‘customary criterion’ does not apply to allowances covered by a specific exemption, because the designation of such allowances is always customary. 

Because the Supreme Court considered the first appeal in cassation to be warranted, the judgment of the Court of Appeal was set aside. The Supreme Court referred the case to another Court of Appeal to answer the question of by whom the interested party was employed. 

In practical terms, what is important here is that the second and third complaints were not upheld. And thus, not surprisingly, the Supreme Court confirmed that neither prior designation as a specific exemption, nor consideration in relation to the customary criterion, apply as a condition to be met for employees without a Dutch employer responsible for tax withholding to be able to apply specific exemptions in income tax.