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Risks when cross-border hiring in and out of labor

Cross-border hiring of employees is occurring more and more often and is considered an integral part of the operations of most companies.

However, in practice cross-border hiring regularly leads to uncertainty when it comes to the question in which country the salary is to be taxed. If taxation needs to happen in the Netherlands and withholding and payment of these taxes has not occurred by the hiring entity, the Dutch tax authorities can claim the tax due from the foreign (lending) entity. The tax treaty between the two countries involved determines which country is allowed to levy income/wage taxes.

Right of taxation

The basic principle of most tax treaties is that if an employee is sent abroad, the right of taxation for the employee's salary lies in principle with the country where the work is actually exercised. However, the right of taxation stays with the country of residence if the employee:

  • has not spent more than 183 days in the State of assignment and
  • the salary is not borne by a permanent establishment of the employer in the State of assignment and
  • the salary is not paid by an employer, or on behalf of an employer, who is resident in the State of assignment.

'Economic employer'

In many cases, the question is whether the entity in the State of assignment can be qualified as 'employer' of the employee who is on assignment. Even though it may be clear that the receiving entity is not the employee's formal employer, it could still be considered as the 'economic employer'.

The concept of 'economic employer' means that even if the employee is legally employed by the home country entity (formal employer), the host country entity that is receiving the benefit could be construed to be the (economic) employer and taxation (and therefore withholding) needs to take place in the host country.

Under the economic employer concept, important criteria for assuming an economic employment are:

  • the costs of the employee are borne by the host country;
  • the employee is integrated into the business of the host entity;
  • the employee is under the control of that entity;
  • the activities of the employee form part of the business of the host entity;
  • the risks of the activities are borne by this employer. 

When the economic employer has not (withheld and) paid the Dutch wage taxes due, the formal employer will be held responsible for payment by the Dutch tax authorities.

Our advice

Due to the economic employer approach of the Dutch tax authorities it is highly recommended to stipulate the exact terms and conditions of cross-border hiring in and out of labour. If necessary, it my be recommended to register the foreign entity with the Dutch tax authorities for wage tax purposes to ensure that the wage tax due is reported and paid.

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