Introduction

On 1 January 2015, the optional scheme of section 2.5, Income Tax Act 2001, was replaced by the new system of the qualifying foreign taxpayer. Pursuant to section 7.8 of the Income Tax Act 2001, the qualifying foreign taxpayer is entitled to the same deductions and tax credits as domestic taxpayers.

The optional scheme was replaced because it was deemed to be not compatible with EU law.[1] In this section we examine the extent to which the new scheme of the qualifying foreign taxpayer is in accordance with EU law.

The scheme is quite relevant in the Dutch border region. Globally speaking, this scheme entails that taxpayers who do not reside in the Netherlands but enjoy over 90% of their worldwide income in the Netherlands are treated as residents of the Netherlands for tax purposes.

Because the current system has only come into effect recently, concrete figures are not available. Consequently, the research focuses essentially exclusively on the legal consequences and discussion points of the scheme.

For the KBB: Schumacker doctrine and the optional scheme for domestic taxpayers

As a general rule, according to standard international tax law the country of residence of the taxpayer must provide for the personal deductions. Under EU law, and specifically the ECJ’s Schumacker decision, a Member State is obliged to allow a domestic taxpayer who enjoys all or virtually all (90%) of his or her income in the Netherlands the same personal deductions as a domestic taxpayer.[2]

With the Schumacker decision in mind, the Netherlands introduced to the option for domestic taxpayer status. The optional scheme did include a significant anti-abuse clause, in the form of the ‘clawback’ provision under section 2.5(3), Income Tax Act 2001.

The clawback provision gave rise to a great deal of discussion, ultimately leading to the state secretary’s decision to approve that foreign taxpayers initially opting in and later deciding to opt out because they did not meet the Schumacker criterion would not have the clawback provision applied to them.[3]

In the Gielen decision, the ECJ then explicitly addressed the place of the optional scheme within EU law[4], ruling that the Netherlands was violating the freedom of establishment and that the Netherlands could not justify this violation by hiding behind the option for domestic tax liability.

Introduction of ‘qualifying foreign tax subject’

The optional scheme of section 2.5, Income Tax Act 2001, was eliminated effective 1 January 2015 and replaced by a 90% scheme with criteria based on section 7.8(6), Income Tax Act 2001. With this system, the Dutch government is trying to move closer to EU law and the Schumacker doctrine specifically. The personal scope is more restrictive than the optional scheme, and it eliminates a number of options under the latter scheme that could have constituted a violation of EU law.[5] This means that henceforth, all foreign tax subjects who earn at least 90% of their income in the Netherlands can be eligible for personal deductions if they are residents of EU and EEA countries, the BES Islands, or Switzerland. These persons are designated as qualifying foreign tax subjects under section 7.8(6) of the Income Tax Act 2001. With this change, the optional element of the present scheme is also eliminated. This effectively puts the Netherlands in compliance with the ECJ’s Schumacker criterion in its strictest form.

Personal scope of application

The personal scope of application under section 7.8(6), Income Tax Act 2001, is restricted to residents of EU and EEA countries, the BES Islands, and Switzerland. The scheme does not apply to residents of any other country. The optional scheme of section 2.5, Income Tax Act 2001, applied to residents of EU Member States and of countries with which the Netherlands had a system in place for the prevention of double taxation that also provided for the exchange of information. The personal scope of application of section 7.8, Income Tax Act 2001, is therefore quite limited as compared to that of section 2.5, Income Tax Act 2001.

The legislator estimates that as a result of this change, a large number of persons in typical emigration/remigration countries will be losing a benefit of an average of €940 that they had formerly obtained by opting in.

Income requirement

The income requirement of section 7.8, Income Tax Act 2001, entails that a foreign tax subject whose income is, by Dutch standards, entirely or virtually entirely (in the Netherlands, this is understood as at least 90%) subject to wage or income tax in the Netherlands can enjoy the same tax advantages as a domestic tax subject.

In reference to the income requirement, the legislator’s position as set out upon the introduction of the Income Tax Act 2001 is worth noting:

In consideration of the case law of the Court of Justice of the European Union, which indicates that as a rule it is up to the state of residence to take the personal and family situation of tax subjects into account, but that in the event of insufficient income from the state of residence, the state of work must take that situation into account, an arbitrary threshold of 75 or 90% of the world income should not be seen as preferable.[7]

Section 7.8 of the Income Tax Act 2001 once again introduces a scheme with just such an arbitrary threshold. According to the legislator, the Gschwind decision entails that ‘entirely or virtually entirely’ can be interpreted as ‘at least 90%’.[8]

Likewise, the partner of the qualifying foreign tax subject may, under certain conditions of and in accordance with the second change memorandum, also be designated as a qualifying foreign tax subject. It should be noted, however, that this expansion to include the partners does not change the fact that discussion can still arise over the allocation and amount of tax credits for emigrating and immigrating domestic tax subjects. This scheme can also potentially violate EU law if it results in a difference in treatment depending on migration year.

European integration

A thorough investigation into the impact of this scheme on European integration must still be conducted; however, any such investigation would require a solid statistical foundation, which is not available at present. As such, there is no way to give an indication of the impact on European integration at this time.

The assumption is that the scheme will have a negative impact on European integration, the reason being that by opting for the hard and arbitrary threshold of 90%, the Dutch legislator may be acting in violation of EU law. For a more detailed discussion of this point, see section 2.3.4 of the full report.

Conclusion

This research demonstrates that the scope of application of the qualifying foreign tax subject under section 7.8, Income Tax Act 2001, is more restrictive in comparison with the old optional scheme of section 2.5, because the personal scope of application of article 7.8 is limited to residents of the EU and EEA Member States, the BES Islands, and Switzerland. Secondly, section 7.8 only applies if the income of the foreign tax subject should be entirely or virtually entirely subject to tax in the Netherlands. This condition contradicts the legislative history of section 2.5, Income Tax Act 2001, because at the time of the introduction of the Income Tax Act 2001 the legislator indicated that this type of arbitrary percentage threshold was not preferable. Further, this hard threshold, set at 90% of the world income, could arguably be in violation of the case law of the Court of Justice of the EU, specifically the matters Commission v. Estonia, Wallentin, and the conclusion in the still pending procedure X (Spanish football broker).

Additionally, according to the Advocate-General (AG) it would be paradoxical if a tax subject with only one work state could make a claim under the Schumacker doctrine, while a tax subject who made use of the freedom of movement and worked in two countries could not. If the ECJ were to follow the AG’s reasoning, this would mean that the Dutch scheme for qualifying foreign tax liability would have to be adjusted, because in that case foreign tax subjects who earned less than 90% of their world income in the Netherlands would likewise have to be eligible for personal deductions in the appropriate proportion to their income.

The conclusion must therefore be that at present the legislator has a clearly different interpretation of the Schumacker and Gschwind decisions than it did upon the introduction of the Income Tax Act 2001, but the parliamentary history of section 7.8 of that act gives no indication of why, and on what grounds, the legislator revised its position. Likewise, how to deal with a situation in which a foreign tax subject has two work states, but meets the 90% criterion in neither of them, remains an open question.

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[1] ECJ 18 March 2010, matter C-440/08 (Gielen), NTFR 2010/795, Jur. 2010, p. I-2323.

[2] ECJ, 14 February 1995, matter C-279/93 (Schumacker), Jur. 1995, p. I-225.

[3] Decision of 26 April 2013, no. DGB2013/201M, NTFR 2013/1090, V-N 2013/29.14.

[4] ECJ 18 March 2010, matter C-440/08 (Gielen), NTFR 2010/795, Jur. 2010, p. I-2323.

[5] Parliamentary Documents II, 2013-2014, 33 752, no. 3, under point 6.

[7] Parliamentary Documents II, 1999/2000, 26 727, no. 7, p. 445.

[8] Parliamentary documents II 2013/14, 33 752, no. 3, p. 24; and ECJ, 14 September 1999, no. C-391/97, Jur. 1999, p. I-5451, BNB 2001/78, with note by I.J.J. Burgers (Gschwind).