From 1 January 2019, the tax part of the tax credit will no longer be automatically granted to cross-border workers, who work in the Netherlands but do not live in the Netherlands. This constitutes a barrier for cross-border workers. ITEM has already questioned this. Recently, the European Court of Justice (ECJ) made an interesting ruling[1] regarding the other part of the tax credit, the contribution part: it may be reduced by the Netherlands on a time-proportional basis.
Case study
The case concerned Zyla, a Polish national who worked and lived in the Netherlands from 1 January to 21 June 2013. After ending her job, she moved back to Poland. There, she remained unemployed for the rest of 2013.
The basic European Social Security Regulation[2] stipulates that Zyla, due to her work in the Netherlands, is socially insured in the Netherlands for the period 1 January – 21 June 2013. Due to her work, she is also liable to tax in the Netherlands. She is entitled to the general tax credit, which consists of a tax part (for taxes) and a contribution part (for premiums). At the time, Zyla opted to be treated as a resident taxpayer for the entire calendar year, which allows her to get the full tax credit. However, the Dutch tax authorities, when assessing the income tax and premium tax credits, reduced the premium part of the tax credit time-proportionally by the period she was not living and working in the Netherlands.
In Europe, the free movement of workers applies, entitling foreign workers to the same social and tax benefits as domestic workers. Also, according to European case-law, member states must take into account the personal and family situation of foreign persons, who have earned most of their income in the member state concerned and cannot benefit from tax or social advantages in the state of residence. According to Zyla, the reduction implemented by the Tax Administration violates this, resulting in discrimination against her, based on her place of residence. Since Zyla’s entire annual income is earned in the Netherlands and she has no income in Poland, she cannot get an equal benefit in Poland on this.
Verdict
However, the ECJ ruled against Zyla. The Netherlands has chosen a social security system in which contributions have to be paid. Some other member states finance social security from general tax revenues. The contribution part of the tax credit is designed to motivate people to keep working. For this purpose, the rebate is linked to the amount of contributions paid. Because Zyla no longer paid contributions, the ECJ initially ruled that there was no disadvantage. Even in the event that there was a disadvantage, Zyla’s situation, in which she was socially insured in the Netherlands only until 21 June 2013, is not equal and comparable to the situation of someone who is socially insured in the Netherlands for the whole year. There is no unequal treatment.
The reduction of the contribution part of the tax credit has been applied time-proportionally, making it in line with the period insured. Due to the different financing methods of social security systems within the EU, EU law cannot prevent social neutrality of movement between member states and the loss of benefits, the ECJ said. EU law only looks at the equal treatment of foreign workers carrying out an activity in a member state other than their state of residence, compared to resident workers.
Consequence
Therefore, not only the tax part of the general tax credit is a point of discussion. In the case of the contribution part of the general tax credit, this ruling shows that the Dutch tax authorities may reduce it time-proportionally to the period insured. The different national systems and national social security competences mean that cross-border work need not be neutral. These do not constitute unjustified border barriers.
[1]CJEU 23 January 2019, case C-272/17
[2]Regulation (EC) 883/2004