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The qualifying foreign taxpayer obligation (“90% rule”): A quantitative ex-ante impact assessment
Prof. dr. Maarten Vink
Johan van der Valk
Marcel Schaper
Lea Smidt
Introduction
Dossier analyses the population of non-resident workers in the Netherlands as of 1 December 2014 to estimate the potential cross-border impact of the qualifying foreign taxpayer obligation (“90% rule”) that came into force on 1 January 2015. The legislation provides that non-resident taxpayers in the Netherlands can benefit from the same deductions and tax credits as resident taxpayers if they earn 90% of their total income in the Netherlands. It replaces the optional scheme that was deemed incompatible with EU law in a ruling by the Court of Justice of the European Union (CJEU).[1]
90% rule
Under the optional scheme, non-resident taxpayers can opt for the same tax treatment as resident taxpayers, even if they earn less than 90% of their world income in the Netherlands. Under the new regime, non-resident workers risk losing tax benefits, such as mortgage interest deductions for a private home, if they do not earn 90% of their world income in the Netherlands and also do not have sufficient taxable income in their country of residence. The CJEU found that this legislation violates the principles of free movement of workers (Art. 45 TFEU) and of establishment (Art. 49 TFEU) in the EU.[2] By providing a statistical overview of non-resident workers in the Netherlands one month before the 90% rule took effect, our ex-ante assessment provides a preliminary benchmark for measuring the impact of the new tax regime. Future impact assessments can estimate the ex-post effects of the legislation on the aforementioned principles of European integration using this benchmark.[3]
Engaged employees
A total of 131.2 thousand non-resident workers were employed on 1 December 2014. Of this target group, 89.1 thousand are men, 42.0 thousand are women. As most non-resident workers are between 25 and 45 years old (15.6%), the legislation may affect families with younger children. Dutch nationals constitute the largest nationality within the population of non-resident workers in the Netherlands (43.4 thousand). They mainly live in Belgium (22.5 thousand) and Germany (16.1 thousand). Another third of non-residents have Polish nationality (42.6 thousand), most of whom live in Poland (41.3 thousand). This also makes Polish nationals the largest group of non-resident workers in the Netherlands, followed by Belgian (38.4 thousand) and German nationals (34.3 thousand).
German and Belgian citizens are likely to commute daily to their workplace if they live in the border region. Most of them work full-time, while Polish nationals are more likely to work part-time. A similar ratio applies to Polish nationals compared to all other nationalities. Since Poland is not a Dutch border country, this may indicate a high percentage of seasonal employment of Polish nationals in the Netherlands. In general, part-time workers are less likely to earn 90% of their total income in the Netherlands, as they may have a source of income in another country to supplement their Dutch salary.
Moreover, the 90% rule affects different employment sectors differently. Among all nationalities, most non-resident workers work in the commercial services sector (65.2%). Nevertheless, a significant number of Dutch nationals work in public and social services (68.6%) and the industrial production sector (38.6%). Although the number of Polish nationals is highest in commercial services, they represent the largest share of non-resident workers in agriculture (81.1%).
The border region is particularly affected by the effects of the 90% rule. The 14 COROP areas along the Dutch-German and Dutch-Belgian border employ most non-resident workers (63.4%). Most of them are Belgian or German residents working in the southern Netherlands. South Limburg in particular employs the most non-resident workers in absolute terms (16.7 thousand) and as a proportion of the region’s total labour force (6.6%). Most of them live in Belgium (76%). The relative number of non-resident workers from Germany is highest in northern Limburg (3.4%).
Conclusion
In short, the 90% rule is likely to reduce the positive effects of labour mobility in the EU, especially in the COROPs at the Dutch border. While some workers may be willing to move to the Netherlands, others may want to change employers to benefit from tax deductions in their country of residence. This not only counteracts the application of EU rights and principles, but also has potentially negative effects on investment and skills in border regions.
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[1] ECJ 18 March 2010, Case-440/08 (Gielen), NTFR 2010/795, Jur.2010. p. I-2323.
[2] ECJ 09 February 2017, Case C-283/15 (X). See also H. Arts and J. Korving, The qualifying foreign tax liability of Art. 7.8 IB and EU law. In: Cross-Border Impact Assessment 2016, Institute for Transnational and Euregional Cross-Border Cooperation and Mobility/ITEM, pp. 188-198.
[3] The data used in this impact assessment, are from Statistics Netherlands ( CBS ). We identify the target group of the 90%scheme by linking processed data from the Municipal Basic Administration (BRP) and the Polis administration . However, data limitations currently prevent a definitive ex post assessment. First, it is only ex ante because the tax returns are only complete are up to 2014 and not for a range of years after the legislation. Second, the number of non-residents who claim tax deductions and earn less than 90% of their income in the Netherlands remains a provisional estimate because tax data on non-residents are not processed at CBS. Polis administration data excludes self-employed persons and information on whether people file returns.