Under the Dutch Income Tax Act, any remuneration received from an employment relationship is subject to income tax. However, there are several exceptions set out in the Work-Related Costs Scheme (WKR). So, what exactly is this scheme?Through this scheme, an employer can determine, within certain limits, which benefits or reimbursements they can provide to employees without incurring tax. Examples include gym memberships, Christmas gifts, and staff outings.
As mentioned, the general rule is that all compensation received from employment is taxable. To avoid having to calculate exactly what an employee receives in addition to their salary each year, the tax authorities have introduced the concept of the 'free space'. This allows employers to provide additional non-taxable benefits to employees on top of their taxable salary. For 2024, the free space is set at 1.92% of the first €400,000 of total wages, and 1.18% for the taxable salary above that amount.
Employers are free to choose the form in which these additional benefits are given. This could be anything from social events like drinks and sports classes to bonuses. However, if the total benefits exceed the stated thresholds, the employer will be required to pay 80% tax on the excess amount. It is therefore crucial for employers to keep track of how much is provided within the free space to avoid unexpected tax liabilities.
In addition to the free space, there is another tax exemption available for certain work-related reimbursements, known as the targeted exemption (gerichte vrijstelling). What is a targeted exemption? A targeted exemption applies to reimbursements or benefits that are considered necessary for employees to perform their work. Employers must be able to justify the necessity of the reimbursement within reasonable limits.
- Public transport passes (OV-abonnement)
- LaptopsMeals during overtime
- Tools for tradespeople (e.g., carpenters)
In addition to the free space and targeted exemptions, the Dutch tax law provides another way to offer tax-free benefits under what’s called a nil valuation (nihilwaardering).
What is a nil valuation? A nil valuation is a benefit that, while advantageous to the employee, is directly tied to the work performed, meaning it’s not considered a personal benefit. One common example is work clothing. While it provides a benefit (as the employee doesn't need to purchase the clothes), the clothing often has a company logo, meaning it’s not something the employee would wear outside of work.
- Reimbursements per kilometre driven (€0.23)
- Meals in company canteens (€3.90)
- On-site childcare
Related to nil valuations, there are also standard amounts (normbedragen).
What are standard amounts? These are workplace provisions that the tax authorities have deemed important but have capped at a certain amount. If the value of the benefit exceeds this limit, the excess is subject to tax. As with nil valuations, the excess can be covered under the free space.
- Workplace furnishings
- Work clothing
- Coffee and tea at the office
- Gym facilities at the workplace
A lesser-known question is whether the Work-Related Costs Scheme also affects VAT. The basic rule is that VAT on costs incurred for providing benefits or reimbursements can generally be deducted. However, this deduction is limited. You can only reclaim VAT on the benefits provided if the total amount of reimbursements to an employee doesn’t exceed €227 (excluding VAT).
For example, if you provide an employee with a Christmas gift worth €200 (excluding VAT) and an iPad worth €400 (excluding VAT), you can reclaim the VAT on the Christmas gift, but the VAT on the iPad is capped at €27 (excluding VAT). The remaining VAT on the iPad cannot be reclaimed.
The law allows employers to provide tax-free reimbursements and benefits in addition to regular salary. However, the rules around these provisions are often quite vaguely defined and can be complex. It’s therefore important to seek professional advice before making any reimbursements or providing benefits to your employees. This will help prevent any unexpected tax assessments later on.
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