Welcome to a special edition of "The Voice of International Tax and Trade" In this edition, we will explore the complexities surrounding setting up a Permanent Establishment (‘PE’) in the Netherlands from a corporate and payroll perspective. We will highlight the aspects of impacting PE recognition and the consequences of PE setup, focusing on wage tax obligations of an entity after the recognition of a permanent establishment in the Netherlands.

This article is written by Kseniia Shaknazarova ([email protected]) and Brian James (bjames@rsmnl,nl), Kseniia and Brian are members of RSM Netherlands International Consulting services with a strong focus on international tax.

As global opportunities continue to grow, many companies want to operate across borders. Frequently, while expanding the business, the companies face the risk of permanent establishment (‘PE’) exposure. One of the main consequences of recognition of a PE is taxation of the profit attributed to a PE based on the double tax treaty applicable between the Netherlands and the other state. However, if the presence of a company is considered as PE, it also has important wage tax consequences.

What is a PE, and what are the corporate income tax obligations

The recognition of a PE depends on several factors such as place of business (does the company have physical presence in the Netherlands), duration of the activity (the time spent conducting business in the Netherlands) and the nature of activities. Importantly, certain activities may fall under exceptions outlined in double tax treaties, meaning that a PE is not recognized. Companies must therefore carefully assess whether their activities in the Netherlands meet these exceptions to avoid unnecessary tax obligations.

The fact of PE recognition in the Netherlands entails certain corporate tax and wage tax compliance actions to be taken. Once it is determined that an operational activity in the Netherlands is considered as PE, it will require the registration of an entity in the Netherlands as a foreign taxpayer for allocation of the correct level of income to the Dutch operation and filing a corporate income tax (‘CIT’) return.

One of the attention points in this respect is transfer pricing implications on the profit attributed to a PE in the Netherlands. In the Netherlands, profit attribution to permanent establishments (PEs) follows the Authorized OECD Approach (AOA), treating the PE as a separate entity and applying the arm’s-length principle to ensure fair pricing of internal transactions. This involves a functional analysis to allocate assets, risks, and capital, with a preference for the capital allocation approach to determine interest expenses. Risk allocation is mainly based on significant people's functions. Companies should carefully assess profit attribution between the foreign entity and a PE in the Netherlands.

Wage Tax Implications of Establishing a Permanent Establishment 

Foreign employers with a PE in the Netherlands trigger a wage tax withholding obligation with respect to the employees that physically work in the Netherlands for the PE.

One of the first steps that needs to be taken after the recognition of PE in the Netherlands is to register as a wage tax withholding agent at the Dutch tax authorities. Next, a payroll must be set up and run to ensure proper wage tax withholding, reporting and remittance. This obligation applies even if the relevant employee(s) remain on the home country’s primary payroll. In this case, a shadow-payroll must be set up in the Netherlands in order to comply with the Dutch wage tax obligations. In addition, Dutch tax law allows a potential simplification: under certain circumstances, wage taxes paid monthly through payroll can be considered as fulfilling the personal income tax obligations of the employee. If granted, this facility relieves employees of filing an annual Dutch income tax return. Employers can request this on behalf of the employee, ensuring simpler compliance.

It is also important to remember that because of the Dutch wage tax legislation applies, this includes the applicable exemptions and exceptions. Under the work-related costs regulation (in Dutch: “WKR”), certain cost or benefits could be given, provided or reimbursed to the employee tax-free, for example by qualifying as ‘specific exemption’ or if designated to the annual tax-free budget. In certain cases, employees with specific knowledge and expertise may even qualify for the 30%-ruling, a Dutch expatriate tax facility which exempts part of the employment income from Dutch tax.

Social Security and Employment compliance

Regardless of the outcome of the PE-analysis, sending or having employees in the Netherlands may affect their social security position. European Union (EU) regulations help streamline social security compliance. Employees seconded to the Netherlands can remain generally remain under their home country’s social security system for up to 24 months under the EU regulations. To this end, an A1 certificate should be obtained. Obtaining this certificate allows foreign companies to be exempt from the social security contributions in the Netherlands. This certificate, which must be maintained in payroll records, serves as evidence that Dutch social security is not applicable.

Employers also must ensure that employees assigned to the Netherlands are treated under conditions equal to those for Dutch employees, in line with the EU Posted Workers Directive. This may include adherence to sector-specific collective labor agreements, covering aspects such as minimum wages, overtime, and holiday entitlements. In addition, employers must comply with Dutch health and safety laws, ensuring a safe work environment.

Forward thinking

The establishment of a PE in the Netherlands and seconding employees to the Netherlands both carry significant wage tax and compliance responsibilities. Ensuring that all wage tax, social security, and employment conditions are met will help avoid penalties and maintain compliance with Dutch law. RSM Netherlands can help you navigate these complexities by offering strategic guidance on cross-border tax structures and PE setup, ensuring compliance with both local and international tax rules, and advising on measures like to minimize potential tax risks.

RSM is a thought leader in the field of international tax and trade consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.