Living in the Netherlands, working in Belgium or Germany
If you are a resident of the Netherlands and you are working in Germany or Belgium, you may qualify for a special provision in the tax treaties. Below we will provide you with some general information regarding these special provision.
What’s the problem?
If you are a resident of the Netherlands and you earn your entire income in the Netherlands, you are entitled to deduct certain expenses (such as negative income from your residence) from your income. If you earn the same income in Germany or Belgium, your income is likely exempt from taxation in the Netherlands. In that situation, there is no income to deduct your expenses from, so the deduction will not be benificial. The Netherlands has a favorable regime for negative income from residence (mortgage relief) compared to both Belgium and Germany. This means that the net income of a Netherlands resided person who earns all his income in the Netherlands, is likely higher than in the situation where the same person would earn the same income in Germany or Belgium.
The solution: compensation
In order to compensate for the aforementioned disadvantage, the tax treaties of the Netherlands and with Germany and Belgium contain a special “Compensation provision”. Under the compensation provision the first step is to re-calculate the Belgian and/or German income according to Dutch standards. The second step is to calculate the Dutch income tax over the re-calculated income. In the calculation of the Dutch income tax, the deductable expenses are taken into account. The final step is to compare the simulated taxation with the actual (German or Belgium) paid taxes. If the Dutch taxation in the simulation proves favorable to the real taxation, the Netherlands will refund this difference to you.
The compensation provision has been in the tax treaty with Belgium since 2003. In Germany the provision came into force as of 1 january 2016. We understood that the Netherlands intents to implement the compensation provisions in tax treaties with other countries as well.
The calculations of the Compenation provision has proven to be quite complex. Especially re-calculating the Belgian and/or German income to Dutch standards can be quite challenging, for example in cases when a company car is involved.