This article was originally published in The XPat Journal Autumn 2016 Issue
On May 1, 2016, the ‘Wet deregulering en beoordeling arbeidsrelaties’ (DBA) entered into force. As a consequence, all existing VAR-statements (showing that the person in question was not working in employment) have lost their legal force. So, now how do you prove that the relationship with your principal is not an employment relationship?
Employed vs. Self-Employed
In the Netherlands, there is a difference in tax treatment between an employed person and a self-employed professional. If the relationship between you and your principal qualifies as an employment relationship, your principal (the employer) has the obligation to withhold and transfer Dutch payroll taxes to the Dutch Tax Authorities.
According to Dutch tax law, the relationship between an employer and employee qualifies as a private employment relationship if the following conditions are met:
· the employee has the obligation to perform the work personally
· the employer has the obligation to pay wages to the employee
· there is a relationship of authority between the employer and the employee.
In order to determine whether the relationship between you and your principal qualifies as a private employment relationship, not (only) the text of the written agreement (if there is one), but also the actual facts and circumstances are relevant.
If there is no employment relationship because the conditions mentioned above have not been met, then, based on the Dutch Wage Tax Act, the relationship could still be a ‘deemed employment relationship’. As a consequence, payroll taxes will be due. An example of a deemed employee could be a small contractor who does not qualify as an entrepreneur.
Declaration of Independent Contractor Status
The ‘VAR’ was a declaration provided by the Dutch Tax Authorities. This declaration clarified the status of the freelancer. The Dutch Tax Authorities issued four types of declarations. If you were in the possession of the VAR-WUO (income from business activities) or VAR-DGA (applicable if the independent contractor worked through an entity – mostly a B.V.) and certain conditions were met, your principal could not be held liable for the reassessment of payroll taxes. Without the VAR, this liability could become a risk.
Declaration of Independent Contractor Status
As stated above, all existing VAR-statements have lost their legal force. As a consequence, both you and your principal can be held liable if the Dutch Tax Authorities qualify your relationship as an employment relationship (retroactively). That is why it is important to establish whether the relationship between you and your principal qualifies as a private employment relationship.
If you and your principal are of the opinion that the relationship does not qualify as a (deemed) employment relationship, you can choose to work according to a model agreement, for example a model agreement for free replacement or no relationship of authority between the principal and the contractor. If the contract is executed as described in the contract, your principal is exempt from the obligation to withhold payroll taxes.
There are three different kinds of model agreements:
· general model agreements
· sector- or profession-specific model agreements
· individual model agreements.
Model and Sector Agreements
In the past months, external parties and commercial sectors have submitted contracts to the Dutch Tax Authorities. The Dutch Tax Authorities have reviewed these contracts and published several contracts on their website. They have also published general template model contracts as well as model contracts per sector and profession.
If you and your principal work according to a model agreement and the contract is executed as described in the contract, your principal is exempt from the obligation to withhold payroll taxes. Should it become apparent, however, at a later stage, that the contract has not been fulfilled in the way described, this situation may change.
Please note that the initial assessment (template contract) does not provide a conclusive statement on the fiscal status (employer or otherwise) of the contractor.
Individual Model Agreement
Another possibility for you and your principal is to create and submit your own template contract. This is, amongst others, especially advisable for specific professions. The template contract can be submitted with the Dutch Tax Authorities. An initial assessment will be made on the basis of this employment relationship (also in this case, the initial assessment is not a conclusive statement on the fiscal status of the contractor). If the Dutch Tax Authorities are of the opinion that there is no evidence of (genuine) employment and the contract is executed as described in the contract, your principal is exempt from the obligation to withhold payroll taxes.
Please also note that it is not mandatory for contractors and principals to use a model agreement (as it was also not mandatory to use the VAR). If you and your principal do not use a model agreement, both of you are obliged to assess whether the relationship qualifies as an employment relationship.
As of May 1, 2016, a transitional period of 12 months applies. During this period, you and your principal have the time and flexibility to adjust the procedures if necessary. It is advisable to use this time to properly establish your relationship with your principal. During the transitional period, the Dutch Tax Authorities will not enforce the rules, but will conduct supervision. It goes without saying that fraud cases will be tackled at all times.