The Deputy Minister of Finance has published an updated decree on the international aspects of pensions and annuity entitlements dated October 9, 2015. This decree, which updates the decree from 2008, addresses the accrual of pension rights by incoming employees and the settlement of pensions of outgoing employees.
Foreign pension plans usually do not comply with the rules stipulated under Dutch law. This can concern, for example, approved pension insurers, accrual rates and, since January 1, 2015, the maximum pensionable salary of EUR 100,000. Where incoming employees continue to participate in their foreign pension plans, this could, in principle, lead to taxable employer contributions and non-deductible employee contributions. For outgoing employees, this could involve a transfer of pension benefits being taxed or economic double taxation at the time the pension benefits are paid out (taxed accrual and taxed pension benefit payments).
The decree of January 31, 2008 provided for a variety of concessions for cross-border pensions. The decree of October 9, 2015 updates this.
The decree of October 9, 2015
The new decree contains various new positions and conditions, which are briefly explained below.
Participation in a top-up pension plan
Under the old decree, tax relief for foreign pension plans could only be obtained if an employee did not participate in a Dutch pension plan. Under the new decree, participation in a Dutch top-up pension plan is permitted, although this is subject to the condition that the combined pension accrual remains within the parameters of the Payroll Tax Act 1964.
Expansion to cover incoming employees from EEA countries
Employees from abroad who come to work in the Netherlands can have their home country pension plan designated as a qualifying pension plan. Under a qualifying pension plan, employer contributions are untaxed and employee contributions are deductible. Employees from countries outside the European Economic Area (EEA) will now be able to make use of the expanded provision, which previously was only available to employees from the European Union (EU).
Designation based on tax treaties
Various tax treaties contain a non-discrimination clause, under which a foreign pension plan must be treated as a qualifying pension plan. If the pension accrued under the foreign pension plan is not substantially greater than that under a Dutch pension plan, tax relief is allowed on the basis of the standards applicable in the home country. The tax relief does not, however, exceed the limits set by the Payroll Tax Act 1964. If the treaty does not stipulate a maximum period for the tax relief, then a maximum 10-year period applies. It is, however, questionable if this 10-year limit can be imposed unilaterally if the treaty does not contain such a limitation.
The balancing method after the transfer of the foreign pension benefits
Pension benefit payments under a Dutch pension plan are, in principle, taxed. This also applies to that part of the pension benefit payments related to the pension benefits transferred from abroad. The new decree approves the use of the balancing method insofar as no tax credit is received for the foreign pension plan. This means that pension benefit payments in the Netherlands are untaxed up to the amount of the contributions for which no foreign tax credit is received.
Subsequent transfer of the pension benefits to a foreign pension administrator
Employees who accept a job abroad can, under certain conditions, transfer their pension benefits to a foreign pension administrator without payroll tax and social security contributions being withheld. Under the old decree, payroll tax and social security contributions would still have to be claimed on a subsequent transfer. Under the new decree, a subsequent transfer can, under certain conditions, also take place without payroll tax and social security contributions having to be withheld.
Partial surrender of a foreign pension plan
If an employee surrenders their pension after the pension benefits have been transferred to a foreign pension administrator, the deferral of payment granted for the protective assessment, in principle, no longer applies. This means that the assessment must, in principle, be paid immediately. However, under the new decree, the assessment does not have to be settled if the surrender is limited to the foreign part of the accrued pension benefits.
Cancellation of liability upon transfer of pension benefits to the pension administrator of the EU/ECB
One of the conditions governing the transfer of pension benefits to a foreign pension administrator is that the latter accepts liability for any outstanding tax and deemed interest on ‘improper acts’, such as surrender. That condition is not imposed if the employee provides adequate security or if the transferring pension administrator accepts liability. If, however, the pension benefits are transferred to the pension administrator of the EU or of the European Central Bank (ECB), the liability of the transferring pension administrator is automatically canceled. The acceptance of liability by the pension administrator of the EU or of the ECB, or the provision of security by the employee is not required for this.
Pensions and annuity entitlements in a foreign self-administered entity
Directors-major shareholders can place their pension in a self-administered entity. Until December 31, 2013, an annuity entitlement could also be placed in such an entity (an annuity private limited liability company; stamrecht-bv). Under certain conditions, a self-administered entity can also be resident in a Member State of the EU or in an EEA country. The applicable conditions are explained in the decree.
The new decree applies to all employment commencing as of October 28, 2015. The designations under the old decree will continue to apply as the general rule. Upon request, the existing designation can be changed to a new designation. Changing a designation is, in any case, worth considering in the case of EEA pension plans and situations where a 10-year designation can be obtained by virtue of a tax treaty. The new decree cannot be applied to the period before October 28, 2015. This means that, for the period before October 28, 2015, a designation will have to be requested pursuant to the old decree from 2008, while for the period from October 28, 2015 onward, this will have to be obtained pursuant to the new decree.