Exemption for employment income from Gulf states

4 October 2017

The Dutch Secretary of State published a Decree in which he grants a tax relief for employees working in certain Gulf states where, based on the tax treaty, effectively no foreign tax relief is available.

Due to this Decree, the effective tax due for employees is limited to the taxation in the Gulf States (i.e. often zero).

Consequently, Dutch employers are no longer required to withhold Dutch wage tax on salary payments to the employees working in the Gulf states. Thus, creating a level playing field with respect to their projects in the Gulf states.

Working abroad whilst being considered tax resident of another country, exposes an individual employee to double taxation. In the majority of the cases an employee may claim protection for such double taxation on the basis of a double tax treaty, concluded between the countries involved, or based on a unilateral agreement.

In general, it can be stated that the home country should provide for an elimination of double taxation. In practice two different methods are used, being the exemption method (whereby the foreign income is effectively exempted from home state taxation) and the credit method (whereby the foreign tax can, within limits, be deducted from the home state taxes). Which method applies depends on the qualification of the income and the respective tax treaty.

The main difference is that with the exemption method the foreign income is taxed against the effective tax rate that applies in the work state, whereas under the credit method the foreign income is taxed at the higher of the home state tax rate or work state tax rate. The aim from the Dutch legislator, as published in the Tax Treaty Policy note 2011, is to put Dutch employees in the same position as local employees when working abroad. Consequently, the exemption method is in principle used as method to eliminate double taxation, unless agreed otherwise in the respective tax treaty.

In case the work state does not levy any taxes, which is the case with the Gulf states (i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), and the home state applies a credit method based on the tax treaty to eliminate double taxation (which is the case in the Netherlands, contrary to its own Tax Treaty Policy note 2011), the employee will effectively be taxed at a higher rate than his colleagues who do not live in another country outside the work state.

In view of the Tax Treaty Policy note 2011 and in view of the undesirable situation whereby Dutch resident employees working in the Gulf region are effectively taxed at a higher rate than their local colleagues, the Dutch state secretary of finance issued a decree on September 7, 2017, wherein he approves the application of the exemption method instead of the credit method with retroactive effect to January 1, 2015. The exemption method can be claimed through the Dutch personal income tax return.

Dutch employers are no longer required to withhold Dutch wage tax on salary payments to employees for their work performed in the Gulf states.

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