Does The 30% Ruling Matter?

Internationals in the Netherlands a have been in a tizzy this week about the announced changes to the 30% ruling. A Change.org petition has garnered nearly 8,000 signatures. So what’s all the op hef about?

What is it?

Qualified highly-skilled migrants are eligible for the so-called 30% ruling wherein you do not pay income tax on the first 30% of your earnings. There’s a number of requirements, including that you must earn a certain amount of money and you can’t live within 150 km of the Dutch border. Dutch citizens are eligible if they haven’t lived in the Netherlands for ten years.

Essentially, the 30% rule is supposed to offset the costs of living abroad. It purports of offset relocation costs, travel home, extra expenses for schooling and lack of secondary spouse wages. It’s also supposed to assist employers with recruiting international talent. 

What is the change?

A reduction in the number of years that you can qualify was planned during the 2017 coalition talks. The coalition agreement stated that it was going to reduce the number of years from eight to five but didn’t specify when or how that ruling would apply. This week, it announced that not only will it be changed for future applicants but also people currently holding the status. That means if you moved here in the past few years, obtained the 30% ruling and were told it was good for eight years, it is not. It is good for five years. (Starting on January 1, 2019.)

(If you have the 30% ruling or you were planning to get it, you should talk to a tax adviser, because I am not one.)

Understandably, people who have the ruing are upset. And it does seem incredibly unfair to be promised something which is then revoked. Adding extra fuel to the fire, when the government reduced the ruling from ten years to eight a few years ago, it grandfathered in those who had been eligible for the ten years.  

Why are they changing it?

The Dutch government produced a report last year that looked into whether or not the 30% ruling was accomplishing its goals. The report found that there were about 60,000 people using the tax break which cost the Dutch treasury 755 million euros in 2015 and was estimated to cost 902 million euros in 2017. (There were no 2017 numbers available at the time of the report.)

The report found that, in interviews with 30% ruling recipients, the 30% ruling wasn’t a deciding factor in taking a job in the Netherlands for many. This is because many didn’t find out about the benefit until after they moved here. The reduction in years was done, in part, because the report also found that some 80% of ruling recipients only used it for five years, not the full eight anyway. This is mostly due to people leaving the Netherlands or changing jobs to a position where they are no longer eligible.

Further, it concluded that because the time limit for similar schemes in other countries is less than the eight years offered in the Netherlands, reducing the number of years wouldn’t reduce the competitiveness of the Netherlands.

At the end of the day, the Dutch government doesn’t think this tax scheme, as it stands, is worth the cost to the country’s purse.

How does it work in other countries?

One of the arguments is that by reducing the 30% ruling, the Netherlands puts itself at a disadvantage against other countries. I’m not convinced. I am, obviously, not an international tax expert, but it doesn’t seem to me that the Netherlands, even at the reduced five year max, is that out of line compared to other countries.

Denmark has a so-called expat scheme which caps the maximum tax rate at 26% for five years. Spain reduces the top tax bracket and only taxes income earned in Spain for six years. France has a partial income tax reduction for eight years. Belgium has a special tax status which can offer some tax advantages. Canada and the US seem to offer none.

The bottom line

Making the reduction retroactive is a bad and dumb thing to do. People are clearly annoyed but more than that, the 30% ruling makes a considerable difference in ones income so yanking the rug out from under people who already have it is grossly unfair. The Dutch government should grandfather in people who had the ruling for eight years and, if they want to change it, only enforce that for new applicants.

Should the Dutch government get rid of it? Probably. There seems to be little evidence that it is useful for recruitment broadly speaking. A reduction in the number of years isn’t likely to make other countries more attractive financially, as most other countries limit their expat tax schemes to six years or less. If it isn’t helpful in recruitment and costs the public purse nearly a billion euros a year in tax revenue, it doesn’t seem sensical to keep it on.

Moreover, I don’t think it should exist at all. If Dutch employers want to recruit top talent from abroad, and they can’t do that without paying higher wages, then they should pay higher wages. The burden on recruitment for companies shouldn’t be on the taxpayer, but on the company.  

ICAP found last year that 63% of foreign employees got no assistance with school fees and 80% got no assistance with housing. Perhaps this companies could offer some useful perks to their employees rather than relying on the Dutch tax paper to underwrite them.