In our article Your 2017 income tax return: living abroad We wrote that it is usually clear in which country a person’s tax residence lies. In a case in which Arnhem-Leeuwarden Court of Appeal In a recent decision, the issue of tax residence was under discussion.
Tax residence
When determining where a person is resident (for tax purposes), the legislation of the country in question is the primary determining factor. The case concerned a man whose family (wife and three children) lives in the Netherlands. He works for a university in the United Kingdom. Of the 190 working days, he works 152 in the United Kingdom and 38 in the Netherlands. In connection with his work, he stays in the United Kingdom for more than 190 days in a property he owns.
You may have already guessed. Under Dutch law, this man’s tax residence is in the Netherlands. The UK tax authorities, however, conclude that his tax residence is in the United Kingdom. This constitutes a case of dual residence.
Tie-breaker
The tax treaty concluded between the Netherlands and the United Kingdom stipulates that, in the event of dual residence, the taxpayer is deemed to be resident in the country with which he has the closest personal and economic ties.
The Court concludes that the tax residence is in the Netherlands. A key factor in this regard is that family ties clearly point to the Netherlands. The Court emphasises that these ties carry significant weight in its assessment. In particular, the fact that the wife, with one or more minor children, lives in the Netherlands is taken into account. The frequency with which the husband stays in the Netherlands and the fact that he always spends his holidays there also play a role.
The man’s social relationships can be traced to both countries.
Both the man’s earned income and that of his wife make a significant contribution to the family’s income. There are therefore significant economic ties in both countries. The Court finds support for its ruling in the fact that the man has consistently regarded himself as a resident taxpayer in his income tax returns. Furthermore, he has consistently designated the house in the Netherlands as his principal residence in those returns.
Prevention of double taxation
Does this mean that Dutch income tax must be paid on the entire UK income? Insofar as the United Kingdom, as the source country, is entitled to levy tax, the Netherlands must refrain from doing so. To this end, it must be determined which part of the income relates to work carried out in the country of employment. This concerns the days on which the person actually resided in the United Kingdom.
The British employer pays a single sum for all the work carried out. Therefore, the portion for which the Netherlands must make a deduction must be determined using the so-called ‘days fraction’. The numerator of this fraction is the number of days actually worked in the United Kingdom (including any sick days). That amounts to 152. The denominator of the fraction is the number of calendar days in the year, less: weekends, agreed annual leave, public holidays and other days on which work is not required. That amounts to 190. The Netherlands must therefore grant relief from double taxation on 152/190 of the income.
Results vary from country to country
The case described above arose in the context of the tax treaty with the United Kingdom. As tax treaties are negotiated separately with each country, the specific provisions of the relevant treaty must be examined on a country-by-country basis. The Netherlands has concluded tax treaties with many countries, but obviously not with all of them. If there is no tax treaty, the so-called unilateral arrangement offer a solution.