Changes to Dutch Expat Tax Rule Could Leave Tech Firms Scrounging (Corrected)

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Isabel Gottlieb

Hermen Hulst, managing director of Guerrilla Games, the largest video gaming company in the Netherlands, is worried—even though he shouldn’t be.

Exciting things are on the horizon for Guerrilla, an Amsterdam-based wholly owned subsidiary of Sony. The company announced plans in July to almost double its staff and move into bigger headquarters by the end of next year.

Even as he shepherds the company’s growth, Hulst is concerned that forthcoming tax changes for expatriates could hurt the company. Guerrilla Games hires so many animators, programmers, and designers from abroad that about half its 250-person workforce is foreign.

The Netherlands plans to trim a tax break that lets foreign workers in specialized fields receive 30 percent of their salary tax-free. The length of the benefits will change to five years from eight years, retroactively, so workers more than five years into existing agreements will be immediately cut off on Jan. 1, 2019.

The change will hit tech companies and startups like Guerrilla particularly hard, because they rely on foreign workers. Faced with a tight labor market and competition from around the world, Dutch firms look to a global talent pool. The change to the 30 percent rule will hurt their ability to lure and keep top workers.

“When somebody leaves Guerrilla Games, chances are they’ll accept a job in California, London, Tokyo, almost never somewhere else in the Netherlands, because they tend to do same kind of work somewhere else,” Hulst said. “That’s why we freak out about this a little bit.”

The change will immediately hit 11,000 workers, according to government figures, and another 6,500 by the end of next year.

Tech companies in the Netherlands generated about $35 billion in revenue last year, and had a combined market cap of about $180 billion, according to Bloomberg data from publicly traded companies. The Dutch tech sector employs about 1.2 million people, or 14 percent of the country’s labor force, according to data compiled by Bloomberg News.

The Netherlands has just under 6,000 start-ups and scale-ups, which are start-ups that are farther along in their growth, according to StartupDelta, a Dutch organization promoting startup growth.

Rolling Back Benefits

January will bring a “major change on income” for the affected workers, said Wim Kanbier, a senior director at PwC in the Netherlands—likely 15 to 25 percent cuts in their net salaries starting with the first paycheck of the year.

The proposed change has many expats scrambling to rethink their financial plans in the next 90 days, and has triggered outrage from universities, companies, and industry associations. They say the lack of a grandfather clause for workers with existing agreements makes the government look untrustworthy, damaging the country’s reputation as a hub for startups and multinational investment.

“One of the pull factors of the Netherlands has always been that the Dutch have a stable and reliable government,” said Patrick Mikkelsen, executive director of the American Chamber of Commerce in the Netherlands.

The Netherlands’ startup and tech sectors rely heavily on foreign workers, as companies look to universities outside the Netherlands for young talent, and recruit more experienced workers from their competitor companies based in Silicon Valley or around the world, Mikkelsen said.

“There’s also a global labor market for a highly skilled workforce,” he said. “As a government, you have to be aware of that and make sure that you have something to offer.”

Hit for Startups, Corporations

The Dutch government has worked to foster a fertile environment for startups, with initiatives like a partially publicly funded hub for startups.

The 30 percent rule has been a key part of the incentives that helped young companies grow, said Pieter Veldhuizen, director of the Dutch Startups Association.

The rule change will affect bigger tech companies, too. CEOs from eight of the largest Dutch tech companies sent a letter to the Finance Minister in June protesting the rule change.

The companies collectively employ 13,000 people, the letter said, of which 20 percent are affected by the ruling. The companies included travel website Booking.com, navigation company TomTom, and financial technology company Ayden, which went public in June worth 8 billion dollars.

In their letter, the industry leaders called for a transitional period for workers with existing agreements.

“It automatically causes insecurity among people living here, and it causes a lot of reputational damage” for the Netherlands as a competitive climate for companies, said Veldhuizen, who also signed the letter. “Why come if the government is that unreliable, untrustworthy?”

Fighting Back?

Some opponents are still trying to fight back—the United Expats of the Netherlands is lobbying to let workers with existing agreements keep their benefits. On Sept. 28 the group announced it hired a law firm, Stibbe, to investigate whether it’s illegal for the government to cut off expats who still have time left on their 30 percent rulings. It expects to have an opinion from the firm by mid-October.

The change is still technically a proposal. It must pass Parliamentary approval, along with the rest of the Netherlands’ 2019 budget. But it seems likely to go through, according to business leaders who spoke to Bloomberg Tax.

The Dutch government pointed to a study showing that most expat workers who get the 30 percent benefits don’t stay longer than five years to explain the move. But the government hasn’t said publicly why it didn’t include a transition period, which is particularly galling to many business leaders and expats.

“The Dutch government has a reputation for very solid, very understanding treatments of changes in taxes, and there being transitions,” Hulst said. “That’s why I’m so surprised, not just angry, but surprised.”

Request International Tax