Tax exemption of Dutch wages in the country of residence Germany when applying the so-called 30% rule

If an employee who is resident in Germany under the DTA with the Netherlands is employed by an employer in the Netherlands and also works there, any additional costs incurred as a result of their stay in the Netherlands (so-called extraterritorial costs) can be reimbursed tax-free in accordance with Dutch tax regulations. Whether and how this affects taxation in Germany (unlimited tax liability due to residence) was decided by the BFH in its decision of April 10, 2025 (case no. VI R 29/22).

In 2019 the employee lived exclusively in Germany, was employed by an employer in the Netherlands and performed his non-self-employed work on 157 days in the Netherlands and 80 days in Germany. The Dutch employer made use of the flat-rate option for extraterritorial costs under Dutch law and paid the employee 30% of his salary tax-free without further proof of actual costs incurred (so-called 30% rule). Accordingly, the Dutch wage tax statement only showed the annual salary adjusted by 30 % and separately (for information purposes) the amount according to the 30 % rule as taxable wages. However, the tax office recognized as taxable income in Germany not only the parts attributable to the days worked in Germany (80/237 working days), but also the parts attributable to the Netherlands (157/237 working days) of the salary that remained tax-free under the 30% rule. This is because the previous inclusion of this tax-free part of the salary only in the progression proviso in accordance with Section 32b of the German Income Tax Act is incorrect because an exemption can only be considered to the extent that actual taxation has taken place in the Netherlands in accordance with Section 22 (1) letter a) DBA Netherlands. This is not the case with the 30% rule.

The BFH took a different view. It is undisputed that, in addition to Germany, the Netherlands also has the right to tax income from employment under the DTA Netherlands to the extent that the employee carried out his work there (in the case in dispute on 157 of 237 working days). In this context, the Dutch salary was also actually taxed in full in the Netherlands within the meaning of Section 22 (1) letter a) DBA-Netherlands. This also applies to the part paid out tax-free in accordance with the 30% rule.

The 30% rule is intended to compensate employees who take up employment with a Dutch employer and move to the Netherlands to carry out their work or travel daily from abroad to the Netherlands for the additional costs associated with this. It is therefore a lump-sum reimbursement of taxable expenses incurred by the taxpayer and not a personal or material tax exemption, which results in actual non-taxation under Section 22 (1) letter a) DTA. As in the case of allowances and tax-reducing provisions in the context of income determination, such an expense-reducing tax exemption does not constitute non-taxation within the meaning of Section 22 (1) letter a) DBA Netherlands. Therefore, the part of the salary exempted from taxation in the Netherlands after application of the 30 % rule is not to be taken into account when determining the German assessment basis in the context of income, but only in the progression proviso.

Notice:

Section 22 (1) letter a) sentence 1 DBA-Netherlands as well as section 50d (IX) sentence 4 EStG constitute so-called fall-back clauses, according to which “income” is not excluded from the basis of assessment for German tax due to its treatment in the other contracting state. Based on this, the tax authorities are endeavoring to include parts of non-taxed income in the tax base. Accordingly, the German Federal Finance Ministry circular of 12.12.2023 (BStBl I 2023, 2179 para. 421) refers to the Dutch expert or 30% rule as an example. The reaction of the tax authorities to the current ruling remains to be seen; at the very least, the 30% rule will probably have to be reassessed.