Compensation scheme: tax treaty with Germany
Some people, especially nearby the border, live in the Netherlands and work in Germany. The tax treaty between the Netherlands and Germany specifies that the country of employment may levy tax. You may pay more tax in Germany than in the Netherlands because you miss out on deductible items. In this case, you can make use of the compensation scheme between the Netherlands and Germany.
Compensation scheme between Germany and the Netherlands
Since the new tax treaty with Germany (2016), the compensation scheme has been included for people who are liable to pay tax in Germany while living in the Netherlands. Do you work as an employee and do you have to pay more than if you were taxed in the Netherlands? Then you can compensate the difference by applying for the compensation scheme. The amount of the compensation is the difference between:
- The German tax on income added up with tax and national insurance contributions in the Netherlands
- The tax and premiums you would pay in the Netherlands
How does the compensation scheme work?
A comparison must be made between the fictitious tax burden in the Netherlands and the actual tax burden when living in the Netherlands and working in Germany. If the tax due in Germany is higher, the Dutch tax authorities will compensate for this.
Deductible items expire
If you work in Germany and live in the Netherlands, you are liable for tax in Germany. Paying tax can be disadvantageous in Germany because you are not allowed to use the deductible items (think of mortgage interest on owner-occupied home, health care costs, and other personal deductions). As a result, you probably pay more tax in Germany than you would in the Netherlands.
Fiscal partner in the Netherlands
If you have a fiscal partner in the Netherlands, maybe, there is no disadvantage for you. You can allocate the mortgage interest deduction, healthcare costs, and other deductible items to your partner. But if your income is higher than your partner’s, a disadvantage can still arise. In this case, the deductible items (such as mortgage interest) are deductible at a lower tax rate.
If the deductible items (such as the mortgage interest) provide no tax advantage, you can also choose to use the transfer facility (in Dutch: doorschuifregeling). In this case, the Dutch tax office will postpone this deductible item to another year in which you have a Dutch taxable box 1 income. You can also use the transfer facility if the compensation scheme does not provide any benefit.
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Do you work in Germany and live in the Netherlands? Could you use some help with the compensation scheme or the tax treaty between the Netherlands and Germany? We are happy to help you! Feel free to contact us using the details below.