Personal income tax and doing business in another country

Doing business abroad means dealing with new rules and regulations. Local foreign legislation, for example, and foreign VAT obligations. But your Dutch personal income tax position may also change. Are you, for instance, still a resident of the Netherlands for tax purposes? Which country may now levy personal income tax on your income? And are some, or maybe even all, of your business profits perhaps subject to taxation abroad?

➔ In this article we explain in more detail some aspects of personal income taxation that you need to consider.

Residency and tax liability

Many countries, including the Netherlands, levy taxes on the income of their residents - irrespective of where that income has been earned. This is taxation of what is known as ‘worldwide income’. It is therefore important to determine the country in which you personally are a resident for tax purposes. Although being registered in the municipal personal records database is relevant here, it is certainly not the deciding factor. Just like many other countries, the Netherlands examines many other relevant facts and circumstances. These may include where you have a permanent abode, where your close or extended family lives, where you work and where you are registered with a GP.

Your business’ country of residence

When you do business in another country, it is possible that the foreign tax authorities will wish to levy taxes on the business profits if you are an entrepreneur for personal income tax purposes (‘ondernemer voor de inkomstenbelasting’, e.g. you have a general partnership or sole proprietorship). You do not personally need to be a resident of that other country for this to occur.

The other country will almost always want to levy taxes if your company has a ‘permanent establishment’ in that other country. It is therefore not always necessary for you to have a (local) foreign legal form or to be registered in the local commercial register. Each country determines under its own rules whether your company has sufficiently close ties with the country for it to be able to levy taxes on your income.

Dual residency?

It is possible that both the Netherlands and the other country can identify enough reasons to treat you as a resident for tax purposes under each country’s national law. In such cases, the stipulations in tax treaties will often provide a solution. Usually, it first needs to be determined in which country you have the strongest, long-term personal ties. If necessary, this will be done in consultation, but the precise rules may vary from country to country.

Where do you pay tax?

If you live in the Netherlands and also carry out business activities abroad, it is possible that the Netherlands will wish to levy taxes on your entire income. At the same time, another country may also wish to levy taxes on the income derived from the activities in that country. In this case, you may need to submit two tax returns: one in the Netherlands and one in the other country.

Avoiding double taxation and submitting tax returns

If you are a resident of the Netherlands for tax purposes and have foreign sources of income, you will need to report your worldwide income in your Dutch tax return and - in principle - only the foreign portion in the foreign tax return. To avoid your income being taxed twice, the Netherlands offers prevention of double taxation in many cases. There are several ways of doing this, depending on the source of income and the treaty status. For example by means of an exemption for the income (for specific business profits) or by crediting the foreign tax (for specific withholding taxes). This methodology can sometimes be complicated and it is often worth seeking advice from a specialist here. Our tax advisors would be happy to tell you more about this.

Be well prepared

If you plan to do business abroad, it is prudent to know in advance which specific rules apply in the other country. And what the tax consequences are, for you and for your business. With thorough preparations and an advisor by your side, you can determine where you stand, leaving you free to concentrate on your international growth ambitions.

Our specialists would gladly advise you on the options and opportunities, and on important points of attention and obligations in relation to international growth.

➔ Whether you are considering your first steps in another country or have been doing business abroad for some time now, we can assist you and your business at every stage of your entrepreneurial journey.

➔ Where required we can rapidly seek advice from the trusted experts in our global Baker Tilly International network, so that you have local advice within easy reach as well.

Would you like to find out more about international growth and doing business abroad? Our advisors are ready to assist you!

The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.