Kas van der Meulen on the new Dutch Act that influences all contractors working with self employed professionals in the Netherlands. What about these model contracts of the Dutch tax authorities?
A rare, unexpected but happy announcement:
Parties can breathe easily. The tension is gone. After much deliberation, the contract agreement has been fiscally approved. The outcome is as follows:
“Client and Contractor (parties) agree that the Contractor or any subcontractor, at the clearly expressed wish of the parties without any intent to conclude an employment relationship, the job to be carried out by, or on account of, the Contractor, at its sole discretion at any time. Only after the job is completed satisfactorily, Principal will pay the agreed fixed rate.”
Unclear? Certainly. In this article I will sketch a brief history. You may of course also find some hints on how to (re)act when (considering) contracting self employed professionals.
The declaration labour relationship (VAR) is gone by May 1, 2016. Contractors can no longer apply for a VAR. Instead of a VAR, as from May 1, clients and contractors can use (model) agreements approved by the Dutch tax authorities. This is not mandatory but often (read: almost always) recommended. Unlike the Dutch tax authorities say, in many cases it is absolutely not clear whether (the Dutch tax authorities – in retrospect – believe) an employment relationship with a, self-employed, contractor, often referred to as freelancer, qualifies as an (fictitious) employment relationship.
Except of course in the cases cited as examples by the Dutch tax authorities, which also never yielded discussion before the introduction of the VAR. These examples, such as the much quoted exclusively for private persons working painter, therefore do not clarify anything in a business-to-business environment and thus useless for you.
Only the minimum
You should therefore use approved (model) contracts. From only (payroll) tax perspective, less is better. If you have few requirements and you only want to minimize the impact on payroll taxes, especially the employee insurances, using, or even just referring to the registration number of, one of the by the Revenue published standard model contracts, might be sufficient when making arrangements. (Or you could use a version like the one I started this article with, leaving everybody puzzled behind of course.)
I can imagine that you might have a bit more requirements, for example for protecting your (intellectual) property, civil liability, warranty claims, safety or within your company used manners. For one or more of these reasons you then probably also used standard (e.g. service, assignment or management) contracts with agreements that usually easily conflict with the fiscal requirements in the standard model. So you will have to adjust these contracts in order to bring these in line with the fiscally approved models.
Easy, I just have to write down what the authorities wish to see
Don’t. The catch? Only when both, client and contractor act exactly in accordance with the agreements in the model contract, there is no risk of an employment relationship and no need for you as a client to withhold and pay payroll taxes. The contractor (freelancer) is also not insured for employee insurances (covering sickness, disability and/or unemployment).
Should I not have done this before?
Yes, it might have been better, but the VAR protected you until recent and because the Dutch government and tax authorities were also not really ready for this, it’s understandable that you, and perhaps close to 99% of all contractors, did not yet.
At least until May 1, 2017, there is fortunately no need to panic. The Dutch tax authorities give you and us almost a year to determine what adjustments are necessary and / or whether the model contracts suit and pledges to assist. However, do not expect too much from the information and level of assistance in specific situations.
Take your own needs as a basis for a standard contract that suits your company. Published agreements may possibly be used to adjust expected conflicting rules before submitting your agreement.
Do I start now (and rush), or should I just wait until the end of April 2017?
Yes, do start, but don’t rush. In order not to be already faced with unintended (fiscal) labour relationships, you are obliged to use this year to actively model your contracts in such a way that self-employed contractors are not in your paid employment. For example by being demonstrably in dialogue with your contractors on the use of a model agreement and discussing the necessary adjustments.
Our contractors do not want a labour contract at all! We always agree on that in writing. Should that not make it all clear?
You might think so yes. And from a labour law perspective, you may be right. However, taking the position of the Dutch tax authorities, it is nevertheless almost always very easy to conclude to an (fictitious) employment relationship.
Employment relationship, the basics
Since time immemorial this is basically just a matter of walking through the list: wages, labour (personal services) and (employers) authority. Since also based on a contract with a self-employed, as in a labour relationship, work will be performed (of course) against (naturally) payment, in practice almost all attention goes to the aspect authority, noting that this does not even have to be exercised. Theoretically being able to exercise may already be sufficient.
In the contract (and in the working process) should therefore be avoided that the contractor:
Must follow directions and instructions of the client.
Must work according to the guidelines of the client.
Is accountable to the client.
Hard to imagine leaving this all out of a contract, don’t you think?
On the other hand, Conducive to have a contract approved is when the contractor is completely free to:
Determine the specific content of the work; and
The way to carry out the work.
Perform the activities, which are in the contract independently.
The client may (of course!) not be leading or supervising the work of the contractor.
Our preliminary conclusion
For being fiscal proof, you, as a client were therefore asked to be utmost restraint and the contractor must have an almost supernatural knowledge and skills to bring him (or her) assignment to a successful conclusion.
Personal service (or not)
As you may have deducted from my strange-looking contract at the beginning of this article is that any provisions in the agreement that restrict the possibility of free replacement of the contractor (also) do not help in the prevention of having to conclude to an employment relationship. Fiscally approved contracts know therefore always a provision along the lines of:
Well, doing, or better leaving all this must certainly be sufficient, is it?
No, unfortunately it isn’t, because even when there is no authority, the Dutch tax authorities may still assume that there is a fictitious employment, which also constitutes the obligation to withhold and pay payroll taxes. Incidentally, this is only a risk if there is parties concluded a (employment) relationship for (consecutive) at least 30 days, for an average of at least two days a week.
Strange but welcome news
In the context of the DBA, it has become possible to contractually exclude some fictitious employment relationships. If this exclusion is included in the contract between client and contractor, the Dutch tax authorities do not assess whether one of these fictitious employment relationships apply. I wonder, now this is apparently suddenly possible, how long it will take the decision makers to make it also possible to contractually exclude that a “real” employment relationship exists.
What more that can’t be done?
A lot. Think of a restriction for contractors to work for other clients or a solicitation clause. Also, working bases on best efforts? That is certainly fiscal suspicious and if you are a client appreciating your own carefully matched materials being used by a contractor, you do not make it easier (apart of course for the tax authorities to conclude to an (fictitious) employment relationship).
Well, what can be done to help the contract to be approved?
Include at least an article in the contract stating that neither the contractor nor his client plan (intend) to enter into a labour contract. Furthermore recommended, if somehow possible:
Important, do not lose patience!
Together we’ll get there! I would like to invite you to see if we can make your contract fiscal proof without leaving out all that’s important for you, with or without help from the Dutch tax authorities. It may surprise you, but we also gained some good experience in doing so, all you need sometimes is a few months of patience.