Dr. Christian Hick

In the appeal decision of 10 April 2025 (VI R 29/22) published on 3 July 2025, Germany’s Federal Tax Court (the Bundesfinanzhof) addressed the requirements for the actual taxation of salary payments in connection with the Dutch 30% rule. The 30% rule allows a reduction of the salary payments subject to tax in the Netherlands by a flat-rate deduction of 30%. The decision is of great practical relevance. The 30% rule is still applicable in the Netherlands and salary agreements with Dutch employers are often concluded by ‘pricing in’ the rule.

Favouring foreign employees through the 30% rule

The applicant, who has unlimited tax liability in Germany, worked for his Dutch employer on 154 days in the Netherlands and 80 days in Germany in 2019. Dutch law allows a Dutch employer to reimburse tax-free the additional costs incurred by an employee resident abroad as a result of working in the Netherlands. Instead of an itemised statement, it is also possible to reduce the income taxable in the Netherlands by a flat-rate deduction of 30%. In order to benefit from the 30% rule, the employee must have specific expertise. This is intended to favour the employment of skilled workers who are not resident in the Netherlands.

When determining the taxable salary payments in the Netherlands, the Dutch employer reduced the taxable salary payments by a flat-rate deduction of 30%. The applicant has not provided evidence of the actual expenses in connection with the activity in the Netherlands. As part of the income tax assessment in Germany, the applicant declared the salary payments attributable to the working days in the Netherlands as exempted income subject to progression in accordance with Art. 14(1) of the double taxation treaty between Germany and The Netherlands (“DTT-NL”).

Non-taxation of income components

The defendant tax office subjected the salary payments covered by the 30% rule to domestic taxation. The application of the exemption method under tax treaty law is precluded by the fact that the 30% rule results in a tax exemption of salary payments. The conditions for actual taxation within the meaning of Art. 22(1)(a) DTT-NL were therefore not met for these salary payments. For the application of Art. 22(1)(a) DTT-NL, it should be noted that Sec. 50d(9) sentence 4 of the German Income Tax Act (Einkommensteuergesetz – EStG) allows a transition from the exemption method to the imputation method even if – as in the present case – there is non-taxation of income components. The lower court agreed with this view (Tax court of Düsseldorf of 25 October 2022 – 13 K 2867/20 E, IStR 2023, 214). The appeal was authorised due to the fundamental importance of the legal issue in dispute.

30% rule results in a flat-rate expense deduction

Article 22(1)(a) DTT-NL is characterised by the fact that the exemption from taxation in Germany under treaty law is granted only on condition that the income is actually taxed in the Netherlands (subject-to-tax clause in the treaty). There would be no actual taxation if the income were tax-exempt in the Netherlands or if the taxable income was not taxed. However, the Federal Tax Court has previously ruled that a case of non-taxation within the meaning of a treaty’s subject-to-tax clause arises only if the entire category of income under the treaty (and not just parts of it) is left untaxed. That said, the requirements for actual taxation would also be met if foreign regulations for determining income or the tax-free reimbursement of expenses had the effect of partial non-taxation.

The Federal Tax Court has correctly decided that the 30% rule results in a flat-rate reimbursement of expenses associated with the activity in the Netherlands. Contrary to the decision of the lower court, the 30% rule does not result in a factual or personal tax exemption for the recognised income components. Further, actual non-taxation under Art. 22(1)(a) DTT-NL cannot be justified by the fact that the flat-rate expense deduction under Dutch law is granted without requiring proof of actual expenses and may therefore lead to overcompensation. From a legal point of view, an expense-related tax exemption also applies in this case.

It is also irrelevant that German law – in comparison with the employee lump sum – does not recognise a comparable deduction that may lead to overcompensation. If – as in the case in dispute – the Netherlands is assigned the right of taxation under treaty law, then it is up to the Dutch state to decide how it ‘actually’ fulfils this right.

The Federal Tax Court did not address the interplay between Art. 22(1)(a) DTT-NL and Sec. 50d(9) sentence 4 EStG. However, in departure from its earlier case law, the court examined whether the requirements for actual taxation were met with respect to individual components of the applicant’s employment income. As a result, this corresponds to the legal consequence of Sec. 50d(9) sentence 4 EStG, which extends reversion clauses under tax treaty law to parts of income.

Outcome

In the case at hand, the Federal Tax Court rightly concluded that the flat-rate deduction of expenses under Dutch law does not result in an actual non-taxation of salary payments within the meaning of Art. 14 DTT-NL, as referred to in Art. 22(1)(a) DTT-NL.

In addition to the treaty with the Netherlands, only a few German treaties (e.g. with Australia, Japan, Liechtenstein and the USA) link the application of the exemption method to the actual taxation of income in the other country. The dispute illustrates the practical problems associated with the separate treatment of income to apply the exemption method set out in Sec. 50d(9) sentence 4 EStG. Against this background, the requirement set out in Art. 22(1)(e) bb) of the German basis for negotiations for the conclusion of double taxation treaties should also be viewed critically.