When determining which portion of a cross-border worker’s salary is taxable in the work country, the "days fraction" is used. This fraction consists of:
- The numerator: The number of days the employee has physically worked in the work country.
- The denominator: The total number of days the employee has worked for their employer.
At first glance, this seems like a straightforward calculation. However, complexities arise when considering vacation days, sick leave, maternity leave, sabbaticals, or travel days. The Dutch Supreme Court recently issued a ruling specifically on travel days, providing clarity on how these should be treated.
Travel days and tax allocation
Neither the bilateral tax treaties that the Netherlands has signed nor the OECD commentary explicitly define how travel days should be factored into the calculation. The Dutch Supreme Court has now ruled that travel time does not generally relate to a specific country but is still considered working time and must be included in the days fraction.
For the sake of simplicity, the Supreme Court has decided the following:
- Travel time should, in principle, be allocated equally (50/50) between the country of departure and the country of arrival.
- If a layover occurs in another country during business travel, this intermediate country should not be taken into account.
- Any work performed outside of travel time on the same day should not be considered in the days fraction.
This means that, regardless of the duration of travel or any additional work performed, a business travel day must always be allocated 50% to the country of departure and 50% to the country of arrival.
Impact of the Supreme Court Ruling
The case brought before the Supreme Court involved flights between the Netherlands and Saudi Arabia, which primarily took place on days when little to no work was performed outside of travel time. In this context, the ruling seems logical.
However, for short business trips or trips at the end of a full workday, applying this ruling can lead to unusual outcomes. The following examples illustrate this.
Example 1: a short business trip ?
Employee A lives in Germany, 20 kilometers from the Dutch border. At 8:00 AM, he leaves his home and travels to the Netherlands for a business meeting. He arrives at his client’s location at 10:00 AM and works there until 5:00 PM. After finishing his work, he travels back home to Germany.
Under the Supreme Court ruling, half of this workday would be allocated to Germany. However, this does not align with the reality that the employee spent nearly the entire day working in the Netherlands and did not work in Germany.
Example 2: a business trip after a full workday
Employee B lives in the Netherlands and works for a German employer. On Thursday, he starts his workday in Germany at 8:00 AM and continues working until 5:00 PM. In the evening, at 8:00 PM, he boards a flight to France, where he has a business meeting scheduled for Friday.
Under the Supreme Court ruling, Thursday would be split between Germany (country of departure) and France (country of arrival), ignoring the fact that the entire workday was spent in Germany. As a result, 50% of his salary for that day would be taxed in the Netherlands instead of Germany.
If Employee B returns home first and then departs from a Dutch airport in the evening, the ruling could even justify allocating the entire day between the Netherlands (country of departure) and France (country of arrival). In this case, his full workday in Germany could be taxed in the Netherlands.
Practical Implications
It remains to be seen how authorities will apply this ruling in complex real-world cases. Additionally, it is crucial to consider how the other treaty country interprets the allocation of travel days, as different approaches may lead to double taxation or inconsistencies.
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