30% ruling not applicable on retrospective bonus

The District Court of North Holland recently confirmed on September 25, 2020 that the 30% ruling cannot be applied on a bonus paid after the active employment is terminated, regardless if the bonus relates to the period when the employment was still active.

In this case the employment contract of the employee was officially terminated on 31 March 2017, but as of 17 January 2017 the employee was relieved from his employment activities. On the 29th of March 2017 the employee was paid a bonus related to his performance in 2016. The 30% ruling was not applied. The employee took into account the 30% tax free allowance as negative employment income in his personal income tax return.

For the 30% ruling, the duration period ends when the employment ends, this is the date that the employee is no longer required to perform employment activities. This means that the 30% ruling cannot be applied on remuneration paid in the inactive period of employment, so-called garden leave. The employer would have been allowed to apply the 30% ruling on the bonus if it was paid in the month following the last day of active employment, ultimately on 28 February 2017 since by law the duration period ends on the last day of the pay period (“loontijdvak”, usually a month) following the pay period in which the active employment ceased

In the same court ruling, it was confirmed that if the 30% ruling is not applied in the payroll, the 30% tax free allowance is not appointed as a final levy component (i.e. work-related costs) by the employer. As a result the full amount is regarded as employment income for personal income tax purposes. The employee cannot apply the 30% tax free allowance in his personal income tax return. According to the Court, the employee will first have to challenge the employer for not applying the 30% tax free allowance under the terms of the employment contract. In addition the employer should have appealed against the wage tax withholding as this was the right entry for a legal claim (and not the income tax return).

When an employment is terminated by mutual agreement, it is quite common to relieve the employee from employment activities until the formally agreed end date of the employment. If the employee is entitled to a bonus, the employer could consider to expedite the pay date of the bonus to the last day of the pay period following the last day of active employment. If this is not done, then the 30% ruling is not applicable according to the Court. The ruling does not state this, but since the duration period ends on that last day of the pay period following the relief of working activities, one should be mindful that this decision could also be relevant for the change of employer scenario. Meaning, that it could be well argued by the tax authorities that the 3 month period in which the employee needs have concluded a new employment contract for changing employer starts per that day next pay period after the active work stopped.

As a consequence, we remain to advise employer to be very cautious on garden leave scenarios and we advise that if such is agreed, to keep that as short as possible. This could also be beneficial for the employee when he would like to continue his remaining 30% ruling duration period with a new employer. We refer to our recommended positions to employers as summarized in this overview.