If you are not Dutch, but you have ever been approached with a job opportunity in the Netherlands, you must have heard the magic words: 30% ruling.
This basically means that if you qualify for the conditions, 30% of your salary will be tax free. This is a very tempting scheme for expats and ultimately on a long term, also good for the Dutch economy.
Conditions of the 30% Ruling
If you simply want to come to the Netherlands and ask for your tax free money, you must take a step back. There are certain requirements that you must fulfill:
- Specific expertise – You must have a specific expertise that is scarce or absent in the Netherlands. If you are a Dutch teacher or clogmaker, you might have problems to qualify.
- Minimum salary – Your gross salary must exceed a certain level. In 2017 this is EUR 52,857 before (EUR 37,000 after) the ruling. The threshold for employees under 30, who have obtained a master degree abroad, the threshold is EUR 40,178.
- Distance requirement – Before 2 years of coming to the Netherlands, you must have lived at least 150 km from the Dutch border. The distance is measured in a straight line to the closest Dutch border. This doesn’t only include whole Belgium, Luxembourg and parts of Germany and France, but funnily also a tiny part of UK in the Dover, Sandwich, Margate area.
If you qualify the above criterion, you need to submit a joint application request with your employer. Then if approved, the ruling will be valid for maximum 8 years. Based on my experience, the tax authority usually grants the maximum term.
You can find more information on the 30% ruling here.
How Much Money Does it Actually Mean?
The exact amount of tax advantage you will get depends on your salary, but even if you only meet the minimum income condition, it is still EUR 6,470 per year. The higher your salary, the higher the advantage is. The limit is the sky.
Below you can see a table about how much it means based on the gross salary.
As you can see it can add up to a quite significant amount each year. It can be quite tempting to spend this extra money, but in this article I’m trying to convince you that you should treat it as a non existing income.
What Should You Do With Your 30% Tax Advantage?
The short answer is that you should invest it. You can invest it in the stock market, use the tax advantage to pay it off against your mortgage or whatever fits the best to your personal situation and risk tolerance. Just try not to spend it. From my side I am following the strategy that I concluded in the last part of the Searching for the Perfect Portfolio series.
Why? Because getting used to a certain income and lifestyle is very easy. And one thing is for sure: after 8 years this tax advantage will be gone and your net salary will be reduced by the same amount. If you spent this money on luxury things, travel, dining out every week etc., it will be hard to adjust to your new, reduced income. If you bought an expensive car with high maintenance fee, it might be difficult to pay the costs. Meanwhile its value has significantly depreciated. And if you spent it on things like buying a big house where your 30% adjusted net salary is just enough to cover the monthly payments, then you are in big trouble my friend…
What happens if you are smart and invest every extra cents? Let’s take an example with 5% yearly returns and based on the amounts indicated in the tax advantage table.
A fixed 5% yearly return is very good in the current economic environment. And still, with such returns and 100% investing, what you can see above is that in year 9, when the 30% ruling is no longer applicable, the returns of the money accumulated over the 8 years is still less than half what the ruling meant in the net salary…
This does not only mean that you should save all the tax advantage that the 30% ruling means for you, but also that you should save on the top of this, just to ensure that your income won’t be less after the term of the tax advantage expires. Of course this should not be impossible; people without the ruling are also able to save money.
Based on the above you should look at your larger paycheck with some caution. Try to resist the temptation to get used to a lifestyle that the 30% ruling would allow, as it is only temporary. After the 8 years have passed, your net paycheck will be cut with about 20% and this might hurt if you are unprepared. Think about your future in advance and try to treat your tax advantage wisely while it still lasts.
Are there any expat readers out there who live in the Netherlands? Do you (or did you) receive the 30% ruling and if yes, how do you use the extra net income?
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.