Dutch Law on Deregulation of Declaration of Employment status (Wet DBA) explained
11 months agoContracting or hiring freelancers in the Netherlands? Read more about the changes to Dutch Law on Deregulation of Declaration of Employment Status and how the abolishment of the VAR will affect you
Up until 1st May 2016, self-employed contractors in the Netherlands were able to use the VAR (Verklaring Arbeidsrelatie) to assert their independent status. This document was obtained by the contractor and provided assurance to the client that it would not be responsible for any payroll taxes with regard to that contractor.
This has been replaced with the model contracts (model overeenkomsten) through the Law on Deregulation of the Declaration of Employment Status (Wet Deregulering Beoordeling Arbeidsrelaties). The idea behind these contracts is that they should include certain clauses pointing to the independence of the contractor. These include the possibility of providing a substitute candidate, no supervision from the client both with regards to the work being carried out (although of course general guidelines as to the end result of the services from the client would be acceptable) and working hours, contractor bearing the risk for the services and use of contractor’s own equipment. These provisions indicates that both parties are aware of which party is responsible for paying taxes and social security contributions. The use of a model contract approved by the Dutch tax authorities indemnifies the parties in the chain against tax liabilities. However, there is a catch…
Model contracts only operate so as to provide such an indemnity where the contractual arrangements are also implemented in practice. In other words, actual working arrangements have to match the content of the approved contract. The aspect where this new regime substantially differs from the previous VAR system is that due to the Dutch “chain law” (ketenaansprakelijkheid), in an event that the practical aspect of the services is more resembling an employment relationship, any party in the chain could be liable for the backdated payroll taxes, not only the contractor.
In a way, this change does not come as a surprise; any lawyer tasked with keeping up to date with developments on the global contracting market knows that tackling false self-employment has been a trend in a number of other countries in recent years (most obviously, the ongoing IR35 changes in the UK, the IRS’ pursuit of misclassification of contractors, and the German Arbeitnehmerüberlassungsgesetz amendments due in 2017).
The new DBA law bears a lot of similarities to the UK IR35 regime which looks into both the contract content and working practices for assertion of self-employed status. In fact, the obligation to conduct regular reviews of the working arrangements to ensure the contractor has not, somewhere along the way, become a permanent employee of the client, is consistent with previous rulings on IR35 in the UK, which confirmed contractor’s status was fluid and, even if compliant to start with, could change at some point during the provision of services (see JLJ Services Ltd v Revenue & Customs  UKFTT 766).
What does the abolition of the VAR mean in practice?
As with any new legislation, we won’t know how strictly the tax authority will enforce, or (perhaps more importantly) interpret, the new law until the first tax inspections which are not due until after 1st May 2017, once the transitional period has passed. What we do know at this stage is that any party in the supply chain can potentially be liable, and there is no fool proof document the parties could obtain to indefinitely indemnify themselves against potential liability.
There is no doubt that this new regime will be more cumbersome on the parties than the VAR system, as additional resources will have to be invested to deal with both the initial administrative aspect of model contract implementation, and subsequent regular reviews of the ongoing relationship. However, as confirmed by the Dutch tax authorities this is not a change of what is legal and what is not, but rather of how the compliance will be assessed and enforced. In theory, businesses supplying and engaging genuinely independent contractors as well as the contractors themselves should only rethink their processes and not the substance of how they operate. However, businesses which saw engaging ZZP-ers as an alternative to employing permanent workforce might need to rethink their staffing practices in light of this new legislation.
What steps need to be taken now to ensure compliance?
Parties involved in the supply or engagement of independent contractors should:
• implement model contracts approved by the tax authority
• adopt adequate processes to be, and remain, compliant (by assessing the status of any current and new contractors).
Communication by agencies/intermediaries with both clients and contractors is even more important than before.
It remains to be seen how this new law will affect the contracting market in the Netherlands in the long run. In anticipation businesses should ensure they operate in a manner compliant with the new law. Communication throughout the supply chain is key. Although several sources revealed there may be some fear and reluctance in the market due to the current uncertainty, this will likely (although “hopefully” might be more appropriate here) regulate itself once practical implications are known, and both demand and supply will find their way back to the usual levels.