This is contribtion number six by KPMG Meijburg & Co regarding the tax planning opportunities for providing low taxed remuneration to employees: saving plans, public holidays and anniversary allowances.

This article is most likely to be relevant for employers interested in providing tax-friendly remuneration for their employees.

On October 26, 1993, the Dutch Parliament enacted a bill which significantly changes the provisions of the savings plans for employees, as well as the tax-free allowances on the occasion of employee anniversaries and public holidays. The new law will take effect on January 1, 1994.

The following employee benefit plans have been changed by the new legislation:
- Premium savings plans;
- Profit-sharing plans;
- Employee savings plans.

In addition, an entirely new provision has been enacted for certain stock option plans. All schemes referred to above must be well documented and fixed by contract. In addition, participation in the qualifying schemes should be open to at least 75 percent of all employees, including those employees who have a direct or indirect substantial interest in the company-employer. However, the new legislation does not allow a qualifying plan to be established by a director who is at the same time a qualifying majority shareholder if he and his spouse are the only employees of the enterprise.

Premium Savings Plans
Under the "premium savings plan", the employee must request that the employer withhold amounts from after-tax wages and transfer such amounts to a savings account. Under this type of plan, the employer may pay the employee a premium which is based on the amount of the employee contributions. The amount of premium which may be free of tax and social insurance premiums has been reduced to 100 percent of the employee contribution. The tax-free savings premium may, however, not exceed Dfl 1,000 per year (prior law allowed Dfl 750).

In order for the employer-paid premium to be exempt from tax and social insurance premiums, the employee contributions must in principle remain in a savings account for at least four years.

If the savings are not withdrawn during the four year period, the provisional premiums are tax exempt. Generally, if the savings are withdrawn prior to the expiration of the four year period for purposes other than qualifying payments, the "provisional" premiums have to be restituted to the employer or to a third party.

Employee Savings Plan
An "employee savings plan" is a plan, other than a pension plan, which allows an employee to set aside an amount of his wages to a special savings account. In contrast to the "premiums savings plan", contributions are made from pre-tax wages. The employee savings plan is similar to the employee premium plan in that the contributions may generally not be withdrawn for a period of four years.

Unlike the previous law, the new provisions no longer require that all employees take part in the plan. However, under the new law, at least 75 percent of the employees must participate in the plan, as set forth above in the Introduction. In addition, the savings period under the new law has been reduced from 7 to 4 years.

If the amount of the savings does not exceed Dfl 1,500 per employee per calendar year, neither the employee nor the employer are required to pay tax or social insurance on the amounts contributed to the plan.

Profit Sharing Plans
Under the profit sharing plan, an employee may elect to participate in a plan under which the employer contributions are tied to the profitability of the employer. Under this type of plan, the employer contributions may be based on the employer's profits, the amount of dividend payment made by the employer on its stock or that of a company related to the employer. As in the case of the employee savings plan, contributions are made before tax.

Under the previous profit sharing plan regime, the amounts set aside by the employer were placed in a blocked account for the employee. Under the new law, the contributions are not required to be placed in a blocked account; however, the method of taxation of the contributions depends whether the amount is actually being saved. Under the profit sharing plan, the tax-free amount may not exceed Dfl 1,500 per employee per year.

If the employee saves the profit contribution in a special account for at least four years, (under the same general conditions as the employee savings scheme) the employer is not required to pay any tax or social premiums on the profit contributed to the account. The amounts in the savings account may be released for the same qualifying purposes as under an employee savings scheme without forfeiting the tax benefit.

Stock Option Plans
A stock option plan is a plan under which the employees are granted the right by the employer to acquire one or more shares of the employer or a company related to the employer. If the option is granted by the company related to the employer, for example a parent company established abroad, the tax benefits of the new legislation may not be obtained.

Under the new legislation, no tax or social premiums are levied on the employee or the employer if the value of the stock options does not exceed Dfl 1,500 per year. With respect to the valuation of the stock options, the existing rules continue to apply.

In order for the plan to qualify for the special tax treatment, the employee must be given the right to elect to transfer an amount equal to the value of the stock option to the employee's savings account. This underlying value may only be made available to the employee after a period of four years from the time the option is granted. If the option right is alienated or surrendered within the four-year period after grant of the option, then the employer is required to transfer to the savings account an amount which is not less than the value of the option at the date of grant.

Combination of Plans
It is possible to combine premiums savings plans, employee savings plans, profit-sharing plans, and stock option plans. If a profit-sharing plan, employee savings plan and/or stock option plan are combined, the maximum tax-free amount for all such plans is Dfl 1,500 per year per employee. The normal rules apply to amounts in excess of Dfl 1,500.

The premiums savings plan may be implemented at any time, which means that if such a plan is combined with the other plans, the maximum tax-free amount is Dfl 2,500 per year.

It should be noted that transitional Rules apply scheme previously set up under old law.

Restriction of the Public Holiday Allowance
Effective January 1, 1994, the amount of the tax-free allowance payable on the occasion of public holidays will be restricted to a total annual tax-free payment of Dfl 300. The maximum amount of Dfl 300 does not have to be divided over a number of public holidays. It is not clear if a payment of Dfl 110 in respect of New Year's Day 1994 will be counted toward the maximum allowance in 1994 if it is paid in December 1993.

Payments for Employment Anniversaries and Termination of Employment
With respect to employment anniversary payments and payments made upon termination of employment, it will still be possible after January 1, 1994 to make a one-time tax-free payment equal to one month's wages upon the 25th and 40th years of employment with the same employer.

In addition, if a one-time payment is made upon the 25th employment anniversary, a subsequent tax-free payment equal to one month's wages may also be made if the employee subsequently terminates his or her employment after the 40th anniversary.

Under the new law, payments made under the old law need not be taken into account. For example, if the employee was given a tax-free payment equal to one month's wages to mark the occasion of a term of 20 years of service in 1989, an additional tax-free payment can be made upon the 25th anniversary of employment in 1994.

A transitional rule has been adopted for anniversary payments which will be paid between January 1, 1994 and May 1, 1994.

Revision of the 1969 Corporate Income Tax Act with respect to deduction for the cost of shares granted to employees
Effective from January 1, 1994, a company which grants new shares to its personnel as compensation for services performed may deduct such amount which qualifies as wages (even if such wages are exempt from tax). The same rules apply to stock option grants and new profit-sharing certificates. In general, the same rules also apply to shares granted to employee organisations.

December 1993, KPMG Meijburg & Co

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247