Kingdom of the Netherlands—Netherlands: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
11 Feb 2016
eISBN:
9781475557695
Language:
English
Keywords:
ISCR; CR; earnings; income; income tax; rate; employment relationship; sham self-employment; protection scheme; employment indicator; self-employment arrangement; Wages; Tax allowances; Pensions; pillar III pension schemes
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Kingdom of the Netherlands-Netherlands: Selected Issues

Abstract

Kingdom of the Netherlands-Netherlands: Selected Issues

Dual Labor Markets in the Netherlands—Environment and Policy Implications1

Non-standard work contracts, in particular self-employment, increased significantly in the Netherlands in the last decade and a half. These arrangements contribute to increase labor flexibility, they entail fiscal costs and they have the potential to undercut pension disability insurance.

This paper discusses the fiscal and social safety net implications of the shifting employment arrangements. In particular, it reviews the tax incentives for self-employment and the implications for the fiscal accounts, disability insurance and the pension systems.

A. Background

1. The Dutch labor system provides a high level of protection to workers on standard employment contracts. In comparison with its European peers, the Netherlands has both low unemployment and high employment rates. Moreover, the Dutch labor market includes a large segment of workers, often older and better trained, with strong employment protection. The OECD Employment Protection Indicator ranks the Netherlands second highest in the protection of regular workers against individual and collective dismissals. Dismissals are arduous and expensive, with costs increasing with workers’ age and years of service.2

A03ufig1

Employment Indicators, 2014

(Percent)

Citation: IMF Staff Country Reports 2016, 046; 10.5089/9781475557695.002.A003

Source: Eurostat.
A03ufig2

Indicators of Employment Protection, 2013

(Scale from 0 (least protection) to 6 (most protection))

Citation: IMF Staff Country Reports 2016, 046; 10.5089/9781475557695.002.A003

Source:OECD.

2. Non-standard working arrangements have proliferated in response to labor restrictions. The rates of part-time work, fixed-term work and temp agency work are typically rather high among EU28 countries. However, part-time work is preferred to full-time work by many, in particular women with young children.

B. Development of Self-Employment

3. The self-employed share of the workforce has grown rapidly over the past 15 years. (Figure 1) The self-employed are freelance workers who provide services and conduct their activities under commercial contracts that receive lower protection than labor contracts. The number of self employed reached 1.4 million workers in June 2015—17.2 percent of labor aged 15–65, a figure that has been rising by an average 2.8 percent per year since 2003. Self employment is most prevalent in agriculture, where it provides more than half of labor, and in construction and health services. Two-thirds of hospital-based specialists (e.g., nurses and physicians) and about 40 percent of all active physicians in the healthcare sector are classified as self employed.3 Three out of four self-employed contractors have no staff, and in 2015 a quarter of the self-employed working alone had at most three clients or customers per year.4 Self-employed workers are on average more educated; about 80 percent of them have at least a high-school degree—higher than the 60 percent in the Dutch labor force in general.

Figure 1.
Figure 1.

Self-Employed in the Netherlands

Citation: IMF Staff Country Reports 2016, 046; 10.5089/9781475557695.002.A003

A03ufig3

Employment Indicators, 2014

(Percent)

Citation: IMF Staff Country Reports 2016, 046; 10.5089/9781475557695.002.A003

Sources: Eurostat and IMF staff calculations.

4. Self-employed workers often remain outside Dutch social protection systems (Box 1). With the exception of social services available to all residents, self-employed contractors have to arrange for their own disability insurance and retirement and the income-related component of health insurance.5

5. Self-employed contractors are less expensive than regular workers for employers.6 The main savings are due to the absence of employer contribution for unemployment, disability, and payroll tax. The social contributions for regular workers do not apply to self-employed persons. Self-employed contractors also do not participate in collective bargaining and are not eligible for the minimum wages set in those agreements. Their work arrangements are flexible with workload and orders, and there is no limit to the hours worked. Hiring and dismissal have limited costs

Incentives Associated with the Status of Self-Employed Workers in the Netherlands

Self-employed contractors benefit from several tax deductions and support from social funds, which reduce their effective income tax and increase their subsidies.

Tax deductions: The net earnings of self-employed contractors are taxed as income rather that as corporate income, and they receive several tax deductions and deferrals. The four main tax allowances are: (i) an entrepreneur's allowance (€7,280 per year); (ii); an SME profit exemption on 14 percent of the profit net of other deductions; and (iii) an age-dependent tax-deferred retirement allowance on up to 9.8 percent of the annual profit with a €8,631 cap to help build retirement savings1. Finally, (iv) self-employed contractors may receive a starter’s allowance (€2,123 per year) for three years. Additionally, self-employed workers are eligible to allowances for research and development (in 2015 up to €12,421 per year, and 50 percent additional for new entrepreneurs), investment (28 percent of the invested amount, with a €15,600 annual cap), and the remuneration of co-workers (limited to 4 percent of taxable profits). A one-time tax deduction (€3,630) is allowed on net profits when the business is sold or shut down. Operating costs can also be deducted from the tax base, including rent, utilities, and interest payment. Asset depreciation observes no preset schedule, and the unused part of the main tax deductions may be carried forward for up to 9 years. One-person businesses may also become VAT-exempt. The tax deductions apply when self-employed contractors report at least 1,225 worked hours per year. However, the tax authorities deem time spent on administration and education worked hours.

Social contributions and benefits

• Health, sickness and disability insurance: All adults in the Netherlands must purchase health insurance at a flat rate (generally €90–€100 per month). In addition, employers pay an income-related surcharge for their workers—6.95 percent to cover health insurance. Self-employed contractors pay a reduced 4.85 percent premium for their basic insurance, and no contribution for long-term care. Disability insurance is not required of the self employed, although they can purchase policies on the private market or continue public policies from previous employment or unemployment. These tend to be relatively expensive and only a minority of the self employed are believed to have taken out this insurance.

• Unemployment protection: Self-employed contractors are not part of the unemployment insurance system and are therefore are not eligible for unemployment benefits. However, to ease the transition from unemployment to self-employment status, new self-employed contractors are allowed to keep their unemployment benefits during the start-up phase. Depending on the income from the new business the unemployed person must pay back (part of) the unemployment benefits after about two years.

1/. The rate was 10.9 percent in 2014 and 12 percent earlier. Upon retirement, the tax-exempted purchases in pension annuities are capped at €400,000 per person. The outstanding tax exempted pensions annuities reached about €50 million in 2014.

6. Self-employed contractors benefit from favorable tax treatment, which is intended to help them arrange for own pension and other contributions. They are eligible for tax allowances, and pay reduced taxes on their profits. The four main tax deductions indicated in Box 1 reduce their taxable income significantly. The net disposable incomes of self-employed contractors are about 20 percent higher than those of wage earners (Table 1).

Table 1.

Taxation of Wage Earners and Self Employed, 2015

(in Euros, per year)

article image
Sources: IBO ZZP, Tables p. 135–140, and IMF staff calculations.

Including pension and disability insurance.

7. The authorities have recently adopted measures to curb the sham self-employment. The legislation introduces standard contracts from April 2016 and creates a presumption of responsibility for the employer for underpayment of taxes and contributions in the event that the contract is found not to qualify as a labor contract.7

C. Self Employment has Implications for Private and Public Balance Sheets

8. Self-employed contractors have lower incomes than wage earners on average and often rely on other income (Table 2). Data for 2007 show that 42.7 percent of self-employed workers reported an annual gross business profit below €10,000, suggesting that some work fewer than the minimum 1,225 hours per year needed to qualify for the self-employment tax allowance. The same population segments rely on other incomes—wages or pensions, suggesting that self-employed individuals supplement their incomes elsewhere.

Table 2.

Self-Employed Workers: Annual Incomes, 2007

article image
Source: Socio-Economic Council (SER), Freelancers in pictures: A comprehensive vision of the self-employed, Opinion No 2010/04, October 15, 2010 (in Dutch), based on tax reports for 2007.

9. Pillar I provides the self-employed workers with an–above poverty level but relatively low income in retirement. It offers a pay-as-you-go tax-financed coverage to all residents from the age of 65. It provides a flat benefit based on the number of years of residency in the country between ages 15 and 65 (gradually being raised to 67 and subsequently indexed to life expectancy). Based on 2008 data, the combined benefits served to self-employed workers by Pillars I and II replace half of their working-life current income. In contrast, the replacement rate for wage earners reaches in average 65 percent. In the absence of Pillar III pensions, other voluntary savings, or Pillar II entitlements, self-employed workers would have to rely on Pillar I.

10. Self-employed workers have limited access to Pillar II pensions. Pillar II pensions are designed to cover wage earners and may cover self-employed persons only if they have contributed in the same sector before their transition to the self-employed status. Conditions for the admission of self-employed contractors vary fund by fund. Since 2011, new self-employed individuals may in principle remain in their Pillar II pension funds through voluntary contributions, but for a maximum of 10 years, provided they remain in the same sector. If they do, self-employed contractors need to contribute both the employer’s and employee’s part of the premiums, resulting in a steep increase in their direct contributions. They may also lose the benefits associated with pensions’ indexation on average sector wages rather than the CPI. The flat contribution rate on all cohorts makes those leaving their pension fund net subsidizers of older cohorts, and deprives them of the ability to receive a similar subsidy from younger cohorts as they age.

A03ufig4

Pillar I and II: Cumulated Replacement Rates by Participant's Age, 2012

(Percent)

Citation: IMF Staff Country Reports 2016, 046; 10.5089/9781475557695.002.A003

Sources: CBS and IMF staff calculations.

11. The Dutch pension system provides for Pillar III plans for the self employed or employees who would like to save more for retirement. However, self-employed individuals have made little use of Pillar III and other voluntary savings.8 Also, self-employed persons do not own significantly higher old-age savings than the median wage-earner population. About 40 percent of self-employed do not contribute to any additional pension plan and their savings declined during the financial crisis.9 In large part, low and more volatile incomes explain lower savings for retirement in comparison with those of wage earners.10

Self-employment arrangements affect the public accounts

12. The tax allowances for self-employed workers have substantial revenue costs reaching 0.7 percent of GDP in 2015 (Table 3). Given its high level, the entrepreneur’s allowance nearly eliminates the income tax for a large number of lower-income self-employed contractors. The combined SME profit exemption and starter’s allowance reduce taxes by 0.4 percent of GDP.

Table 3.

Estimated Fiscal Costs of the Tax Allowance to Self-Employed

article image
Sources: CBS, tax authorities, and IMF staff calculations.

Tax expenditure data (2015 Budget in the Miljoenennota bijlage 5).

Data for 2007 are taken from SER (2010), those for 2015 from the IBO ZZP (2015).

Data at end-June 2015.

13. Given their lower taxable incomes, the self-employed are more likely to qualify for support from social funds, which further contributes to deteriorate public accounts. The subsidies received by self-employed individuals are difficult to measure, due mainly to sparse information. However, their lower tax base makes self-employed workers eligible for a range of public services, in particular long-term and nursing care, and lower rents in the social housing sector. To the extent that their taxable income is low enough to qualify, they also receive housing subsidies, as well as child care and support. The authorities estimate total government expenditure for these benefits for the self employed contractors at about €220 million in 2015.11

D. Conclusions

14. The large and growing population of self-employed workers reflects deep changes in the Dutch labor market. Self employment has added flexibility in work arrangements and helped the Dutch economy adapt to globalization. Many of the self employed are middle- or higher-income professionals with adequate insurance and retirement arrangements. However, others are lower-income workers who are not enrolled in the insurance and pension protection schemes that apply to workers covered by standard labor contracts. They are therefore at higher risk for lower incomes in old age and disability.

15. There is a need to clarify the status of self-employed, in particular by tightening eligibility. At present, a single self-employment status serves to cover a wide variety of situations—self-employed with or without personnel, full-time self-employed and part-time self-employed; and activities based on real entrepreneurship or opportunistic decision. Not all of the self employed are in that status voluntarily. Many work under conditions that resemble regular employment relationships, and their increasing number has the potential to undercut the social safety net and to jeopardize the viability of the pension schemes. Therefore, tight enforcement of recent regulations aimed at screening involuntary self employment is a welcome development. Perhaps new criteria could also help (e.g., when hours and work location are set by the entity paying for the services, there would be a presumption that this is a regular employment relationship).

16. The lack of retirement benefits and sickness and disability insurance for the self employed should be addressed. The low levels of participation in Pillar II and Pillar III pension schemes and sickness and disability insurance exposes many of the self employed to low income in retirement and disability. This could be addressed through a collectively-managed Pillar III system with contributions roughly equivalent to average Pillar II plans for employees. The self employed could be enrolled by default but opt out of part of the pension contributions down to some minimum level. Sickness and disability insurance could also be made obligatory, and a collectively managed insurance pool could be used to control costs to beneficiaries. At the same time, the authorities should consider liberalizing the regulatory regime for employees and move toward more equal tax treatment between employees and the self-employed.

References

  • CBS, “Dynamiek op de Nederlandse Arbeidsmarkt—De Focus op Flexibilisering”, 2015 (in Dutch).

  • Donders P., Maarse H., “Pensions, Health Care, and Long-Term Care—The Netherlands”, Analytical Support on the Socio-Economic Impact of Social Protection Reforms, May 2011.

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  • Donders P., Pennings, F., “Pensions and Self-employed an International Comparative Study”, BMC and Utrecht University, March 2012

  • Dekker R., “Non-standard employment and mobility in the Netherlands”, MPRA, Delft University of Technology, Tilburg University, November 2007.

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  • Dietvorst G., A Universal Tax Framework for Pensions, CEPAR and CESifo Workshop on Taxation and Pensions, August 2015.

  • ELLN, “New Forms of Employment and EU Law, Seminar Report, 7th Annual Legal Seminar”, European Labour Law Network, November 2014.

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  • Hatfield I., “Self-Employment in Europe”, Report, Institute for Public Policy Research January 2015

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  • Ministry of Social Affairs and Labor [Conditions], “IBO ZZP [Self-Employed Without Personnel] Report on Self-Employed”, October 2015 (in Dutch), available from https://www.rijksoverheid.nl/documenten/rapporten/2015/10/02/eindrapport-ibo-zelfstandigen-zonder-personeel

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  • Mol-Verver S.J., “Self-Employed: A Search for Regulatory Alternatives (De Fiscale Behandeling Van De Zzp-Er: Een Zoektocht Naar Alternatieven)”, Amsterdam Law School Legal Studies Research Paper No. 2014-62, Amsterdam Centre for Tax Law Research Paper No. 2014-01 (in Dutch)

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  • OECD, “Ageing and Employment Policies: Netherlands, Working Better With Age”, 2014.

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1

Prepared by Michelle Hassine (EUR).

2

The cost of dismissal was reduced in July 2015 but remains proportional to number of years of service.

3

Data from Statistics Netherlands for 2013 (Table Medisch geschoolden; arbeidspositie, positie in de werkkring, naar beroep) and The Dutch Healthcare System, 2009 in The International Profile of Health Care Systems, Commonwealth Fund, June 2010.

5

All adults living permanently in the Netherlands are required to purchase their own health insurance. Lower-income individuals are eligible for a rebate or subsidy. However, there is an income-related surcharge to the basic premium that is paid by the employer, or in the case of a self-employed person, by the individual.

6

The minimum age to apply for Pillar I was reformed in 2009 and raised to 66 by 2018 and 67 by 2021. Early retirement under Pillar I is not allowed.

7

The new legislation also allows the tax authorities to check whether the commercial contract is creating an employer-employee relationship. On the Act on Deregulation Labor Relations, see https://zoek.officielebekendmakingen.nl/kst-34036-2.html (in Dutch).

11

There is no information as to how much of this amount is due to the deductions to taxable income solely for the self-employed population. Lower-income employees would also be eligible to receive these benefits based on taxable income.

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Cover IMF Staff Country Reports
Kingdom of the Netherlands—Netherlands: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2016: Issue 046
Publisher:
International Monetary Fund
ISBN:
9781475557695
ISSN:
1934-7685
Pages:
45
DOI:
https://doi.org/10.5089/9781475557695.002

Employment Indicators, 2014

(Percent)

Indicators of Employment Protection, 2013

(Scale from 0 (least protection) to 6 (most protection))

Self-Employed in the Netherlands

Employment Indicators, 2014

(Percent)

Pillar I and II: Cumulated Replacement Rates by Participant's Age, 2012

(Percent)