What is shadow  payroll?

Shadow payroll is an essential mechanism for employees who are sent abroad from the Netherlands or vice versa (employees who are sent to the Netherlands from abroad). Such postings often have implications for applicable social security and/or tax obligations. It is crucial to know where the employee is socially insured and in which country payroll taxes need to be paid. 

To avoid double taxation, the Netherlands has established treaties with many countries. These treaties outline how the taxes and social security contributions of both countries are coordinated. If social security contributions must be paid in one country and taxes in another, or if taxes must be paid in both countries, then a so-called shadow payroll comes into play. 

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Example of international payroll 

If an employee is on the payroll in the Netherlands and is socially insured there but also works in Germany, taxes may need to be paid in Germany as well. To determine the correct payments, a payroll in the Netherlands is required, but also one in Germany. 

Note that the concept of wages (what is considered as ‘wages’) is not 100% identical in all countries. For example, a company car in one country might lead to a completely different salary (additional benefit) than in another country, or the provision of meals might lead to different additional benefits from country to country. 

In international payroll administration, it is crucial to make the correct payments to the relevant tax authorities to avoid surprises later on. It is particularly inconvenient if it turns out later that taxes or social security contributions have been paid in the wrong country. First, payments will still need to be made in the correct country, and second, it is not always easy to recover incorrectly paid amounts from the other country. This can also lead to fines. 

Employers and employees can make arrangements about the tax burden when working abroad in three ways: 

1. Gross salary agreement: The difference in tax burden caused by working abroad is entirely the responsibility of the employee. This can result in either a positive or negative net salary for the employee. The employer does not compensate for a difference in tax burden. 

2. Tax equalization: The employer and employee agree that any difference in tax burden is the employer’s responsibility. The employer pays or benefits from the difference by calculating what the employee would have paid in their home country if they had not worked abroad. 

3. Benefit but no disadvantage (Tax protection): If working abroad results in a lower tax burden, the employee benefits from this. If additional taxes need to be paid, the employer bears the cost. 

How does shadow payroll work? 

A shadow payroll is performed in the background of the regular payroll. This means that the shadow payroll is only intended for calculating the correct withholdings and payments of payroll taxes in the other country. No actual payments are made to the employee from the shadow payroll. The withholdings are settled in the employee’s regular payroll or are the employer’s responsibility. 

Example of shadow payroll 

When an employee is sent from Germany to the Netherlands, the Dutch (shadow) payroll must first determine which wage elements are taxable in the Netherlands. After determining if the employee remains a fiscal resident of Germany, the number of days worked in the Netherlands during a specific month is determined using the travel calendar. Income is allocated to the Dutch working days. Based on this, the required withholdings and contributions in the Netherlands are determined. Note: there will generally be no payment to the employee based on the Dutch payslip, as they are already on the payroll in Germany and receive their regular salary from there. The aforementioned agreements between employer and employee about the division of the tax burden are also important here. 

In the payroll tax return, this employee is reported to the Tax Authorities. It is therefore important to have a citizen service number (BSN) to avoid the anonymous rate being applied to the taxable salary in the Netherlands. 

When is a shadow payroll necessary? 

• A shadow payroll may be necessary in the following situations: 

• An employee works in multiple countries. 

• An employee is on the payroll in one country but is posted to another country (this is particularly the case if they want to remain socially insured in the first country). 

Important documents for a shadow payroll: 

• Identification (ID or passport if the employee is from outside the EU) 

• The employment contract and the assignment letter 

• The days calendar with the days worked in different countries  

• The pay slips 

• The A1 statement or certificate of coverage. 

• The 30% decision arrangement (if applicable) 

Carrying out a schaduw payroll 

Carrying out a shadow payroll and requesting various documents that are necessary in this context is often complex and requires specific knowledge. We can support you with planning the deployment, requesting the various documents and executing the shadow payroll. Fill out the form below if you have any questions or requests.