What does the Extraterritorial Arrangement (ET) mean and what are the benefits?

What does the Extraterritorial Arrangement (ET Arrangement) involve and what are the benefits?

The regulation for extraterritorial costs, better known as the ET regulation, plays an important role within the temporary employment sector. This scheme allows staffing organizations to exchange the taxable wages of migrant workers for a tax-free reimbursement of extra costs, such as double housing costs and extra travel expenses. This can provide financial benefits to both the employer and the employee, but also involves a complex set of strict conditions and rules. Both the tax authorities and collective bargaining parties strictly monitor compliance with the ET scheme. Specific provisions are also included in the ABU and NBBU collective bargaining agreements. Below we discuss the ET regulation and the conditions that must be met in more detail.

What is the ET regulation?

The ET regulation is a regulation contained in the collective labor agreement for temporary workers and applies to migrant workers working in the Netherlands. There are both labor law and tax rules that must be met. The 'Covenant concluded between the Tax Authorities and the Temporary Employment Industry' (and renewed on June 6, 2024) gives a practical interpretation of the scheme.

The arrangement allows for tax-free reimbursement of additional costs arising from the employee's stay in the Netherlands - such as double housing and travel costs to and from the country of origin (the heimreise or home leave). The principle is that part of the taxable salary is converted into a tax-free reimbursement or provision in kind, resulting in a net gain for the employee. Employer expenses may also decrease when applying the ET plan.

What rules must be complied with?

It is important to realize that temporary employment agencies must comply with two categories of rules: the tax rules from the covenant between the Tax Office and the temporary employment industry, and the additional rules from the collective bargaining agreement for temporary employees. The covenant, updated in 2024 and based on the Payroll Tax Act, is the guideline for applying the ET regulation.

Among other things, it regulates the conditions for determining whether a temporary worker qualifies as an ET worker. To this end, the covenant offers two options: either the company meets the six conditions or the company can make this plausible using the free evidence doctrine. The six conditions for using the ET rule are:

1. Recruitment list: This contains the details of the recruited temporary workers who come to work in the Netherlands temporarily. Important data such as the full name, date of birth and foreign residential address of the temporary worker must be listed. Also included are the establishment details of both the recruiting office and the Dutch temporary agency. This document must be carefully kept in the (payroll) administration.
2. Temporary employee recruited in country of residence: The temporary employee must have been recruited in the same country as his home address or the surrounding region.
3. Employment contract requirements: The employment contract must state the foreign residential address, be governed by Dutch law and contain an agency clause or be concluded for a definite period. An employment contract for an indefinite period of time is also allowed, as long as it directly follows a previous employment contract with an agency clause or for a definite period of time and meets all other conditions.
4. Addendum exchange: There must be an addendum setting forth the exchange of taxable wages for the untaxed compensation or provision.
5. Health insurance offer requirement: The temporary employment agency must offer Dutch health insurance during the temp period.
6. Occupant list or transport registration: During the temporary employment period, the temporary employment agency must provide housing (resident list*) and/or transportation from and to the temporary worker's country of origin (transport registration**).

*The occupancy list registers the temporary workers for whom housing is arranged during the temporary employment period. This includes at least the full name, date of birth, BSN and foreign residential address of the temporary worker. This list must be carefully kept in the (payroll) records.

**The transport records document which temporary workers received transport (by bus, train or plane) during the agency period. This list includes at least the full name, date of birth, BSN and foreign residential address of the temporary worker. The transport records must be carefully kept in the (payroll) administration.

If these six conditions cannot be met, the covenant offers the possibility of using the "free evidence doctrine." This means that the temporary employment agency must use other evidence to make it plausible that the employee meets the criteria for the ET regulation. For example, the temporary employment agency may submit other documents or information that prove that the temporary worker meets the specified criteria. This offers more freedom and space to apply the ET regulation.

The rules from the CLA for Temporary Agency Workers

The CLA for Temporary Workers gives further details of the agreements concerning the exchange of employment conditions. Article 20 contains the specific rules for exchanging part of the remuneration for untaxed reimbursements or benefits in kind.

Exchange of remuneration

First of all, the agreement must clearly state which part of the remuneration will be exchanged and for which period. The exchanged pay must always remain above the legal minimum (hourly) wage and comply with all legal provisions.

Currently, as stated in Article 20 of the CLA, a maximum of 30% of pay (including for irregular working hours and overtime, compensatory hours and vacations in excess of the statutory requirements) can be exchanged. There is a limit of 81% of extraterritorial expenses reimbursed tax-free. This percentage does not apply to certain allowances and compensatory hours as stipulated in Article 19 of the CLA. As of January 1, 2025, this 81% limit will expire and a full exchange rate (100/100 exchange rate) will apply.

Administrative requirements

Strict administrative requirements also apply: the amount exchanged must be clearly visible on the pay slip and the value of exchanged vacation days in excess of the statutory entitlement must be established. Until the end of 2024, vacation days and other reservations do not apply to the exchanged salary (except for pension accrual), but from January 1, 2025, reservations must also be made on this amount.

Importantly, the exchanged pay does not affect the calculation of overtime and irregularity allowances. The calculation of these allowances is based on the salary before the exchange.

Maximum term of five years

The new version of the covenant states that the tax-free allowance for extraterritorial expenses may last a maximum of five years. This rule stems from the 2019 Tax Plan and has been included in the Payroll Tax Handbook every year since then.

However, an exception has been made for employees who work in the Netherlands for only one season (seasonal workers). A longer period than five years can be used for these employees. It is up to the temporary employment agency to assess whether there is a coherent period of residence or separate, separate periods of residence.

Conclusion

The ET regulation offers benefits to temporary employment agencies and migrant workers through tax-free reimbursement of extraterritorial expenses. At the same time, this regulation requires strict conditions to be met. By being well aware of the rules and the covenant, optimal advantage can be taken of the scheme.