Amsterdam is an attractive option for financial services organisations looking to enter the EU market. The headline 20% cap on employee bonuses is often seen as a hindrance, but there are a number of exceptions, or alternatives, that can mitigate or avoid the impact of the cap.
As a number of leading cities in the EU look to attract financial services organisations, whether from the UK as a result of Brexit, from the US, or elsewhere, Amsterdam is often cited as a particularly attractive location. After all, as one executive noted in a recent Financial Times article making this point: “The tulip market was in some ways the beginning of the derivatives market“.
As a Dutch citizen, living in Amsterdam and working as an employment partner in an international law firm, I can only underline these statements about the attractive Dutch business climate. And there is more: Recently, the new installed cabinet announced (more or less) the abolishment of Dutch dividend withholding tax and a decrease of base line corporate tax rates which would make Holland even more attractive for overseas businesses looking for EU access.
On the other hand, since 2015 there has been a lot of discussion about the 20% bonus cap for executives and other employees working for a financial undertaking. Some said that the bonus cap would be detrimental to the Dutch business climate. Others said the opposite. One thing is certain: the new cabinet has no plans, at least not publicly, to amend the bonus cap in the near future.
So, how does the bonus cap work?
The 20% bonus cap
The 20% bonus cap effectively means that a financial undertaking with registered seat in the Netherlands (such as banks, insurance companies and investment institutions) may pay a bonus to persons working under its responsibility (in most cases: employees), provided that the bonus is capped at 20% of the person’s annual base salary. Any bonus exceeding this cap is deemed null and void.
Other European countries have bonus caps too, but these tend to be in the range of 100% to 200% of the annual base salary. There is also an EU-wide cap, under the European Capital Requirements Directive 2013/36/EU (CRD IV), although this has a different scope. The Dutch 20% bonus cap applies to all persons working under the responsibility of a financial undertaking (including for example insurance companies) whereas the CRD IV bonus caps apply to so called ‘identified staff’ (which is a smaller group than all persons working under the responsibility of) working for banks and investment institutions. Insurance companies are out of scope for the CRD IV.
The 20% bonus cap also applies not only to all persons working under the responsibility of a financial undertaking with registered seat in the Netherlands, but also to persons working under the responsibility of a financial undertaking (or its Dutch branch) that is obliged to have a license in the Netherlands, but with its registered seat in another country. Under certain conditions, the 20% bonus cap may even apply to the entire European group of the financial undertaking with seat in the Netherlands.
With these scope extensions, the question is: What exceptions apply?
The 20% bonus cap: exceptions
There are a number of exceptions to the 20% bonus cap:
- For branches of financial undertakings with seat in another country that fall under the scope of CRD IV;
- For international holdings;
- For persons that work mainly outside of the Netherlands; and
- For persons whose remuneration is not based on a collective labour agreement, provided that the bonus for the group of persons on average does not exceed 20%.
Let’s have a closer look at these exceptions:
- CRD IV branch
The bonus cap does not apply to Dutch branches of financial undertakings with a registered seat outside the Netherlands that are covered by the remuneration rules of CRD IV. This exception is important for banks and investment undertakings that are under supervision in other EU Member States and, on the basis of a resulting European passport, offer their products and services in the Netherlands.
If a branch in the Netherlands does not fall under the remuneration rules of CRD IV, for example, because the financial undertaking is located outside the EU (for example the US), the 20% bonus cap applies in principle.
- International holdings
A parent company of an international group may be able to apply a 100% (or 200%, with shareholders’ approval) bonus cap instead of the 20% bonus cap if the following conditions are cumulatively fulfilled:
(a) at least 75% of the total number of employees under the responsibility of the entire group;
(b) during the last five years;
(c) have worked outside the Netherlands for at least three – not necessarily continuous – years;
(d) for at least 50% of their worked time.
Until recently, this exception was not of interest to foreign financial institutions. The conditions were interpreted on the basis of parliamentary history that only Aegon was eligible. The exception was therefore known as the ‘Aegon exemption’. On March 3, 2017, however, the DNB (De Nederlandsche Bank – the Dutch central bank) explained these terms so widely that this exception could be a possible solution for financial institutions in London or the US.
The Dutch parent company does not have to be the ultimate parent company, as long as it is the head of the European group. This means that the group activities can largely stay in London (post-Brexit) or in the US and the foreign entity can manage the entities outside the EEA without Dutch bonus restrictions.
- Activities outside the Netherlands
A higher 100% bonus cap may be applied if the person concerned has worked more than 50% of the total hours in another state. This maximum may be increased to 200% if: (i) the shareholders, owners or members of the financial undertaking have approved; and (ii) the person carries out work in a state which is not part of the EU. This exception makes it possible for Dutch financial companies to allocate 200% variable remuneration to US employees (or employees in London after Brexit).
- Bonus is on average 20%
For individuals whose remuneration does not derive exclusively from a collective labour agreement, an individual bonus cap of 100% applies, provided that the average of the proportions between the fixed and variable rewards of all persons who are mainly employed in the Netherlands and whose remuneration does not consist exclusively from a collective labour agreement is not more than 20%.
This exception is wider than it seems. The calculation involves adding the bonus per person and dividing by the total number of persons. The calculation method does not take into account the amount of variable salary in money. By way of illustration: if no collective labour agreement applies, the CEO’s bonus percentage will be taken into account in the same way as the bonus rate of the receptionist.
The Netherlands has an attractive business climate for US financial undertakings, but the Dutch 20% bonus cap remains an issue. The four exceptions outlined above could be an answer for some, but it seems fair to say that these exceptions seem more attractive to international financial conglomerates than for smaller-scale Fintech companies and financial companies that involve a lower systemic risk. This is because:
- Those types of undertakings are often not large enough to benefit from the holding exemption. The holding exemption would be more interesting for large banks or financial conglomerates with headquarters outside the EU that are willing to have a European holding company in the Netherlands.
- CRD IV will often not apply (in which case exception 1 above – the “Dutch branch” exception – is not a solution); and
- The “on-average” exception (exception 4) for non-collective labour agreement employees is likely to have less effect, as the workforce will be smaller.
Where the 20% cap does apply, increasing fixed salary for these types of companies is often not an option as it pushes up the fixed cost base – variable rewards may be preferred as a way to promote innovation and attract and retain technological talent.
Of course, for fast-growing companies, one option that we often advise on which avoids the cap altogether is to grant stock options to employees, so that they can benefit from future revenue growth.
If your financial undertaking is considering setting up in the Netherlands, please contact one of our experts in the Netherlands.