VAT When Hiring Abroad: A Guide for Employers

What is value added tax (VAT)?

Value added tax (VAT), called btw (belasting over de toegevoegde waarde) in Dutch, is a consumption tax charged on most goods and services. It is an indirect tax: businesses collect it and pass it on to the government, but the end consumer bears the cost, because the tax is aimed at final consumption. Almost every EU member state runs its own version, each with its own VAT rates, all built on a shared framework set by the European Union.

VAT is a major source of government revenue. Across the OECD, value added tax (VAT) raises roughly a fifth of total tax revenue on average, and in many EU countries its share of total tax revenue is higher still. Only income tax and social contributions usually make up a larger share of total tax revenue. With that much government revenue at stake, tax authorities enforce the VAT system closely.

How value added tax works along the supply chain

The name explains the idea. VAT is charged at each step of the supply chain on the added value created at that step. VAT-registered businesses charge VAT on their taxable sales of goods and services and deduct the VAT they have paid on their purchases. Only the end consumer, who cannot deduct anything, carries the full tax burden, which is why VAT is described as a tax on final consumption.

Take a simple product's production, from raw materials to the final consumer, at a 21% standard VAT rate:

The consumer pays a final price of €605: the €500 purchase price plus €105 of tax added. The tax authority receives the same €105 in total, collected in three parts as value is added during the production process. Each of the businesses in the chain pays over only the VAT on its own added value. The exact amount of tax paid in total matches what a single tax on final consumption would have raised.

Key differences between VAT and sales tax

If you know the American system, comparing VAT with sales tax helps. Like VAT, a sales tax is an indirect tax. Both are consumption taxes on goods and services, but value added tax and sales tax collect the money in very different ways.

• When the tax is charged. In a sales tax system, tax is charged once, at the final sale to the consumer. The retailer pays the sales tax it collected over to the state, and businesses earlier in the chain never deal with it. VAT is charged at every step of the supply chain.
• Who handles it. Sales tax mainly concerns retailers selling goods and services to consumers. VAT involves every VAT-registered business in the chain, including businesses that sell only to other businesses.
• Who sets it. There is no federal VAT in the United States. Sales tax rates are set by states and local governments under their own tax code. In the EU, VAT rates are national, within limits set by EU law.
• Avoiding tax on tax. A sales tax only works if purchases by businesses are exempt, otherwise tax is paid on tax. VAT solves this differently: businesses recover the VAT paid on their inputs.
• How the burden falls. Under both VAT and sales tax, the tax is meant to land on final consumption. Under VAT, other businesses in the chain recover what they paid, so it should not become a cost for them.

That last point is why VAT matters to you as an employer, even if you sell nothing to consumers. Under a sales tax you might assume tax only concerns retail customers. Under value added tax (VAT), any business that buys services, including HR and staffing services, is part of the system and has to handle the tax correctly.

Why VAT is usually not a real cost for businesses

For most businesses, VAT passes through rather than sticking. When your VAT-registered business buys a service for taxable activities, the VAT you pay (input tax, sometimes still called purchase tax) is offset against the VAT you charge on your own taxable sales (output tax). You settle the difference in your VAT return. If you charge more VAT than you have paid, you pay the difference to the tax authority. If you paid more VAT than you charged, you receive a VAT refund into your business account.

The tax is meant to fall on final consumption, not on the businesses along the way. This principle, that value added tax should be neutral for a business entitled to deduct it, explains why the cross-border rules look the way they do. You still pay VAT on your purchases, but when the treatment is right, the tax burden should not fall on you at all.

VAT rates: standard rate, reduced rate and zero rate

VAT is not a flat tax. Each country sets a standard rate and one or more reduced rates for selected goods and services, and some supplies carry a zero rate or are exempt altogether. VAT rates also differ widely between EU countries: the standard rate ranges from 17% in Luxembourg to 27% in Hungary.

A reduced rate lowers the tax rate on everyday consumer goods. In the Netherlands the reduced rate of 9% covers food products and public transport. In the UK, the reduced rate of 5% applies to items such as children's car seats.

Zero rated goods are still taxable supplies, but the tax rate is 0%. In the UK, children's clothing and most food are zero rated goods, so a shop selling them charges zero VAT yet can still reclaim the VAT it paid on its own costs. That is the main difference between the zero rate and an exemption. Businesses making VAT exempt supplies, such as social services or postage stamps under the universal postal service, do not charge VAT and generally cannot reclaim the VAT paid on their costs either.

For HR and staffing services, the standard rate almost always applies: 21% in the Netherlands and 20% in the UK. The zero rate and reduced rate rarely come into play. What matters far more is whether VAT applies at all, and in which country.

Three ways of hiring abroad

"Hiring abroad" rarely means a single kind of transaction. It can mean:

1. Employing someone directly, where you pay wages.
2. Buying a service from a recruiter, Employer of Record, payroll provider or sponsor partner, where you pay a fee that carries VAT.
3. Engaging a self-employed contractor abroad, where you pay their invoice.

On a cash-flow statement these look alike. For VAT purposes they are entirely different, and getting the category right is what matters most.

Wages versus services: the distinction that governs everything

Start with the rule that clears up most of the confusion: employment falls outside the scope of VAT. Salaries paid to employees carry no VAT. In VAT terms, an employee is not a taxable person supplying you a service. They work under your direction as part of your organisation. Salaries, holiday allowance, bonuses and employer social contributions are not VAT events. You do not charge VAT, you do not pay VAT and you have nothing to reclaim. Wages are subject to income tax, a direct tax, and payroll taxes instead, not to an indirect tax like VAT.

That is why businesses hiring internationals directly onto their own payroll never see VAT on the total cost of the person. That cost is wages, and wages sit outside the VAT system.

This changes as soon as a third party stands between you and the worker. A recruitment agency, payroll bureau, staffing company or partner acting as the formal employer supplies your business with a service. Services are firmly within the scope of VAT. Their fee is subject to VAT, even though the wages paid to the worker are not.

Two practical consequences catch out finance teams at many businesses:

• Look at what the invoice is actually for. When a provider employs someone on your behalf, the invoice may show a service fee separately from recharged wage costs. Or it may treat the whole engagement as one taxable service. The way the invoice is built, not your sense that you are "just paying a salary", decides how much VAT applies.
• VAT on a genuine business service is usually recoverable. If your business is VAT-registered and uses the service for taxable activities, you reclaim it as input tax or receive it as a VAT refund. For most VAT-registered businesses, it is a cash-flow and timing matter, not a permanent addition to the tax burden.

Keep this framework in mind for the cross-border rules: wages are outside VAT, services are inside it, and whether VAT is a real cost depends on your right to deduct it.

How VAT applies to cross-border HR services

This is where hiring abroad gets its characteristic complication. When you buy an HR or staffing service from a provider in another country, which country's VAT applies? And who has to pay VAT to the authorities?

The place-of-supply rule for B2B services

For services sold business-to-business, the EU has a general rule: the service is taxed where the customer is established, not where the supplier is. Most people assume the opposite. If a Dutch staffing provider supplies a business customer in Germany, the service is treated as supplied in Germany and German VAT applies.

Recruitment, payroll administration, Employer of Record fees and sponsorship support generally fall under this general rule. Some services, such as those connected to real estate, have their own special rules, but standard HR and staffing services usually do not. In practice, VAT on a cross-border B2B HR service belongs to the customer's country.

Does the Dutch supplier then have to register for VAT in Germany and charge German VAT? Usually not, thanks to the reverse charge.

The reverse charge mechanism

For most cross-border B2B services within the EU, the reverse charge applies. The supplier invoices without VAT and states that the reverse charge applies. The customer then accounts for the VAT in its own country. In its VAT return, it declares the VAT due at the local rate and, if entitled, deducts the same amount in the same return.

For businesses that can fully recover VAT, the two entries cancel out. The net cash effect is zero, and so is the tax burden. The reverse charge is set out in Articles 44 and 196 of the EU VAT Directive. It keeps value added tax (VAT) neutral for VAT-registered businesses trading across borders, without forcing suppliers to register in every country where they have customers.

So a compliant invoice from an EU HR provider with no VAT and a note such as "VAT reverse-charged" is neither a mistake nor a favour. It means reporting the VAT is now your job. Forgetting to record it is one of the most common cross-border VAT errors, because no VAT is paid out of your account to remind you. For fully recoverable businesses, the reverse charge does not mean you pay more VAT. It only changes who reports it.

A few limits to keep in mind:

• B2B only. The reverse charge under the general EU rule applies between businesses, not to consumers. You show you are a VAT-registered business with a valid VAT identification number.
• Non-EU suppliers. Services bought from outside the EU, for example from a UK or US provider, are often also reverse-charged in your country. You may still need to account for VAT locally.
• Domestic supplies. A Dutch provider supplying a Dutch customer will charge VAT at the standard rate of 21%, which you reclaim if entitled. The reverse charge is a cross-border feature.

Why validating a VAT number matters

Because the reverse charge depends on the customer being a VAT-registered business, suppliers should check the customer's VAT identification number before invoicing without VAT. In the EU, this is done through VIES(the VAT Information Exchange System), the European Commission's official tool for checking that a VAT number is valid and active.

This works in both directions. As a buyer, giving your supplier a valid VAT ID is what allows correct reverse-charge treatment. If it cannot be validated, a careful supplier may charge local VAT instead, which you then have to reclaim. As a supplier, checking the VAT ID protects you. If you apply the reverse charge to a customer who turns out not to be a valid business, the unpaid VAT can fall back on you.

Invoicing international contractors

Employees are the simple case: wages, no VAT. Contractors are more involved, because self-employed contractors are businesses in their own right, usually registered for VAT.

First, establish whether the person really is an independent contractor or is in fact an employee. That question affects much more than VAT, including payroll tax, income tax, social security and employment law. Tax authorities across Europe, and certainly in the Netherlands, are looking closely at misclassification. Settle it before you think about the invoice. If the relationship is really employment, wages are outside VAT, whatever the paperwork says.

For a genuine contractor, the VAT treatment depends on where they are established.

Same country. A VAT-registered contractor will charge VAT at the local rate, which you reclaim if entitled. Smaller businesses may use a small-business scheme instead. In the Netherlands this is the kleineondernemersregeling (KOR), available where VAT taxable turnover stays under €20,000 a year. Their invoice then carries no VAT and should say so. Nothing has gone wrong, and there is nothing to reclaim.

Elsewhere in the EU. This is the classic cross-border B2B service. The place of supply is your country and the reverse charge normally applies. The contractor invoices without VAT and notes the reverse charge. You account for the VAT at your local rate and deduct it in the same return where entitled. For this to work, the invoice needs both your VAT identification number and theirs.

Outside the EU. A contractor in, say, the UK, the US or India will usually invoice without EU VAT. You then generally account for the VAT in your own country under the reverse charge. The details depend on national rules, but the principle holds: buying a service from outside the EU does not remove VAT from your return.

What a compliant reverse-charge invoice contains

• the contractor's name, address and VAT identification number;
• your business's name, address and VAT identification number;
• a clear description of the service, the date (the VAT tax point) and the amount;
• an explicit statement that the reverse charge applies ("VAT reverse-charged" or btw verlegd), with no VAT charged.

If a cross-border contractor adds local VAT without explanation, leaves out your VAT ID, or does not mention the reverse charge, query the invoice before it is paid. Incorrectly charged VAT is often slow and difficult to recover. Having paid it also does not cancel any obligation you have to account for VAT yourself.

Staying compliant across several jurisdictions

The hardest part of cross-border hiring is rarely a single transaction. More than one tax authority can have a legitimate claim on the same arrangement, each with its own reporting format and deadlines.

Know when you need to register somewhere new. Receiving cross-border services under the reverse charge does not usually require businesses to register in the supplier's country. That is the point of the mechanism. Other activities can, though: making taxable sales in another country where no reverse charge is available, holding stock there, or crossing a local VAT threshold. In the UK, for example, businesses must register with His Majesty's Revenue and Customs (HMRC) once their VAT taxable turnover exceeds the UK government's threshold, which has been £90,000 since April 2024. If your own business starts supplying HR or staffing services across borders, the same analysis applies in reverse. The One Stop Shop (OSS) simplifies reporting for some cross-border supplies, but it is mainly designed for sales to consumers. Businesses should check before assuming it covers staffing services.

Report what the reverse charge makes yours. VAT you account for on services received from abroad must appear in your VAT return, even though no VAT changed hands. Within the EU, suppliers of cross-border B2B services also file periodic recapitulative statements (the EC Sales List, or opgaaf ICP in the Netherlands). UK reporting works differently since Brexit. His Majesty's Revenue and Customs requires each UK report, the VAT return, to be filed through Making Tax Digital, and the UK government no longer uses EC Sales Lists for services. Skipping any of these because "there was no VAT to pay" is the most common cross-border mistake.

Keep records that will survive an audit. Tax authorities expect you to produce invoices, VAT ID checks, contracts and the reasoning behind each treatment for several years. In the Netherlands, the tax code sets a standard retention period of seven years, or ten years for records relating to real estate. For cross-border arrangements, keep proof that the other party was a valid VAT-registered business (your VIES check) as well as the invoice.

Common traps

• Treating a reverse-charge invoice as needing no action and never recording the VAT.
• Assuming an Employer of Record or sponsor fee is "just wages" and missing the VAT on the service element, along with the VAT refund.
• VAT paid to a foreign contractor who charged it incorrectly, which is often hard to get back.
• Classifying an employee as a contractor and ending up with VAT and income tax problems on top of an employment law issue.
• Forgetting that your right to deduct depends on using the service for taxable activities. If part of your business makes VAT exempt supplies, recovery may be limited and some VAT becomes a real part of your tax burden.

Rates, thresholds and national rules change, and the right treatment can depend on details this guide cannot cover. Use it as a map of how the VAT system works, and confirm the specifics with a qualified tax adviser before you commit.

How Hilfort helps

At Hilfort, we want hiring international talent in the Netherlands to be as simple as possible. That includes the tax and invoicing side, not only the immigration paperwork.

When Hilfort acts as the recognised sponsor and formal employer for your hire, you deal with one Dutch counterparty and receive one correctly structured invoice. You no longer have to piece together wages, service fees and cross-border VAT from several sources. Because we combine legal, tax and payroll expertise, we set up the arrangement so the VAT treatment is right from the first invoice. We explain exactly which parts are a VAT-relevant service fee and which are not, and we make sure the documentation holds up if the tax authority asks.

For businesses working with people in several countries, this is often where the real value lies. You have one contact who understands how the immigration route, the employment relationship and the VAT treatment fit together, so a decision in one area does not cause a problem in another.

Planning to hire or engage talent across borders? We are happy to walk through your setup and make sure the invoicing, VAT, residence and payroll are handled properly from the start.

FAQ

Do I pay VAT on a foreign employee's salary?

No. Employment falls outside the scope of value added tax. Wages, holiday allowance and employer social contributions carry no VAT, whether the employee is Dutch or from abroad. They are subject to income tax and social contributions instead. VAT only comes in when a third party supplies a service, such as a recruiter, payroll provider, Employer of Record or sponsor partner, because a service is a taxable supply on which VAT is paid.

Is value added tax the same as sales tax?

Not quite. Both are a consumption tax charged on goods and services, and both aim to tax final consumption. But sales tax is charged once, at the final sale to the consumer. In a sales tax system, only retailers collect it. Value added tax (VAT) is an indirect tax collected in stages across the whole supply chain. Each VAT-registered business charges VAT on its taxable sales and reclaims it on its purchases. That brings businesses at every step into the system, including employers buying HR services.

What does "reverse charge" on an invoice mean, and do I owe anything?

It means the supplier has not charged VAT and you are now responsible for accounting for it. For most cross-border B2B services in the EU, you declare the VAT in your own VAT return at your local rate and, if entitled, deduct the same amount in the same return. For businesses that can fully recover VAT, the net effect and the tax burden are usually zero. No VAT on the invoice does not mean nothing to report.

A contractor in another EU country invoiced me without VAT. Is that correct?

Usually, yes, for a genuine business-to-business service. The service is taxable in your country and the reverse charge applies, so the contractor invoices without value added tax and you account for it. Check that the invoice shows both VAT identification numbers and states that the reverse charge applies. If it adds foreign VAT without explanation or leaves out your details, query it before it is paid.

Can I reclaim the VAT on recruitment or staffing services?

Generally, yes, if your business is VAT-registered and uses the service for taxable activities. The VAT paid is then input tax you can deduct or receive as a VAT refund, which makes it a cash-flow item rather than a real cost. If part of your business makes VAT exempt supplies, your right to deduct may be limited and some VAT becomes a real cost. Confirm your recovery position for your own activities.

How much VAT will I pay on a service invoice in the Netherlands?

For a domestic service, VAT at the standard rate of 21% is paid on top of the fee, which you reclaim if entitled. For a cross-border B2B service under the reverse charge, no VAT appears on the invoice. You account for the same 21% in your own return and deduct it there. In both cases, how much VAT you actually bear depends on your right to recover it, not on the headline tax rate.

What is the VAT difference between hiring an employee and engaging a contractor?

An employee's wages are outside value added tax. A self-employed contractor is a business, so their invoice is a taxable supply. Domestically they charge VAT at the local rate, unless they use a small-business scheme. Across borders, the reverse charge usually applies. Make sure the classification itself is right first, because misclassifying an employee causes problems well beyond VAT, including payroll tax and income tax.

How do I check whether a VAT ID is valid?

Within the EU, use VIES, the official VAT Information Exchange System, to confirm that a VAT identification number is valid and active. Reverse-charge treatment depends on the other party being a genuine VAT-registered business. Keep a record of the check, because a tax authority may ask to see it.

Do I have to register for VAT in another country if I hire there?

Not automatically. Receiving cross-border services under the reverse charge does not usually require registration in the supplier's country. Registration obligations tend to come from other activities, such as taxable sales in another country without a reverse charge, holding stock there, or crossing a local VAT threshold. Confirm the position for your own setup.

Which goods and services are subject to VAT?

Most goods and services that businesses sell are subject to VAT at the standard rate. Some goods and services qualify for a reduced rate or the zero rate, such as public transport in the Netherlands or children's clothing in the UK. Other goods and services are exempt, including healthcare, education and social services. HR, recruitment and payroll services are standard-rated in almost all EU countries.

Does the United States have VAT?

No. There is no federal VAT in the United States. Instead, most states charge a sales tax on goods and services at the point of sale, under their own tax code. Businesses used to US sales tax should not assume the same logic applies in Europe: under VAT, businesses that only buy services from other businesses still have obligations, and the VAT they have paid is normally recovered rather than absorbed.

How long do I need to keep VAT records?

In the Netherlands, seven years as standard and ten years for records relating to real estate. For cross-border arrangements, keep the VAT ID checks and the reasoning behind your treatment as well as the invoices. Other countries set their own periods, so when several apply, follow the longest.

Is this tax advice?

No. This guide explains how value added tax generally works in cross-border hiring so you know what to look for. VAT rates, thresholds and national rules change, and the right treatment can depend on your specific situation. Confirm the details with a qualified tax adviser, or let Hilfort set the arrangement up correctly from the start.