Litigation costs: no negative wages

The District Court of The Hague has ruled that a litigation cost award paid by an employee to his former employer does not qualify as negative wages for Dutch income tax purposes.

The case concerned an employee who was dismissed on the spot in 2012 and was subsequently ordered in 2017 to pay various damages and a procedural cost award of € 16,487 to his former employer. In his 2020 personal income tax return, the employee claimed the grossed-up equivalent of that amount, € 34,350, as negative wages. The Tax Inspector rejected the claim and the court upheld that position.

The court held that no causal link existed between the procedural cost award and the former employment relationship. The award exclusively compensated the employer's litigation costs and did not find its cause wholly and directly in the employment. It therefore fell outside the wage sphere.

The ruling is consistent with established case law. Negative wages require a direct corrective link to the employment relationship: for instance, repayments of wages received in excess, or compensation paid for breach of obligations arising from the employment contract itself. A cost award that is accessory to civil litigation does not meet that threshold, even where the original dispute was employment-related.

Action point: employees or employers who face post-employment litigation should not assume that payments made pursuant to a court order, including cost awards, automatically qualify as negative wages. Timing of the payment, the nature of the obligation and the directness of the link to the former employment all need to be assessed before any tax claim is made.

For more information about the tax treatment of post-employment payments, please contact your Nassau specialist at info@nassau.tax.