Cutting back a tax break for foreign workers whose skills are not available in the Netherlands will lead to 15% to 20% fewer highly-skilled migrants, according to an analysis for the finance ministry.

The tax break, known as the 30% ruling, originally gave a selected group almost a third of their income free of Dutch tax for a period of five years, the typical length of stay.

An independent review by economic research bureau SEO has now found that the 30% ruling was both effective and efficient, and contributed to the Dutch economy. A cut, passed by government last year, will lead to a drop in highly-skilled migrants “and have a negative effect on the business climate,” it found.

It confirms concerns from businesses and experts raised last year that they will soon be unable to fill jobs and that the largely symbolic change to the allowance will actually do the Netherlands economic damage.

Economic gain: €128.5 million yearly

Since this year, the tax break has moved to a sliding scale, with 20 months at a 30% tax-free allowance, 20 months at 20% and 20 months at 10%. But this is dramatically more costly to administer than a flat rate, the report found. “A higher percentage attracts a larger number of highly skilled migrants, improving the business climate and making a positive contribution to the economy,” it found.

Scrapping the tax break entirely would lead to 40% fewer knowledge migrants. Cutting it back will negatively impact all kinds of Dutch businesses from start-ups to SMEs and major firms. “The positive effect of the scheme on the influx of highly skilled migrants yields more in budgetary terms than the scheme costs because all users pay less tax,” the SEO report added.

The scheme brings in a net tax revenue averaging €128.5 million a year, due to jobs in the Netherlands that would not otherwise be based here.

Although the researchers did not calculate the indirect positive economic effects of the tax break, they said they included more VAT revenue, more jobs due to a greater demand for services and higher salaries for other employees “as a result of knowledge spillovers”. It said: “The labour input also contributes to solving social challenges.”

Who has the tax break?

In 2022, there were around 110,000 people in the Netherlands (about 0.6% of the population) with the tax break – fulfilling specialist skill gaps and a number of other requirements. They are more likely to be highly-educated, under 35, childless and men, have a higher than average income and work full time.

A questionnaire filled in by around 7,000 people with the ruling found three in 10 said they were spending more on living costs in the Netherlands.

Many chose the Netherlands over other countries because of the perk and when it was reduced from eight to five years in 2019, their numbers dropped by 19.6%.

30% ruling does not significantly raise house prices

The report also debunks the idea that “people with the 30% ruling” are responsible for significantly higher rents in places like Amsterdam, as alleged during the election campaign by NSC leader Pieter Omtzigt. “Compared to the whole population, there is virtually no price effect of economic significance,” said the report.

“In some areas such as Amsterdam, there may be an effect on rent and purchase prices, which is very modest compared with the total price increase during the evaluation period.”

The effect of the 30% ruling on house prices in Amsterdam in 2022 was, it calculated, to increase rental prices by 0.9% and house prices by 1.8%. This was roughly a tenth of the total price inflation of around 11% that year from other causes, such as domestic tax incentives and landlord price gouging.