Taxes for Expats – The US – Netherlands Tax Treaty
The US – Netherlands tax treaty was signed in 1992, with a protocol added in 2004 covering dividends, certain other types of income, and sharing tax information between the two countries.
The purpose of the treaty is to prevent double taxation for Americans living in the Netherlands and Dutch citizens living in the US, however the inclusion of a ‘Saving Clause’ in Article 24 (paragraph 1) of the treaty allows for the US to still tax its citizens living in the Netherlands as if the rest of the treaty didn’t exist, so the treaty doesn’t prevent American living in the Netherlands from having to file US taxes.
Furthermore, the savings clause states that former US citizens who gave up their US citizenship to avoid paying US taxes may still be taxed by the US for up to 10 years.
US taxes for expats in the Netherlands
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in the Netherlands, with worldwide income of over $12,000 (for 2018) a year, or just $400 of self-employment income, are required to file a US tax return each year.
The Netherlands on the other hand only requires Dutch residents to file Dutch taxes. An American typically qualifies as a Dutch tax resident if they have a residence in the Netherlands, or if they’ve maintained a temporary residence in the Netherlands for a year, or if they’ve been in the Netherlands for 60 months in the last 120 months.
This leaves many US expats living in the Netherlands having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Dutch taxes first (due by April 1st) .
US expats in the Netherlands may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not in their name).
“The Dutch strive for an egalitarian society and are known for their liberalism, welcoming religions and traditions from elsewhere. That said, the Netherlands certainly has a rich culture and history of its own” – Expat Arrivals
The United States – Netherlands Tax Treaty
The United States – Netherlands Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, as already mentioned, due to a Savings Clause, the benefits are limited for Americans expats living in the Netherlands. The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid, which normally depends on where the income arises.
The way the treaty allows US expats to avoid double taxation on their income taxed in the Netherlands is by allowing them to claim US tax credits when they file their US tax return to the same value as Dutch income taxes that they’ve already paid.
For income arising in the US, Americans in the Netherlands can claim Dutch tax credits against income US taxes paid to the IRS.
To claim US tax credits against Dutch taxes paid, expats must file form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in the Netherlands won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Netherlands Tax Treaty also allows the Dutch government to send US expats’ Dutch tax information directly to the IRS, as well as their Dutch bank and investment account details and balances.
Some Americans in the Netherlands, for example students, teachers, and some retired expats, may be able to claim a provision in the United States – Netherlands Tax Treaty (besides claiming US tax credits). Expats should consult a US expat tax specialise to check. Expats who canclaim a provision in the treaty can do so by filingIRS form 8833.
The US-the Netherlands Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in the Netherlands not to pay social security taxes to both the US and Dutch governments. Expats’ contributions made while in the Netherlands can be credited to either system. Which country they pay depends on how long they will be living in the Netherlands.
Expats in the Netherlands who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.