Residency and taxes: The ultimate guide for US expats in the Netherlands
The Netherlands is one of the friendliest countries in the world for expats and foreign workers, but there are still some tricky things to be aware of. In this article, Greenback Expat Tax Services explains a few key tax issues that US expats face, as well as how to file your US federal tax return from a foreign country.
Taxes in Netherlands
The Netherlands is a member of the European Union (EU) and follows many of the same tax laws as other EU countries. This means that US expats living in the Netherlands are subject to Dutch taxes on most types of income, including wages, pensions, social security benefits and interest earned on investments.
The country has a progressive tax rate, meaning that your income will be taxed at different rates depending on how much money you earn. The Netherlands is one of the few countries in the world to tax residents on worldwide income. This means that even if you don't work here and make all your money elsewhere, if you are a tax resident, you still have to state your foreign income on your Dutch tax return and potentially pay taxes on it.
Expat tax dilemma
The expat tax dilemma is a situation where an individual is required to pay taxes in two different countries. This may happen because they have lived abroad for long periods of time or because they have made multiple moves across national borders.
The first step towards understanding your obligations as an expatriate is understanding tax residency, namely which state claims jurisdiction over your income. In most cases, but not all, this will be decided by where you reside from one year to the next.
If you move around frequently enough, or if you travel back and forth between two countries regularly, then things can get tricky. You would be liable under both sets of laws at the same time. US Expats living overseas are required to file a US tax return regardless of where they lived.
First, it’s essential to note that tax residency is not the same as tax domicile. In fact, they are very different concepts and are not related.
Tax residency is a legal concept determining where you will be taxed on your worldwide income. Tax residency looks at where you are living for each tax year. For instance, if you move to another country, this is where your tax residency will be.
Tax domicile, on the other hand, is simply a residence that has been permanently established by an individual who intends to remain at this location indefinitely. This is more of a long-term concept and is determined by where you consider your home to be throughout your life.
In other words, someone’s tax residency can change, but their tax domicile cannot - you can only have one at any given time in your life! This distinction matters because both factors will determine how much income tax you have to pay every year when living abroad in the Netherlands.
Tax planning for expats in the Netherlands
Tax planning is a long-term investment. The more you plan for the future, the more money you are likely to save. In addition to helping you plan for retirement; tax planning can help your family and business thrive in the Netherlands.
As an expat in the Netherlands, you are subject to Dutch tax law, which is based on residency, not citizenship. You are subject to Dutch tax law if you spend more than 183 days in the Netherlands in any given year. If this is the case, you must file an annual income report.
The good news is that the tax system here is quite streamlined, and there are no state or local taxes on personal income. You may also be liable if your business is registered in the Netherlands; you may be taxed on your company’s profits and the value of your assets.
US-Netherlands Tax Treaty
A tax treaty is an agreement made between two countries to avoid double taxation - which can arise when the same income is taxed simultaneously by both countries. The treaty generally sets out how much tax will be paid in each country, and it may provide relief from taxation in one country if you are a resident of the other.
If you're an American who becomes a Dutch resident or citizen and earns money while living in the Netherlands, you'll still need to file US tax returns each year. You must pay taxes on your Dutch earnings in the US, either directly or through your employer's payroll system.
However, under the US-Netherlands tax treaty, the amount of tax due in each nation is reduced by up to 95 percent of what would otherwise have been owed.
This, in addition to other deductions expats can make use of, means that US expats living in the Netherlands generally don't end up owing US taxes, but of course this depends on your individual circumstances.
In addition, if you have both US and Dutch citizenship, you can choose which country's tax laws apply to your worldwide income. If you're also earning income from property, such as rent payments from tenants living in your home abroad, that too is subject to taxation. However, thanks to the tax treaties, certain types of non-business income earned abroad may qualify for exemption under certain conditions.
Worldwide income is your income from all sources outside of the Netherlands. You are taxed on this worldwide income by both the Netherlands and the country where said income was earned.
If you earn money from a source outside of the Netherlands, it may be subject to taxes in both places. This can lead to double taxation, which is when a person is taxed on their income more than once. However, the Netherlands has tax treaties with most countries that reduce or eliminate double taxation.
To avoid paying taxes twice, you must report all your worldwide income annually to the Dutch Tax Authorities (Belastingdienst) regardless of whether it was already taxed abroad. Forms INT1, INT2 and INT3 will help determine which forms need to be filed if you have worldwide income.
Employment Income Exemption
The Employment Income Exemption is an essential piece of Dutch tax law. If you're eligible to claim this exemption, you don’t need to pay taxes on your employment income. It's not only a great way to save money, but it's also one of the most straightforward ways for expats to reduce their tax burden.
You are eligible for an income exemption from the Belastingdienst if either of the following applies to you:
- You live abroad and are employed in the Netherlands, and only have income from wages in the Netherlands
- You are an employee recruited or sent from another country to work in the Netherlands
If you are a Dutch employee, you can claim the employment income exemption by submitting an R-9 form when you fill out your tax return. The R-9 form is available on the Belastingdienst website. The amount of income that is exempt depends on how long you have been living in the Netherlands; the longer you reside in the country, the higher your tax-free allowance will be.
Hopefully, we've helped you understand the residency and tax implications of living in the Netherlands.
Got more questions about taxes and residency? Contact Greenback Expat Tax Services for more advice on your US tax obligations!