Dutch / U.S. Income Tax Treaty

DUTCH/US INCOME TAX TREATY

(link to text)

 

The U.S. and the Netherlands have concluded a treaty to avoid double taxation and to prevent fiscal evasion with respect to taxes on income ('Treaty').

 

One of the most important matters that the Treaty covers is tax residency. The residency of an individual determines which country has the initial right of taxation. In addition, only an individual who is a resident of either the U.S. or the Netherlands may claim benefits deriving from the Treaty.

 

U.S. citizens and Greencard holders are considered to have a continued U.S. tax residency based on their citizenship, or the fact that they are a permanent resident alien based on their Greencard. However, if a U.S. citizen or Greencard holder lives in the Netherlands, the Dutch tax authorities will also consider them a resident of the Netherlands based on domicile. In this situation such an individual has a dual residency and both the Netherlands and the U.S. will claim full taxation on worldwide income resulting in double taxation of the same income in both countries. The Treaty clarifies the dual-residency issue by stating that the 'real' residency will be determined by a permanent home, personal and economic relations or habitual abode criteria (see article 4 of the Treaty).

 

Once 'real' residency has been determined, the Treaty then sets the rules for allocation of right of taxation between the country of 'real' residency and the other country in the consecutive Treaty articles.

 

The country that is awarded right of taxation of the income will be allowed to tax the income at its own tax rates. This may be more or less beneficial than having it taxed in the original country. For instance, the maximum U.S. federal tax rate on employment income is 39.6% but the maximum Dutch tax rate on income is 52%. If you live in the Netherlands and receive a bonus from your U.S. employer, the bonus may be subject to full Dutch taxation at the 52% tax rate.

 

There is no relif to account for the fact that the tax due on the bonus would have been lower if was taxed in the U.S.

The country that needs to acknowledge that the other country has right of taxation does this by providing the taxpayer a relief for avoidance of double taxation.

 

Below are some examples of certain types of income and which country has the right of taxation.

Type of income

Country allowed to tax the income

income from interests and dividends

country of individual's real residency

capital gains

country of individual's real residency unless sale of real property or material share in a company

business profits

country of the company's permanent establishment

income from real property

country in which the property is situated

independent personal services

country where the services were earned

employment income

country of individual's real residency. However, if he was present in the other country for more than 183 days in a tax year, or if the remuneration was paid by (or on behalf of) the employer from other country, then the other country has partial right of taxation.

pensions

country of individual's real residency; under some circumstances the lump sum distributions from retirement accounts or pensionfunds set up under specific tax deferment schemes are allowed to be taxed in the country where the income was earned.

 

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