Given the friendly nature of the Netherlands and the people there, it’s hardly a surprise so many US expats head over. That being said, despite the Netherlands being a notably good place to work and live, there are still some potential issues that expats need to make a record of.
Throughout this article, tax advisor Arif Patel, based in Preston, UK explains what some of the major problems with expatriate taxes in the Netherlands are and how you can file your US federal tax return in light of them.
Paying Taxes in the Netherlands
The Netherlands is a European Union member, meaning that it follows the same aspects of tax law that other countries within the EU do. Analysis of these laws show that if you are a US expat living within the Netherlands then you would have to pay, from the date you started working there, taxes on the majority of your income. This includes the likes of pensions, wages, interest that has been earned on investments and social security benefits.
The Netherlands is ideally positioned for people on lower wages given the tax rate is progressive. This means individuals are taxed and paying tax depending on the amount of money that they earn.
Interestingly, the Netherlands is also one of the only countries in the world where residents are taxed for a worldwide income. Essentially, even if a tax resident lives elsewhere and makes the majority of their money elsewhere such as the UK, they still need to complete a Dutch tax return where they confirm their foreign income and potentially pay taxes on it.
Expatriate Tax Matters in the Netherlands
Arif Patel has written on previous occasions that one of the major expatriate tax matters that people could face is the expat tax dilemma. This occurs when an individual has lived abroad for a long time and has moved to multiple different countries.
For instance, say for the year ahead an expat wanted to live in the UK, the Netherlands and Australia, they might be liable to pay accurate taxes that represent the money they made in each of these countries. It’s important expats research and have an understanding about what their obligations are.
To better understand your obligations as an expat and to practice working in other countries, you should better understand tax residency, specifically, what state that you have been or are in association with claims jurisdiction over your income. Arif Patel has researched this topic at length and it appears that in the majority (but not all) cases, it will be decided by where you reside as a member from one year to the next.
If you move from one country to another frequently then this is where tax matters can get tricky and you might need specialist assistance such as that of Arif Patel. This is because you would be liable for both sets of laws at the same time. You can always apply for an extension on filing tax returns if you’re confused and reach out to taxation technicians who can offer specialist assistance as well.
Another important aspect to consider is the 30% ruling for which certain expatriate employees may be eligible. It allows employers to pay 30% of the employee’s salary as a tax-free allowance, effectively reducing the amount of income tax the employee pays. To qualify, the employee must have specific expertise that is scarce in the Dutch labour market and must have been recruited from abroad. The ruling is intended to compensate for the extra costs of living abroad, such as travel expenses and housing. It typically applies for a maximum of 5 years, though this duration has changed over time. This tax advantage aims to make the Netherlands more attractive for highly skilled international workers.
Tax Residency Explained by Arif Patel
It’s important to note that a tax residency is not the same as a tax domicile. They are different concepts which have no association with one another.
Tax residency applies more to worldwide income and expatriate taxes. It is a legal concept where the location for which you will be taxed on your worldwide income is decided. It looks at where you live for each tax year. If you move, say from the UK to the Netherlands, then the Netherlands is where your tax residency will be not the UK.
A tax domicile is different, as this is a residence that someone has decided will be their permanent location indefinitely. Anyone has the ability to change their tax domicile, but they should understand this is a long term commitment as it will be where you consider to be your home for the rest of your life.
To put it plainly, a tax residency changes much easier than a tax domicile does. You can only have association with one tax domicile at any given time throughout your life.
“The distinction between the two is important as if you live in the Netherlands as an expat, your expatriate taxes will be impacted by them.” Says Arif Patel.
Should You Plan for Tax?
It’s important you work with a tax advisor such as Arif Patel if you plan on being in the Netherlands for more than 183 days. Expatriate tax matters in the Netherlands are determined on residency, not citizenship, so if you reside in the country for any more than 183 days, you are subject to Dutch tax law and in association with this, need to file an annual income report.
The US-Netherlands Tax Treaty
A lot of people need specialist assistance with expatriate tax matters because they want to avoid getting taxed for the same income twice by two different countries. A tax treaty has been set up between the US and the Netherlands so that any residents can avoid such an issue.
Under the tax treaty, the total amount of tax which is due in each nation is reduced by up to 95% of what would have been owed otherwise. Pairing this with other deductions and changes that US expats in the Netherlands can make use of means that expats don’t generally end up owing any US tax.
Does Worldwide Income Affect You?
Finally, it’s worth considering whether worldwide income will affect you. This is income you have made from other countries like the UK. You will still be taxed on this income by the Netherlands, plus the country where it was earned.
“This can be an issue where you need specialist assistance because it can lead to double taxation.” Says Arif Patel.
That being said, the Netherlands have tax treaties in place with most countries, which limits the risk of double taxation occurring.
If you need assistance with preventing double taxation or better understanding any of the points raised above, be sure to reach out to those who offer specialist assistance such as Arif Patel.
About Arif Patel
Arif Patel is a retired tax expert based in Preston, UK. Throughout his career, Arif has advised clients on all manner of tax related issues, particularly US Expats.
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