Dutch American Friendship Treaty (DAFT) tax guide
Oct 4, 2023
US business owners and investors setting up a business in the Netherlands are usually not first-timers. They tend to have one or more pre-existing businesses in the United States or elsewhere. While this makes their tax situation a bit more "interesting" than usual, this should never serve as a deterrent to go down that path. Clear national and international tax rules serve to clarify the situation beforehand. In this article we will briefly explain what's going on. While specifically written for DAFT visa applicants, it can also be used by US entrepreneurs otherwise involved in the Netherlands.
Entrepreneurs moving to the Netherlands (for example under the Dutch American Friendship Treaty) have a choice between 2 main company forms: the BV (which allows for 30% ruling) and the ZZP/sole proprietorship. For the purposes of this article, with “Dutch business” we shall mean a B.V. company, which is broadly similar to the US C Corporation. In order to understand the full picture, we first need to look at some basics. We start off by explaining the situation in terms of personal income taxes and then later on zoom into the specifics of business taxes. For both taxes, we first need to look at the concept of tax residence, and then at the actual application of the taxes to each type of income.
Distinguish between residence and tax residence
If you come to the Netherlands, for example on a Dutch American Friendship Treaty visa, you will become a resident of the Netherlands, with a valid work and residence permit. This will be issued by the IND (the Dutch immigration authorities) based on the applicable immigration laws. This status does not automatically make you a tax resident of the Netherlands. This status is determined by the Dutch Tax Authorities in accordance with the applicable tax rules. For Dutch tax purposes, residency is determined based on facts and circumstances. Unlike many other countries, the Netherlands do not consider spending 183 days in-country as decisive in this regard. It is merely seen as one of the relevant circumstances that is taken into account when determining residency.
The other circumstances are:
you spend most of your time at a Dutch address;
your partner and/or family lives in the Netherlands;
you work in the Netherlands;
you have insurance in the Netherlands;
your (family) physician is resident in the Netherlands;
you are a member of one or more clubs / societies in the Netherlands;
your kids receive an education in the Netherlands.
From a Dutch point of view it is possible to be a tax resident of more than one country. If a person is considered a Dutch tax resident under Dutch domestic law, and a US tax resident under US domestic law, his/her tax residency for treaty purposes needs to be determined. Article 4 of the United States - Netherlands Tax Treaty provides the following tie-breaker, which is applied top-down (first apply the first, if that one doesn’t decide, move to the second, etc.):
a person is a resident in the country where he has a permanent home available to him;
if a person has a permanent home in both countries, a person is a resident in the country where his personal and economic relations are closer (centre of vital interests);
if his centre of vital interests cannot be determined, or there is no permanent home, he is a resident in the country in which he has an habitual abode;
if a person has an habitual abode in both countries or neither country, a person is a resident of the country of which he is a citizen;
if a person is a citizen of both countries or neither country, the Dutch and the US authorities will determine a person’s residency for treaty purposes by mutual agreement.
If you move to the Netherlands and work and live here full-time, you will be considered a tax resident in the Netherlands.
Taxation on salary
As a Dutch business owner, there are two main ways in which to earn income: salary and dividends. Let’s start with salary first. If you, as a US citizen, become a tax resident of the Netherlands, the Netherlands will tax you on your salary earned in employment at your Dutch company. The US will not tax your Dutch income on account of the US-NL Tax Treaty (except for the per diem situation explained below). You still need to declare your Dutch income in the US though, but that is not the same as paying taxes over it.
If you come to the Netherlands, and keep a salary going from your US company, the Netherlands will not tax that salary as long as that salary was received for work performed while physically outside of the Netherlands. You need to be able to prove this, if necessary. In such case the Dutch tax authorities will assume the salary is being taxed in the home jurisdiction of the US company. When the work is actually performed while physically present in the Netherlands, the Netherlands will want to tax the income earned. Now you may wind up paying taxes on both sides of the Atlantic, but this is what tax treaties are for. The rules of the US - NL Tax Treaty state that any income tax hit you take in one country can be deducted from your taxable income in the other country. This so-called “credit system” ensures you will never pay more than the full amount of income taxes you would normally pay in the highest taxing country. You will therefore not pay double taxes. Your income tax returns have just become more complicated.
(NB: Tax treaties with other countries may contain an “exemption system” as opposed to the “credit system”. Such system makes you totally exempt in one country and totally liable in the other). Last but not least, don’t forget that a cross-border employment may also lead to the US company being considered a “permanent establishment” in the Netherlands. This may lead to corporate income tax consequences for that company in the Netherlands. This is decided on a case-by-case basis.
Taxation on dividends and capital gains
Now let’s discuss dividends and capital gains on shares, starting with the Dutch ones. If you as a US entrepreneur set up a Dutch company, this makes you its shareholder. In the case of profits in the new Dutch company, the shareholder status may confer dividend rights on you as a shareholder. This includes any sale price you receive on those shares. How is this taxed by the US and the Netherlands?First ascertain whether you are a Dutch tax resident. This can be established using the same “facts and circumstances” as outlined above. If you are a Dutch tax resident, the Dutch rules for dividend taxation apply as long as you hold 5% or more in the Dutch company. In the Netherlands the current (2023) rate for dividend tax stands at 26.9%. If you own under 5% of the shares in a company, those shares are taxed at 1,76% flat rate (2023). Whether or not the US will take a share of your Dutch shareholdings is dictated by the US-NL Tax Treaty. A number of rules apply here (see article 10), but any taxes from the US side are capped via the same “credit system” as outlined above under salary. Any additional US tax will never result in more than the difference between the two tax rates.
NB: Any dividends received in the Netherlands in a Dutch holding company (as opposed to as a natural person) are exempt from taxation under the so-called participation exemption. You do need to meet a couple of rules here, the main one being you need to own at least 5% of the shares.
Dutch tax treatment of US shares
Now that we have an understanding of Dutch and US tax treatment of your situation with your new Dutch company, we can expand our horizon a bit. If you are moving to the Netherlands to set up your business here, chances are you have been doing this in the US as well. If you live and work in the Netherlands from your own business, and you have a US business going on as well, you need to take into consideration the Dutch tax perspective on your US business. Again, the deciding factor here is the NL-US Tax Treaty, but there’s one other important factor. If you have obtained the 30% ruling in your own Dutch company, this means you can opt-in for the partial non resident status in the Netherlands. This means you will be considered non-resident in the Netherlands for the purposes of Box 2 and Box 3 taxation. Box 2 taxation concerns shareholding at 5% and above in any company, and Box 3 taxation concerns shareholding under 5% and liquid assets (savings, crypto and such). You can opt-in for partial non-resident status during your annual Dutch income tax returns. If you opt-in, you can entirely forego the declaration of your foreign Box 2 and Box 3 assets, including any US shareholdings you may have.
If you do not opt for this, or your 30% ruling period has expired, you do need to report these assets in your annual Dutch income tax returns , as world income. Again, declaring doesn’t mean you automatically have to pay taxes over it. The NL-US Tax Treaty decides how the taxation works from a Dutch perspective. This treaty is first and foremost intended to prevent double taxation. This means you will never pay more taxes than the highest tax rate applicable in either jurisdiction, via the same “credit system” explained above.
If you are operating a US LLC next to a Dutch BV, bear in mind that a US LLC is a “transparent entity” which means that profits are taxed as salary in the US. Such profits cannot be offset with dividends earned in the Netherlands under the regular provisions of the USA-NL Tax Treaty, because they are two separate forms of income. This may lead to a double-taxation situation. In those cases it may be worthwhile to transform your LLC into a C Corporation, in which case the type of earning from the US company becomes equal to the Dutch one.
Gift and inheritance tax
If a person is considered a Dutch tax resident, they are considered to be a Dutch tax resident for personal income tax as well as gift and inheritance tax. Please note that, by fiction of law, people who have Dutch nationality are considered a Dutch tax resident for gift and inheritance tax for 10 years following their emigration from the Netherlands once they have been a Dutch tax resident, even if their Dutch tax residency has lasted for only one day. People without the Dutch nationality are considered a Dutch resident for Dutch gift tax only for one year following their emigration from the Netherlands.Partial tax residence
Individual tax residents of the Netherlands that qualify for the Dutch 30% ruling, can mark themselves as “partial tax residents” in the Netherlands. As a partial tax resident, a person is not subject to Dutch income tax in box 2, except with respect to a substantial interest in Dutch companies, and is not subject to Dutch income tax in box 3, except with respect to Dutch real property. Partial tax residents are fully subject to Dutch income tax in box 1. Beware that the partial tax residence does not exempt all your foreign shareholdings from Dutch tax scrutiny. Foreign shareholdings in which you are actively involved as a director, can lead to your salary from that company and/or the corporate income of that company to be taxable in the Netherlands as “permanent establishments”.
Per diem exception
US citizens working in the Netherlands with a 30% ruling, and an opt-in for the partial non-resident status, have the particular option of per-diem tax exemption. This rule means that US employees, who are living and working in the Netherlands and are a tax resident in the Netherlands, can be exempted from taxation in the Netherlands for days worked outside the Netherlands. For this, only full 24-hour work days are counted. Travelling days, weekend days and partial days do not count. Also, it is recommended you keep a countersigned hours administration for these days. Tax exemption for these days means the employee may receive payment for those days tax-free. The days worked abroad are taxable in the US as world income there, when opted in as partial non-resident in the Netherlands under 30% ruling. They are then exempted in the Netherlands under the Netherlands-USA Tax Treaty.
The 183-day rule
There is another major exception, called the 183-day rule. This rule states that any amount of days under 183 worked in a country in which you are not already a tax resident, are not taxed in that country. This rule was made out for convenience of international, project-based workers and to prevent them from being taxed (or at least having to file taxes) in their short-period host country. If you meet all of the following criteria, you will not be considered a tax resident in the Netherlands:
A. You don’t stay in the Netherlands for 183 days during 1 tax year (article 16 sub 2 a the US-NL Tax Treaty). For this purpose holidays, weekends, part days and transit days are counted as full days.
B. You are paid by an employer that is not established in the Netherlands.
C. The employer does not have a permanent establishment in the Netherlands.
Don’t misunderstand this rule: if you move to the Netherlands and setup your new business here, the sheer fact that you were not 183 days in the Netherlands, doesn’t exempt you from taxes in the Netherlands under this rule. It will only prevent you from being taxed for example by Spain for that 4-week workation you did in Ibiza last summer, while working from your Dutch BV. If you were a tax resident in the Netherlands, for example due to work for a (self-owned) company, you will be considered a tax resident and you will fail to meet criterion B or C. The Netherlands will then always claim income taxes over your income (article 16 sub 1 of the US-NL Tax Treaty), regardless how many days you will be in or out of the country. At the same time, the tax rules of the country of origin still apply. If you are a US citizen migrating to the Netherlands for business or for work, the US will always keep considering you a tax resident. This means you always need to declare any income from anywhere in your US income tax returns. Declaring income doesn’t mean you will be taxed over it, mind you.
Dutch exit tax considerations
When you decide to pack your bags and leave your Dutch adventure behind you, you need to wrap things up with the Dutch Tax Authorities as well. We call this “exit tax”. Dutch exit tax is limited to substantial interests (Box 2) and Dutch pensions. We will disregard pensions here for purposes of brevity, and they are not standard to any labor or self employment in the Netherlands anyway. As for substantial interests (box 2) taxation: if you move from the Netherlands to another country, you are considered to have transferred all your substantial interests at fair market value. In short, this means that you are subject to exit tax in Box 2 if you own shares in a Dutch BV that has any undistributed profits at the moment of your emigration from the Netherlands. If, at the moment of your emigration, you cannot or do not elect to be treated as a foreign taxpayer, as a main rule you are also subject to exit tax with respect to your substantial interest in foreign companies as well. However, if you leave the Netherlands within 8 years after moving to the Netherlands, and you have not lived in the Netherlands for more than 10 years in the 25 years prior to you leaving the Netherlands, you are not subject to exit tax with respect to your interest in foreign companies, as long as the foreign companies are not a Dutch tax resident.
The basics of Dutch taxation on your US company
All the above rules refer to tax residency and income for private persons. If you own businesses in two jurisdictions, bear in mind that separate rules apply for corporate tax residency as opposed to private tax residency. Corporate tax residency may lead to Dutch taxation on the corporate income of the US company. Corporate tax residency in the Netherlands is decided by the place of management and control of the company. The fact that a company is registered in, for example, Delaware under the laws of the state of Delaware, does not mean that company cannot (also) be a tax subject of the Netherlands. The deciding factor here is the place where the management decisions of this Delaware company are made. Under Dutch case law there is a presumption that the management and control of a company is in the country where the majority of its board members or officers are a resident. If you are a 100% owner and sole director of a Delaware company and living in the Netherlands, this poses a problem. Your Delaware company may be subject to Dutch corporate income tax. There are 2 ways to deal with this problem:
- Make sure that all management decisions are made while you are in Delaware and you have sufficient documentation to prove this.
- Appoint a local director in Delaware in your stead.
If the Delaware company is not a Dutch tax resident, it may still qualify as a Dutch taxpayer if it has a so-called “permanent establishment” in the Netherlands. In short, if you are a director of a foreign company and work in the Netherlands and you generate revenues in the Netherlands for the foreign company, you may be constituting a permanent establishment for that foreign company in the Netherlands. As a consequence, the Dutch tax Authorities may want to take a bite out of the corporate income of the Delaware company. The United States-Netherlands Tax Treaty does not offer a hard rule here, so how this works needs to be established on a case-by-case basis.
Funding your Dutch company by invoicing your foreign controlled company
If you have a pre-existing foreign company (for example a US LLC or C Corporation) it is also possible the new Dutch company will either send invoices to, or receive invoices from, this US company. In such a case the concept of “transfer pricing” enters the stage. This means that the appropriate fee of the invoice should be determined on an “at arm’s length” basis.
In practice this means the fee between the two companies should be established on commercial terms, as if the BV and the LLCs would not have a common shareholder. It is recommended that you have sufficient documentation that establishes the at arm’s length nature of the fee. This can be done by, for example, establishing a commercially sound hour rate and keeping time records. Then add a 10% markup for good measure.
Sally is a US citizen, moving to the Netherlands. Sally is a serial entrepreneur and will be involved in foreign companies while in the Netherlands. Sally is going to setup a Dutch company and obtain a 30% ruling in it. Will she be exempt from all Dutch taxes on her foreign companies, on account of the partial non-resident status obtained by 30% ruling?
Partial non-resident status will leave her foreign shareholdings out of the Dutch tax sphere for the duration of her 30% ruling. This also applies to foreign companies established while in the Netherlands. But she needs to keep an eye out for three things:
(1) Dividends and capital gains are not taxed in the Netherlands due to the partial non-resident status. But if Sally draws a salary from the foreign companies, this must be reported under Dutch box 1 income and perhaps paid additional taxes over. For example when the physical work for that salary was performed in the Netherlands. The applicable double-taxation normally prevents double taxation, but how this works needs to be established on a case-by-case basis.
(2) If the management of the foreign companies is performed from the Netherlands, the Netherlands may consider those companies as Dutch tax residents and subject to Dutch corporate income tax. For this, the Dutch Tax authorities look at where the management decisions of the company are made. If Sally is sole director of the company doing everything from the Netherlands, this can be a problem. If there are 3 other directors, and meetings take place elsewhere, no corporate income taxation is to be expected in the Netherlands. Sally needs to make sure she has the paperwork to prove this.
(3) If Sally works for the foreign companies in the Netherlands and generates profits for them, she may be creating a "permanent establishment" for those companies in the Netherlands. This is separate from the management decisions explained under (2) and can lead to a partial tax on the corporate income of the companies. How this works needs to be established on a case-by-case basis.
In this article we have explained in general terms what’s in store for you, as a business owner, when setting up a new business in the Netherlands. This article is intended for general consumption, and should serve as a basis for further investigation into your particular situation. Do not consider this as tax advice. Furthermore, do not reach out to us with particular questions about your particular tax situation, as we will not provide you the answers. We can only refer you to a tax lawyer who can give you the exact details.