Tax Guide for US Expats Living and Working in Netherlands
Who Is Liable For Income Taxes in Netherlands
Residents are subject to income tax in the Netherlands on their worldwide income. Nonresidents are subject to tax on specific Netherlands-source income only.
Residence is determined based on circumstances. For Dutch residency, it is essential to determine whether the individual has permanent personal ties with the Netherlands. For this purpose, specific circumstances (social, economic and legal) are not decisive; all personal ties are relevant.
Nonresident taxpayers may elect to be taxed as a resident taxpayer of the Netherlands. Furthermore, the 30% facility (see 30% facility) provides the option for residents of the Netherlands to be taxed as a “partial” nonresident taxpayer.
Income subject to tax. Netherlands income tax is levied on three categories (boxes) of income. Each box has its own rules to calculate taxable income, its own tax rates and exemptions. In general, negative income from one box may not be offset against positive income from another box.
Box 1 income. Box 1 income includes employment income, business profits and income from a primary residence. Profits received from personal business operations, from independent personal services and from certain shares of partnership income are taxed as business profits.
Tax on income in Box 1 is levied at progressive tax rates, with a maximum tax rate of 52% on income over €55,694. Wage tax is levied throughout the year (pay-as-you-earn) on employment income and directors’ fees if a Dutch wage tax withholding agent is available. The wage tax paid serves as an advance payment of the final income tax payable.
Employment income. Employment income includes salaries, wages, pensions, stock options, bonuses and allowances (for example, home leave and cost-of-living). Housing allowances may be taxable in certain situations. Some allowances for expenses may be paid as a tax-free allowance, subject to certain limitations and restrictions. Effective from 1 January 2011, the system of tax-free employment benefits and allowances is replaced by the work-related costs scheme (werkkostenregeling; see New Dutch wage tax regulation). This new scheme will have a major impact on employment conditions policy as a whole in 2011 and future years. Transition arrangements are in place.
Income and gains derived by private equity managers and other individuals from investments in which they are deemed to have a so-called “lucrative interest” is subject to the progressive income tax rates up to a maximum of 52% in a manner similar to entrepreneur income (the 30% facility is not applicable).
A nonresident individual receiving income from employment actually carried on in the Netherlands is subject to Dutch income tax. In certain situations the so-called 60-days rule applies. Under this rule, the Netherlands gives up its right to levy tax on employment income if the employee works in the Netherlands less than 60 days in any 12-month period. A nonresident who is employed by a Dutch public entity is also subject to Dutch income tax, even if the employment is carried on outside the Netherlands. A nonresident who is employed by a Dutch employer and is working in the Netherlands for part of the time may be liable to tax in the Netherlands on the full remuneration received from the employer. However, tax treaties generally do not allow the Netherlands to tax income related to non-Dutch workdays.
Self-employment income. Annual profit derived from a business must be calculated in a consistent manner and in accordance with sound business practices. Annual profit is reduced by related business expenses, and taxable income is then determined by subtracting the deductions and the personal allowances described in Deductions and allowances.
A nonresident individual earning income from an enterprise carried on through either a permanent establishment or a permanent representative in the Netherlands is subject to Dutch income tax. Profits of a permanent establishment are calculated on the same basis as profits of resident taxpayers.
For the allocation of profit between a foreign head office and a Dutch permanent establishment, the permanent establishment is deemed, in principle, to be a separate entity dealing at arm’s length.
Directors’ fees. Directors’ fees are treated as ordinary employment income.
An employee who is a 5% or greater shareholder is deemed to earn a salary of at least €41,000 a year. A lower amount may be taken into account for shareholders who can prove that their actual salaries at arm’s length are less than €41,000. However, if the tax authorities can prove that a salary at arm’s length would be higher than €41,000, the director’s salary must equal at least 70% of the salary at arm’s length and at least as much as the salaries of other non-shareholder employees. These rules do not apply if the salary at arm’s length of the employee/shareholder does not exceed the amount of €5,000 a year.
A nonresident receiving income as a director of a company resident in the Netherlands is subject to Dutch income tax. Tax treaties entered into by the Netherlands generally grant the right to tax this income in the resident country of the company that pays the directors’ fees. Exemptions are made, among others, in the tax treaty with Switzerland and in the new tax treaty between the Netherlands and the United Kingdom.
Income from a primary residence. The owner of a primary residence is taxed on the deemed rental value of the residence which is determined based on the so-called “real estate valuation act,” which aims to reflect fair market value. For dwellings with a value exceeding €75,000, in general, a rate of 0.55% applies to calculate the deemed rental value. For dwellings with a value exceeding €1,020,000, a rate of 1.05% applies on the excess. This rate will increase gradually to 2.35% in 2016. The deemed rental value reflects the net income from real property, which is the deemed rental income less certain deductible expenses. For a period of up to 30 years, mortgage interest paid for the acquisition, maintenance or improvement of a primary residence is fully tax deductible from the deemed rental value and other Box 1 income. In general, the acquisition of a primary residence cannot be fully financed by a mortgage if a capital gain on the previous primary residence was realized. In principle, income from a second residence or rental income is taxed as Box 3 income.
Box 2 income. Box 2 income includes profits from a substantial shareholding, which is a shareholding of at least 5% of a certain class of shares of a company resident in or outside the Netherlands. Both capital gains and regular income (dividends) are taxed. Tax is levied at a fixed rate of 25%.
Nonresidents are taxable on capital gains and regular income from a substantial interest of a company resident in the Netherlands.
Box 3 income. Box 3 income includes income from savings and investments. The taxpayer’s net value of savings and investments, including shares and bank accounts (excluding the value of loans with respect to a primary residence), on 1 January of the calendar year, is deemed to yield income at a rate of 4%. This income is taxed at a fixed rate of 30%. Specific exemptions apply for certain assets, including art and certain life insurance policies. A general exemption of €20,785 applies for each resident taxpayer.
Dutch resident taxpayers are taxed on their worldwide income, including income from savings accounts maintained outside the Netherlands. European Union (EU) member states in which savings accounts are maintained must inform the EU member state where the beneficial owner of the savings account resides about the existence of this savings account. This notification is made annually. Consequently, the Dutch tax authorities are aware of savings accounts maintained outside the Netherlands, but within the EU.
For Austria, Belgium and Luxembourg, a transitional rule applies. These three countries are not required to exchange information on savings accounts if they apply a withholding tax to savings income. For 2011, the rate of this withholding tax is 35%.
Nonresidents are only taxable on the net value of real estate located in the Netherlands or on profit rights in an enterprise resident in the Netherlands.
A dividend withholding tax is imposed on dividends paid by resident companies to resident or nonresident recipients. The withholding tax rate is 15%, unless reduced or eliminated by an applicable tax treaty. Resident individuals may credit domestic withholding tax against their total income tax due. A credit may be granted against Dutch income tax for foreign taxes paid on dividends and interest.
A 15% withholding tax is levied on dividends derived by non-residents, unless the rate is reduced by an applicable double tax treaty. Nonresident taxpayers cannot credit the Dutch dividend withholding tax against the final income tax payable. No further tax is imposed unless the shares constitute a substantial interest, in which case, income tax may be levied and dividend withholding tax may be credited. Interest and royalties derived by a nonresident are not subject to withholding tax. However, interest is included in taxable income if the recipient holds a substantial interest in the payer.
Taxation of employer-provided stock options. In general, stock options are taxed at the moment of exercise. The taxable gain arising at exercise is the fair market value of the shares on the exercise date less the exercise price. Specific transitional rules apply to stock options granted or vested before 1 January 2005.
Capital gains. Capital gains generally are exempt from tax. However, exceptions apply at the applicable 2011 tax rates indicated in the following table.
Deductions and allowances
New Dutch wage tax regulation. Effective from 1 January 2011, a new Dutch wage tax regulation concerning allowances (werk-kostenregeling) is introduced. Until 1 January 2014, the employer may apply the old regulation for one or more whole calendar years. The new wage tax regulation will be mandatory, effective from 1 January 2014. The principle underlying this new system is that fewer rules apply with respect to tax-free allowances and employment benefits and that all allowances and benefits granted to employees by employers essentially constitute taxable wages.
Specific exemptions are provided. The employer is entitled to a tax-free work-related costs budget of 1.4% of the total taxable wage bill. If the actual work-related costs exceed this budget, an employer’s final levy of 80% on the excess is due. For more information about the new regulation, please contact Ernst & Young in the Netherlands.
Deductible expenses and tax-free allowances. Taxpayers may claim the following deductions and allowances:
- Deduction for mortgage interest for the acquisition, maintenance or improvement of the taxpayer’s primary residence.
- Deduction for certain life insurance premiums that entitle individuals to annuity payments. The amount depends on the available pension rights of the individual.
- Deduction for alimony payments.
- Deduction for extraordinary expenses exceeding a certain threshold, including medical expenses, support provided to direct relatives and qualifying gifts.
- Under certain conditions, a moving allowance, up to a maximum of €7,750, may be granted besides reimbursing for the actual cost to transport the goods. If the employer does not reimburse the employee for the moving costs, these amounts are not deductible by the employee.
- An allowance for business travel, including commuting expenses, may be granted for private transportation, subject to certain limitations. Commuting expenses for public transportation may be reimbursed in full. Business travel and commuting expenses may not be deducted.
The deductions listed above for certain life insurance premiums, alimony payments, extraordinary expenses and gifts are not available to nonresidents. Under certain circumstances, a tax-free allowance for extraterritorial cost may also be available (see 30% facility) for qualifying expatriates.
30% facility. Expatriates in the Netherlands may qualify for a special tax facility, the 30% facility. This facility enables an employer to pay an employee a tax-free allowance of up to 30% of present employment income and a tax-free reimbursement of school fees for children attending international schools. On request, the employee may be considered a nonresident taxpayer of the Netherlands for certain items of income (partial nonresident status). The maximum term for the 30% facility is 120 months. To qualify for the 30% facility, certain conditions must be met, including the following:
- The employee must be recruited or assigned from abroad to work in the Netherlands.
- Dutch wage tax must be withheld.
- The employee must have specific expert knowledge that is scarce in the Dutch labor market.
By definition, employees in the middle or higher management of a company are considered “specialists” if they are transferred on a temporary basis to the Netherlands within an international group (job rotation) and have been working for the group for a minimum of two-and-a-half years.
The tax-free allowance is intended to cover all “extraterritorial costs.” As a result, no additional tax-exempt reimbursements of costs are allowed on top of the 30% tax-free allowance.
Instead of applying the 30% facility, reimbursement of the actual extraterritorial costs free of tax is allowed even if this amount is higher than 30% of the present employment income. Consequently, the employer must maintain records of all actual extraterritorial costs reimbursed free of tax.
Personal tax credits. Personal tax credits are fixed amounts that directly decrease the income tax payable.
The personal tax credits consist of a general credit for every taxpayer (€1,574), an employment credit for recipients of income from profits and employment (up to €1,489) and other credits, such as for children, single parents and senior citizens.
The personal tax credit is limited if a taxpayer is not insured under one or more of the following national insurance schemes:
- General Old Age Pension Act (AOW)
- Survivor Benefits Act (ANW)
- Exceptional Medical Expenses Act (AWBZ)
This is particularly important for senior citizens who no longer have to pay AOW contributions. Their personal tax credits are approximately half of the amounts referred to above. Their senior citizen’s credit and supplementary senior citizen’s credit are not restricted. In addition, the personal tax credit may generally not exceed tax payable plus national insurance contributions, and therefore cannot result in a refund.
Relief for losses. Individual taxpayers may carry losses related to Box 1 back for three years or forward for nine years. In general, positive income of one box may not be offset by negative income of another box.
B. Other taxes
Net worth tax. The Netherlands does not impose net worth tax.
Inheritance and gift taxes. Inheritance and gift taxes are levied on all property inherited from or donated by an individual who was a resident or deemed to be a resident of the Netherlands at the time of death or donation. Dutch individuals who emigrate from the Netherlands are deemed to be resident in the Netherlands for 10 years after emigration. A gift made by a former Dutch resident, regardless of nationality, who left the Netherlands less than one year before making the gift is subject to Dutch gift tax. Tax is levied on an heir or a gift recipient, regardless of his or her place of residence.
Inheritance and gift tax rates range from 10% to 40% of the value of a taxable estate or donation after deductions, depending on the applicable exemptions and the relationship of the recipient to the deceased or donor.
Nonresidents inheriting assets from an individual who was a resident or a deemed resident of the Netherlands at the time of death are subject to inheritance taxes. To provide relief from double taxation, the Netherlands has entered into inheritance tax treaties with the following countries.
Austria
Sweden
United Kingdom
Finland
Switzerland
Northern Ireland
Israel
United States
A treaty with France has been signed, but it has not yet been ratified. Relief may also be available if no treaty applies.
Effective from 1 January 2010, the Dutch Succession Code is amended. Under the amended code, if the conditions with respect to the business succession facility (bedrijfsopvolgingsfaciliteit, or BOF) are satisfied, 83% to 100% of the value of the business assets or the substantial interest shares may be exempted from gift and inheritance tax.
For segregated private assets (afgezonderd particulier vermogen, or APV) such as a trust, a family foundation or a Netherlands Antilles private foundation, entirely new rules have been introduced. Effective from 2010, such assets are allocated to the contributor or his or her heirs for income tax purposes. When the person to whom the assets are allocated dies, his or her heirs are taxed on the assets as if they were part of the inheritance.
C. Social security
Contributions. The Social Security Acts can be classified into two categories, which are National Insurance Acts and Employee Insurance Acts (excluding health insurance). National Insurance Acts provide benefits to all Dutch residents. National Insurance contributions are payable on taxable income of up to €33,436 and are not deductible for tax purposes. The maximum annual National Insurance contribution payable by an employee is €7,126 (after taking into account the social security credit).
Employee Insurance Acts provide additional benefits for wage earners. Employee Insurance contributions (excluding health insurance) are €0 for the employee and approximately €5,300 for the employer.
The following National Insurance Acts contribution rates (total of 31.15%) apply in 2011:
- 17.9% for the General Old Age Pension Act (AOW)
- 1.1% for the Survivor Benefits Act (ANW)
- 12.15% for the Exceptional Medical Expenses Act (AWBZ)
Totalization agreements. Nonresidents earning income from Dutch employment are, in principle, subject to Dutch National Insurance and Employee Insurance contributions. As a result, they may be subject to social security taxes both in their home country and in the Netherlands.
To provide relief from double social security contributions and to assure benefit coverage, the Netherlands has entered into agreements with several countries. As an EU member state, the Netherlands applies EU Regulation 883/04, which entered into force on 1 May 2010 and replaced EU Regulation 1408/71. Regulation 1408/71 continues to apply for a maximum of 10 years to all cross-border situations existing before 1 May 2010 in which Regulation 883 alters the relevant state if the individual does not opt into coverage of the new regulation and if a material change in circumstances does not occur.
The Netherlands has also entered into social security agreements with the following non-EU member states:
Chile
Montenegro
Croatia
Morocco
Australia
Egypt
New Zealand
Bosnia
Isle of Man
Serbia
Herzegovina
Israel
Tunisia
Canada
Japan
Turkey
Cape Verde
Korea (South)
United States
Channel Islands
Macedonia
Uruguay
Double tax relief and tax treaties
The Decree for the Avoidance of Double Taxation provides proportional relief from Dutch income tax on foreign-source Box 1 income taxed in the country of source and applies in the absence of an applicable tax treaty.
Most double tax treaties concluded by the Netherlands provide for double taxation relief, regardless of whether the income is subject to income tax abroad.
To learn more about the history, culture, economy and other information about Netherlands
We have been preparing US income tax returns for US Citizens and permanent residents living in Netherlands for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Netherlands and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Netherlands.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email