Netherlands-United States International Income Tax Treaty Explained

US Netherlands Tax Treaty

US Netherlands Tax Treaty: International Agreements “US Tax Treaties” between the United States and foreign countries have existed for many years — and the US Netherlands Tax Treaty is no different. An Income Tax Treaty like the income tax treaty between the Netherlands and the United States is designed to minimize inconsistent and double taxation — although a tax treaty cannot (unfortunately) shield certain tax implications of items such as a foreign pension. The Netherlands and the United States have been engaged in treaty relations for many years. The treaty has been updated and revised multiple times since then — with the most recent version being 2004. The purpose of the US/Netherlands Tax Treaty is to help Taxpayers determine what their tax liability is for certain sources of taxable income involving parties to the treaty. While the US Netherlands Tax treaty is not the final word on how items of income will be taxed — it does help Taxpayers better understand how either the US Government and/or the Netherlands will tax certain sources of income; what the IRS reporting requirements are — and whether or not the saving clause will further impact the outcome. Let’s review the basics of the US Netherlands Income Tax Treaty – and which income is taxable:

Saving Clause in US Netherlands Tax Treaty

As we work through the treaty, one important thing to keep in mind is the saving clause. The saving clause (essentially) provides that, despite any information provided in the treaty — both countries reserve the right to tax certain citizens and residents as they would otherwise tax them under the general tax principles of their respective countries.

What does the Saving Clause Say?

• • • Notwithstanding any provision of the Convention except paragraph 2, each of the States may tax its residents and nationals as if the Convention had not come into effect.

    • For this purpose, as regards the United States, the term national shall include a former citizen, not being a national of the Netherlands, whose loss of United States citizenship has as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.Saving Clause Limitations in the Netherlands/US Tax Treaty.

Despite any limitation created by the saving clause, certain portions of the tax treaty are immune from the saving clause — which means the tax treaty will stand despite the Savings Clause

• • • The provisions of paragraph 1 shall not affect

      • a) the benefits conferred by one of the States under paragraph 2 of Article 9 (Associated Enterprises), under paragraph 4 of Article 19 (Pensions, Annuities, Alimony), and under Articles 25 (Methods of Elimination of Double Taxation), 28 (Non-Discrimination), and 29 (Mutual Agreement Procedure); and

      • b) the benefits conferred by one of the States under Articles 20 (Government Service), 21 (Professors and Teachers), 22 (Students and Trainees), and 33 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of that State, nor, in the case of the United States, lawful permanent residents of the United States.

Resident Defined in the Netherlands & US Tax Treaty

• • • For the purposes of this Convention, the term “resident of one of the States” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, or that is an exempt pension trust, as dealt with in Article 35 (Exempt Pension Trust) and that is a resident of that State according to the laws of that State, or an exempt organization, as dealt with in Article 36 (Exempt Organizations) and that is a resident of that State according to the laws of that State.  If, under the laws of the two States, an individual is a resident of both States, his residence for purposes of the Convention shall be determined under the rules of paragraph

      An individual who is a resident of one of the States under the law of that State, or who is a citizen of the United States, and who is not a resident of the other State under its law, will, for the purposes of this paragraph, be treated as a resident of the State of which he is a resident or citizen only if (i) he would be a resident of that State and not a third State, under the principles of subparagraphs (a) and (b) of paragraph 2 of this Article, if that third State is one with which the first-mentioned State does not have a comprehensive income tax Convention, or (ii) he is a resident of that State and not a third State, if that third State is one with which the first-mentioned State does have a comprehensive income tax Convention, under the provisions of that Convention.

What does this Mean?

It means that for purposes of the tax treaty, a resident is essentially a person who intends on being a resident of that country by way of domicile, place of management or incorporation — or any other situation when considering the totality of the circumstance, would tend to show that the person intended on being treated as a resident of that country.

Permanent Establishment in the Netherlands & US Tax Treaty

• • • For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 

    • The term “permanent establishment” includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; and f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

    • A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

What does this Mean?

When it comes to Permanent Establishment rules — it can get very complicated since it involves business, and especially with the introduction of the TCJA, the rules are still kinda-sorta in a state of flux. The most important concept of permanent establishment is that unless a company has a permanent establishment “fixed place of business” in this specific country then they are generally not going to be taxed by that country on the income generated in that country.

Real Property Income in the US Netherlands Income Tax Treaty

• • • Income derived by a resident of one of the States from real property (including income from agriculture or forestry) situated in the other State may be taxed in that other State.

    • The term “real property” shall have the meaning which it has under the law of the State in which the property in question is situated. The term shall in any case include property accessory to real property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as real property.

    • The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real property.

    • The provisions of paragraphs 1 and 3 shall also apply to the income from real property of an enterprise and to income from real property used for the performance of independent personal services.

    • A resident of one of the States who is liable to tax in the other State on income from real property situated in the other State may elect for any taxable year to compute the tax on such income on a net basis as if such income were attributable to a permanent establishment in such other State. Any such election shall be binding for the taxable year of the election and all subsequent taxable years unless the competent authorities of the States, pursuant to a request by the taxpayer made to the competent authority of the State of which the taxpayer is a resident, agree to terminate the election.

    • Exploration and exploitation rights of the sea bed, its sub-soil, and natural resources found therein (including rights to interests in, or to benefits of, assets to be produced by such exploration or exploitation) shall be regarded as real property situated in the State in which such sea bed, sub-soil, and natural resources are located. Such rights shall be considered to pertain to the property of a permanent establishment in that State to the same extent that any item of real property located in that State would be considered to pertain to a permanent establishment in that State.

What does this Mean?

When it comes to real property income, the Netherlands & US Tax Treaty provides that any income generated from the real property situated in one of the contracting states may still be taxed in that state — in other words, for example, if a US person resides in the United States and has an income generated in the Netherlands, then the Netherlands can still tax the income even though the person is a resident of the other contracting state — and nothing would prevent the state of residence from taxing it as well. (Foreign Tax Credits should minimize the tax outcome).

Dividends in the Netherlands & US Tax Treaty

• • • Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State.

    • However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other State, the tax so charged shall not exceed:

      • a) 5 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 percent of the voting power of the company paying the dividends;

      • b) 15 percent of the gross amount of the dividends in all other cases.

    • The provisions of subparagraph (b) instead of the provisions of subparagraph (a) shall apply in the case of dividends paid by a United States person which is a Regulated Investment Company or Real Estate Investment Trust or in the case of dividends paid by a Dutch company, which is a “beleggingsinstelling” in the sense of Article 28 of the Netherlands Corporation Tax Act (Wet op de vennootschapsbelasting 1969) (hereinafter referred to as “beleggingsinstelling”).

What does this Mean?

When it comes to dividends, the general proposition is that even if dividends are paid by a company of one contracting state (Netherlands) to a resident of the other contracting state (US), it is the other contract state that gets to tax the dividends (US) — although they can still be taxed in this state of source but only up to a limited amount of tax. When it comes to dividends, there are many exceptions, exclusions and limitations to be cognizant of — which will vary based on the taxpayer-specific facts and circumstances.

Interest in the US Netherlands Income Tax Treaty

• • • Interest arising in one of the States and beneficially owned by a resident of the other State shall be taxable only in that other State. 

    • The term “interest” as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and not carrying a right to participate in the debtor’s profits, and in particular, income from government securities, and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds, or debentures, and an excess inclusion with respect to a residual interest in a real estate mortgage investment conduit, as well as other income that is treated as income from money lent by the taxation law of the State in which the income arises. The term does not include income dealt with in Article 10 (Dividends). Penalty charges for late payment shall not be regarded as interest for the purpose of this Convention.

What does this Mean?

The taxation of interest is a bit more straightforward than dividends, but still has its own set of complexities to be aware of. From a baseline perspective, interest earned in a contracting state (Netherlands) which arises from the beneficial ownership for a person in the other contracting state (US) is only taxable in that other state — shall vs may. Of course, there are some exceptions and exclusions to the first paragraph which taxpayers should evaluate carefully for their specific situation.

Capital Gain in the Netherlands & US Tax Treaty

• • • 1. Gains derived by a resident of one of the States from the disposition of real property situated in the other State may be taxed in the other State. For the purposes of this paragraph the term “real property situated in the other State” shall include:

      • a) real property referred to in Article 6 (Income from Real Property); and

      • b) shares or other comparable corporate rights in a company that is a resident of that other State, the assets of which company consist, directly or indirectly, for the greater part of real property situated in that other State, and an interest in a partnership, trust, or estate, to the extent that it is attributable to real property situated in that other State. In the United States, the term includes a “United States real property interest” as defined in the Internal Revenue Code on the date of signature of this Convention, and as amended from time to time without changing the general principles described in this paragraph.

What does this Mean?

Capital gains are also a common source of passive income. Essentially, if real property is alienated which culminates in a taxable event in a contracting state, then it is taxable in that contracting state. There are specific definitions to be aware of depending on whether the property is located in Netherlands or the United States –and different rules may apply to each based on their own respective tax regimes. In addition, there are specific definitions involving what is termed as “real property situated in a contracting state.”

Exchange of Information: US Netherlands Income Tax Treaty

• • • The competent authorities of the States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention, including for the assessment, collection, administration, enforcement, prosecution before an administrative authority or initiation of prosecution before a judicial body, or determination of appeals with respect to the taxes covered by the Convention. The exchange of information is not restricted by Article 1 (General Scope). Any information received by one of the States shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the above functions in relation to taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. A State may use information obtained under this Convention as evidence before a criminal court only if prior authorization has been given by the competent authority which has supplied the information. However, the competent authorities may mutually agree to waive the condition of prior authorization.

    • If information is requested by one of the States in accordance with this Article, the other State shall obtain the information to which the request relates in the same manner and to the same extent as if the tax of the first-mentioned State were the tax of that other State and were being imposed by the other State. If specifically requested by the competent authority of a State, the competent authority of the other State shall endeavor to provide information under this Article in the form of depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings), to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes.

What does this Mean?

The exchange of information portion of the tax treaty is commonplace. It basically provides that each contracting state will exchange information with the other — necessary to carry out the purpose of the treaty. It also explains how the exchange of information may not be restricted under certain other articles of the treaty — but there are also limitations regarding the requirements that a contracting state may or may not have to adhere to.

Pension in the Netherlands/US Tax Treaty

One of the most important aspects of tax treaty law is how pension income is taxed. This is especially true so that retirees can plan for their golden years.

• • • Subject to the provisions of paragraph 2 of Article 20 (Government Service), pensions and other similar remuneration derived and beneficially owned by a resident of one of the States in consideration of past employment and any annuity shall be taxable only in that State.

    • If, however, an individual deriving remuneration referred to in paragraph 1 was a resident of the other State at any time during the five-year period preceding the date of payment, the remuneration may be taxed in the other State if the remuneration is paid in consideration of employment exercised in the other State and the remuneration is not paid in the form of periodic payments, or a lump sum is paid in lieu of the right to receive an annuity.

    • The provisions of paragraph 2 shall not apply to the portion of the remuneration or lump sum referred to in paragraph 2 that is contributed to a pension plan or retirement account under such circumstances that, if the remuneration or lump sum had been received from a payer in the State of the recipient’s residence, the imposition of tax on the payment by the State of the recipient’s residence would be deferred until the amount of the payment was withdrawn from the pension plan or retirement account to which it was contributed.

    • Subject to the provisions of paragraph 2 of Article 20 (Government Service), pensions and other payments made under the provisions of a public social security system and other public pensions paid by one of the States to a resident of the other State or a citizen of the United States shall be taxable only in the first-mentioned State.

What does this Mean for Pension Income?

When the payments refer to pension, it refers to pension distributions that arise in one state as a result of past employment paid to the resident of the other state — it is only taxable in the first state (in other words, the state that made the payments). But, it is limited by the Saving Clause (so the source country can still tax the income).

What does this Mean for Social Security Income?

When the payments refer to payments that are Social Security — and payments are being made to a resident of the other state or to a citizen of the United States – it is only taxable in the first state (in other words, the state that made the payments). It further clarifies that in this situation in which a US citizen resides in the Netherlands, and receives Social Security or similar payments from the Netherlands — Netherlands is the only country that gets to tax the income (despite US worldwide income rules).

Reporting Forms for Netherlands Pension

The following is a summary of five (5) common international tax forms.

FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.

The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals is as follows:

• • • Single or Filing Separate (in the U.S.): $50,000/$75,000

    • Married with a Joint Returns (In the U.S): $100,000/$150,000

    • Single or Filing Separate (Outside the U.S.): $200,000/$300,000

    • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520

Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:

• Gift from a Foreign Person: More than $100,000.
• Gift from a Foreign Business: More than $16,076.
• Foreign Trust: Various threshold requirements involving foreign Trusts

Form 5471

Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:

• • • Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.

    • Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.

    • Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.

    • Category 4: Control of a foreign corporation for at least 30 days during the accounting period.

    • Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).

Form 8621

Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company). The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

*There are some exceptions, exclusions, and limitations to the filing requirements.

Received a Gift or Inheritance From Netherlands?

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business, or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

Which Banks in Netherlands Report U.S. Account Holders?

There are thousands of Foreign Financial Institutions within the Netherlands that report US account holder information to the IRS. The list can be found here: FFI List:.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR reporting, it may involve a much broader spectrum of assets and accounts, including:

• • • Bank Accounts

    • Investment Accounts

    • Retirement Accounts

    • Direct Stock Ownership

    • ETF and Mutual Fund Accounts

    • Pension Accounts

    • Life Insurance or Life Assurance Policies

Totalization Agreement & the United States/Netherlands

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS:

• • • An agreement, effective July 1, 1988, between the United States and Netherlands improves Social Security protection for people who work or have worked in both countries. It helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

    • The agreement covers Social Security taxes (including the U.S. Medicare portion) and retirement, disability and survivors insurance benefits. It does not cover benefits under the U.S. Medicare program or the Supplemental Security Income (SSI) program.

    • This document covers highlights of the agreement and explains how it may help you while you work and when you apply for benefits.

The United States has entered into 26 Totalization Agreements, including the Netherlands (as of 1990).

US Netherlands Income Tax Treaty is Complex

In conclusion, The US and Netherlands tax treaty is a great source of information to help better understand how certain income may be taxed by either country depending on the source of income, the type of income, and the residence of the taxpayer. The tax outcome may be changed depending on whether or not the savings clause impacts how tax rules will be applied for certain types of income.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure on matters involving the United States-Netherlands Tax Treaty.

Contact our firm for assistance.