US Netherlands Tax Treaty: How It Affects Your Taxes

The U.S.-Netherlands tax treaty exists to mitigate the complexities that arise when both countries tax the same income. Its purpose is to prevent double taxation for individuals and companies with financial activities in both nations. This is relevant because the U.S. taxes its citizens on their worldwide income, regardless of where they live, while the Netherlands primarily taxes individuals based on residency. The agreement establishes rules to determine which country has the primary right to tax different types of income, often reducing the tax rates that would otherwise apply.

Determining Residency for Treaty Purposes

A central function of the U.S.-Netherlands tax treaty is to define a person’s “residency” to establish which country has the primary right to tax their income. A “resident of a Contracting State” is any person liable to tax in that state due to domicile, residence, or similar criteria. For individuals considered residents of both countries under their respective domestic laws, the treaty provides a series of tie-breaker rules that are applied sequentially.

The first test is the “permanent home” test; if an individual has a permanent home available in only one country, they are a resident of that country. If they have a permanent home in both countries or neither, the next test considers their “center of vital interests.” This analysis examines where the person’s personal and economic ties are closer, looking at factors like family, social relationships, occupation, and the place from which they administer their property. Should the center of vital interests not be determinable, the “habitual abode” test is applied, which looks at where the individual spends more time.

If an individual has a habitual abode in both countries or in neither, the rules turn to citizenship. An individual who is a citizen of only one country is considered a resident of that country. If the person is a citizen of both countries or neither, the competent authorities of the U.S. and the Netherlands will settle residency by mutual agreement.

Key Treaty Provisions

The U.S.-Netherlands tax treaty contains foundational articles that govern its application, with two of the most significant being the “Savings Clause” and the “Limitation on Benefits” (LOB) article.

Savings Clause

A defining feature of most U.S. tax treaties is the Savings Clause, which allows the United States to tax its citizens and residents as if the treaty did not exist. This means a U.S. citizen living in the Netherlands cannot use the treaty to reduce U.S. tax on their income. However, the Savings Clause contains exceptions for specific provisions, such as the rules governing Social Security payments, alimony, and the mutual agreement procedure for resolving tax disputes. For these items, the treaty article dictates how they are taxed.

Limitation on Benefits

The Limitation on Benefits (LOB) article is designed to prevent “treaty shopping,” which occurs when a resident of a third country sets up an entity in the U.S. or the Netherlands solely to gain access to the treaty’s reduced tax rates. The LOB article ensures that only “qualified persons” with a substantial connection to either the U.S. or the Netherlands can claim treaty benefits. Individual residents and the governments of both countries are automatically considered qualified persons. For companies, one common way to qualify is by being a publicly traded company on a recognized stock exchange in either country, and subsidiaries of such companies can also qualify.

How the Treaty Affects Taxation of Common Income Types

The U.S.-Netherlands tax treaty provides specific rules for many common types of income, determining which country has the primary right to tax and often reducing withholding tax rates.

Dividends

The withholding tax that the source country can impose on dividends paid to a resident of the other country is capped at 15%. This is a reduction from the 30% statutory withholding rate in the U.S. A lower rate of 5% applies to dividends paid to a company that owns at least 10% of the voting power of the company paying the dividend, which reduces the tax burden on intercompany dividends.

Interest

The treaty provides for a 0% withholding rate on interest arising in one country and paid to a resident of the other. This means interest income is taxable only in the recipient’s country of residence, simplifying cross-border lending.

Pensions, Annuities, and Alimony

Private pensions, similar remuneration, and annuities are taxable only in the recipient’s country of residence. A U.S. resident receiving a private pension from a Dutch source would only pay U.S. tax on that income. In contrast, pensions paid for government service are taxable only by the country that paid them. Alimony payments are also taxable only in the recipient’s country of residence.

Social Security Payments

Payments made under a social security or similar public insurance system are taxable only in the country making the payment. For instance, U.S. Social Security benefits paid to a resident of the Netherlands are taxable only by the United States. This rule is a notable exception to the Savings Clause.

Business Profits

The business profits of an enterprise are taxable only in its home country unless it carries on business in the other country through a permanent establishment (PE). A PE is a fixed place of business, such as an office, branch, or factory. If a company has a PE in the other country, that country may tax the profits that are attributable to the PE, limiting its taxing rights to the economic activity occurring within its borders.

Income from Real Property

Income derived from real property, including rental income, is taxed in the country where the property is located. For example, if a U.S. resident owns a rental property in the Netherlands, the rental income can be taxed by the Netherlands. The U.S. would then provide a foreign tax credit for the Dutch taxes paid to avoid double taxation.

Capital Gains

The taxation of capital gains depends on the type of asset being sold. For gains from the sale of real property, the treaty allows the country where the property is located to tax the gain. For gains from the sale of other assets, like stocks and bonds, the gains are taxable only in the seller’s country of residence, unless the shares are part of the business property of a permanent establishment in the U.S.

Information and Forms for Claiming Treaty Benefits

To use the provisions within the U.S.-Netherlands tax treaty, taxpayers must document their eligibility on the correct forms. The two primary forms are IRS Form 8833 for disclosing a treaty-based return position and Form W-8BEN for claiming benefits from U.S. withholding agents.

Form 8833, Treaty-Based Return Position Disclosure

Form 8833 is used by taxpayers to disclose to the IRS that they are taking a position that a U.S. tax treaty overrules or modifies an aspect of U.S. tax law. Filing this form is required in many situations where a taxpayer’s U.S. tax liability is determined by relying on the treaty. To complete the form, you will need to provide the treaty country (Netherlands) and the specific article(s) of the treaty that support your position, along with a summary of the facts on which your claim is based.

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner

Form W-8BEN is used by foreign individuals to certify their non-U.S. status and to claim treaty benefits for income received from U.S. sources. The form’s purpose is to establish that you are not a U.S. person and to claim a reduced rate of, or exemption from, U.S. tax withholding. To complete Form W-8BEN, you must provide your full name, country of citizenship, permanent residence address, and your foreign tax identifying number (TIN).

How to File for Treaty Benefits

The filing process differs for Form 8833 and Form W-8BEN, as one is part of a U.S. tax return while the other is submitted to a financial institution.

For Form 8833

The completed Form 8833 must be attached to the taxpayer’s U.S. income tax return for the year in which the treaty position is taken. For non-resident individuals, this would be Form 1040-NR, U.S. Nonresident Alien Income Tax Return. For foreign corporations, the relevant return is often Form 1120-F, U.S. Income Tax Return of a Foreign Corporation.

For Form W-8BEN

Unlike Form 8833, Form W-8BEN is not filed with the IRS. Instead, this form should be submitted directly to the withholding agent or payer of the income, such as a U.S. brokerage firm. The firm will then use the information on the form to apply the correct, treaty-reduced withholding tax rate to your income.