American Expats in the Netherlands: 10 Things to Know Before Moving
The Netherlands offers many benefits for American expats. It’s especially attractive thanks to the 30% tax ruling commonly known as the “30% facility.” This special tax break is applicable to certain qualified persons relocating to the Netherlands for work.
However, as with any move abroad, it’s important to weigh all financial considerations. So before making the big move, Americans moving abroad to the Netherlands should be aware of these ten items:
1. As an American expat in the Netherlands, investing and paying taxes may be more difficult than you’re accustomed to.
U.S. citizens are uniquely subject to citizenship-based taxation. This means no matter where you live, you’ll be required to file taxes on an annual basis and stay compliant with U.S. tax regulations. Learn more about expatriation and tax considerations that affect U.S. citizens and green-card holders.
As such, you’ll want to familiarize yourself with requirements around annual Report of Foreign Bank and Financial Accounts (FBAR) submissions and the consequences of owning Passive Foreign Investment Companies (PFICs). PFICs are not only time consuming and costly to report (Form 8621) but they’re also taxed punitively under U.S. law.
All non-U.S. mutual funds and exchange-traded funds, even those offered by large U.S. companies, are considered PFICs. What matters is where the funds and ETFs are registered. For this reason, you’ll likely want to avoid buying Dutch or other European mutual funds.
American expats should usually avoid owning shares in non-U.S. mutual funds. Generally speaking, you’ll want to buy U.S.-based funds that are exempt from PFIC rules.
Additionally, working with a Dutch financial advisor may incur the Netherlands’ 21% value-added tax (VAT), which is a flat tax levied on goods and services. American financial advisors are exempt from VAT.
2. You likely won’t be able to invest with a U.S. brokerage house.
Many U.S. financial institutions have stopped working with non-U.S. residents, such as U.S. expats living in the Netherlands. Several brokerage firms will even proactively close accounts owned by American expats when they find out you’re living overseas.
Additionally, the EU’s MiFID II rules prevent EU residents from investing in non-EU funds. As such, U.S. brokerage firms prevent EU-resident clients from buying U.S. mutual funds and exchange-traded funds.
Fortunately, MiFID II contains a clause that allows American expats and others to buy U.S.-based investment funds as long as they work with an experienced non-EU registered investment advisor who purchases U.S. funds on their behalf.
This allows Americans partnering with non-EU financial advisors, such as Creative Planning International, to achieve tax efficiency and compliance both in the U.S. and in the Netherlands.
3. The Netherlands has unique tax policies you’ll need to plan around to avoid excessive taxation.
The Netherlands tax system features unique regulations that require forethought and specialized planning, especially for Americans. These include the 30% tax ruling, Box 3 income tax and the country’s inheritance tax regime.
The U.S. and the Netherlands are party to three separate tax treaties — income tax, estate tax and Social Security — that coordinate tax treatment between the contracting states on specific types of income and mitigate the risk of double taxation.
Proper interpretation and correct application of treaty provisions, however, requires training and expertise. Additionally, the treaties don’t eliminate all complications that can lead to double taxation (e.g., contributing after-tax Dutch earnings to a U.S. individual retirement account on a U.S. pre-tax basis), and we recommend you consult with an international wealth manager to best avail yourself of treaty benefits.
4. To buy or not to buy (a house), that is the question.
Having fallen in love with the Netherlands, you may decide you are tired of renting and want to own a piece of property. If so, there are two things to keep in mind:
- The Netherlands taxes homeowners based on the rental income they would theoretically receive if they rented out their homes. This tax falls under Box 1 income tax.
- If you finance your home purchase through a loan, be mindful of U.S. IRS taxation on the change in the value of the mortgage should you pay it off (refinance, prepay the mortgage or sell the home). Make sure to consider the following:
- U.S. taxpayers will owe tax on any “gain,” (i.e., the amount calculated by taking the original mortgage balance in USD and subtracting the USD value of the mortgage at payoff).
- Any USD “losses” are ignored. Fortunately, U.S. taxpayers would still qualify for U.S. tax-free gains ($250,000 per qualifying taxpayer) on the sale of their primary residence, while the Netherlands does not tax gains on the sale of personal property.
5. The Netherlands’ 30% facility can offer significant financial benefits to American expats.
The 30% facility offers a variety of tax benefits to new residents in the Netherlands, such as U.S. expats, for the first five years of their stay. Key benefits include the following:
- 30% of income is tax free
- Exemption from Dutch Box 3 investment income tax (the Box 3 tax applies to worldwide financial assets)
Taxes paid to the Netherlands on the other 70% of income should qualify for U.S. tax credits (and vice versa), thereby avoiding double taxation.
After the 30% facility expires, residents in the Netherlands will then face Box 3 income taxes on their worldwide financial assets.
6. No Dutch taxes on capital gains … at least for a time.
U.S. expats eligible for the 30% facility in the Netherlands can enjoy tax-free investment income on their U.S. investment account. However, per the Saving Clause in Article 24 of the U.S./Netherlands income tax treaty, if the investor is a U.S. taxable person, they will still be subject to U.S. passive income taxes on those same investments.
Once their 30% facility expires after five years, the Netherlands resident will be subject to Box 3 income tax. Box 3 income tax is assessed on the value of financial assets and looks and feels like a wealth tax. However, Box 3 is actually considered income tax and qualifies as a credit against the aforementioned U.S. passive income taxes for U.S. expats in the Netherlands.
In 2021, the Netherlands Supreme Court ruled the manner in which Box 3 has been taxed since 2017 was in violation of the European Convention on Human Rights. As such, the Netherlands will need to establish a new approach to taxing financial assets.
In April 2022, the Dutch government confirmed they’ll tax actual income from 2025 forward, which may be similar to the way the U.S. taxes interest, dividends and realized capital gains.
Currently, the specifics of the computation methodology aren’t known. So long as Box 3 income remains an income tax and not a wealth tax, it should continue to qualify as a credit against U.S. taxes due on the same income.
The Dutch government may also reassess past Box 3 income taxes back to 2017, which could present some additional complexities for Americans (as they may find themselves needing to restate historical U.S. tax returns to account for the change in Dutch taxation).
7. Gifting and estate planning as an American expat in the Netherlands can be tricky — and may result in double taxation if you’re not careful.
The U.S. and the Netherlands have an estate tax treaty to mitigate double taxation issues affecting the same assets. Most importantly, Americans residing in the Netherlands should understand two key factors:
- The U.S. taxes the estate of the deceased if the decedent was a U.S. domicile (i.e., all U.S. citizens no matter where they live and die), while the Netherlands only taxes the beneficiary of the inheritance if the deceased was a resident of the Netherlands; the key consideration here is the potential mismatch regarding the person subject to taxation: the giver vs. the receiver.
- Given the relatively high U.S. estate tax exemption ($12.06 million per person in 2022), Dutch tax rules here will likely take precedence. This is especially true for transfers between U.S. citizen spouses, which are tax exempt in the U.S. while not necessarily so in the Netherlands.
8. The trust you set up in the U.S. may help in the disposition of your estate — but consult with a Dutch estate planning attorney.
A U.S. trust may expedite the transfer of your U.S. assets outside of U.S. probate and circumvent the need for an IRS transfer certificate.
The benefit on the Dutch side is ambiguous at best. As a civil law country, the Netherlands has not historically acknowledged trusts. Different experts in the Netherlands reach different conclusions based on their experience and the unique circumstances of each case.
This matter is best handled with a competent Dutch estate attorney conversant in cross-border issues. To learn more on how “cross-border” is defined, watch our quick explainer video.
9. The Netherlands has forced heirship; the U.S. does not.
The concept of forced heirship is foreign to most Americans, as the vast majority of U.S. states do not require any part of an estate to pass to specific descendants.
Fortunately, the Netherlands follows EU Regulation 650/2012, which allows residents to explicitly indicate in their wills that their estates will pass per the laws of their country of citizenship. U.S. citizens are, thus, able to pass their estate on as they wish.
Applying this EU regulation does not affect the taxation of the estate — only who the heirs may be.
10. It’s unlikely the Netherlands will assess taxes if you inherit money from a U.S. resident while you’re living in the Netherlands.
The assessment of inheritance taxes in the Netherlands depends on the domicile of the deceased and the location of the inherited assets. If you inherit U.S. assets from a U.S. resident, the Netherlands should not tax that inheritance.
However, once inherited, the assets may eventually face Dutch taxation, were you to die a resident in the Netherlands.
Request a meeting with a wealth manager from Creative Planning International to discuss your unique situation as an American expat in the Netherlands, and get the comprehensive wealth management solutions you deserve.
