The tax implications of being a US expat in the Netherlands

Melissa Groves from Bright!Tax is here to explain in which scenarios the Netherlands allows for dual-citizenship, when you need to renounce being a US citizen and what it means for your taxes.

Dreaming of replacing the American dream with Dutch windmills, art museums and cycling along the canals? You're not alone - the Netherlands really does offer a picturesque life.

Double taxation

However, as a US expat, you might face a complex tax situation. Your home country still wants their cut, potentially leading to double taxation and a filing mess. Moreover, the Dutch have pretty strict laws around dual citizenship.

So, how do you navigate your citizenship and tax situation while in the Netherlands? This article explores the answers to these questions: get ready to untangle the FEIE, FTC and expatriation tax to find the path to tax efficiency (and maybe some stroopwafels).

Dual citizenship in the Netherlands

The Netherlands is among the strictest countries when it comes to dual citizenship. Yes, you can have it - but only in very specific situations. Thus, if you want to become a Dutch citizen, you most likely have to give up your other passport(s).

However, more relaxed laws were set to be debated by the Dutch parliament late in 2023, so we might expect to see some changes soon.

For now, the general rule is that you need to renounce your other citizenship to obtain the Dutch one. This is especially true if you do it through naturalisation, the most common process for getting citizenship in the Netherlands.

Some exceptions include:

• Dual citizenship at birth: If you were born with Dutch citizenship and another citizenship automatically due to your parents' nationality, you can keep both.
• Marriage / registered partnership: You can keep your original citizenship if you're married to or in a registered partnership with a Dutch citizen.
• Refugee status: Recognised refugees in the Netherlands can keep their original citizenship when becoming Dutch.
• Country restrictions: If your home country doesn't allow renouncing citizenship, the Netherlands may grant an exemption.
• Minors: Children under 18 can inherit dual citizenship if it occurs automatically.

Note: The US allows dual citizenship, so there are no specific restrictions for US citizens seeking Dutch citizenship on the US side. However, you'll still need to meet the Netherlands' requirements and potentially renounce your US citizenship (with exceptions mentioned above).

Tax implications of dual citizenship for US expats in the Netherlands

Being a US citizen with Dutch residency creates a unique tax situation. The US operates under a citizenship-based taxation system, so US citizens, regardless of where they live or work, are required to file US tax returns annually.

This also applies to US expats living in the Netherlands, so in some cases, you'll need to file tax returns with both countries.

US - Netherlands Tax Treaty and tax credits

Fortunately, the US and the Netherlands have a tax treaty to prevent double taxation. This treaty helps to ensure you're not taxed on the same income by both countries. However, due to the Saving Clause included in the treaty, you may be better off claiming tax credits:

Foreign Earned Income Exclusion (FEIE)

The FEIE allows qualified US expats to exclude a portion of their foreign earned income from US taxes, which may significantly reduce your US tax liability. To qualify, you must meet the physical presence test or the bona fide residence test.

Foreign Tax Credit (FTC)

Even if your income falls outside the FEIE limits, you might still be able to reduce your US tax burden with the Foreign Tax Credit (FTC). The FTC allows you to claim a credit on your US tax return for income taxes you've already paid to the Netherlands, helping to prevent paying taxes twice on the same income.

Child Tax Credit (CTC)

US expats living in the Netherlands with qualifying children or dependents living with them can claim the Child Tax Credit (CTC) just like in the US. The credit usually gives you up to $1.600 in partially-refundable credits per qualifying child / dependent.

Tax implications of renouncing US citizenship

Decided to renounce your US citizenship? This is a formal and irreversible process, involving appearing in person at a US consulate or embassy abroad to complete an oath of renunciation.

There are also fees associated with the process, such as:

Exit tax

A significant tax consequence of renouncing US citizenship for certain individuals is the potential for an expatriation tax, also known as the exit tax.

The exit tax applies to US citizens meeting one or more of the following criteria at the time of renunciation:

• Net worth: Having a net worth of $2 million (USD) or more.
• Tax history: Having an average annual net income tax liability exceeding a certain threshold (adjusted annually for inflation) for the five years preceding expatriation.
• Tax compliance: Failing to certify compliance with US tax obligations for the five years preceding expatriation.

If you fall under one of these categories, the IRS may tax you as if you sold all your worldwide assets the day before expatriation. This could result in a significant tax bill, especially for high net-worth individuals.

Tax filing obligations after renunciation

Even after renouncing your US citizenship, you might still have some tax filing obligations:

• Final Tax Return: You'll need to file a final US tax return for the year of renunciation, reporting your income up to the date of renunciation.
• Form 8854: You'll need to document your compliance with US tax obligations for the five years preceding your expatriation by filing Form 8854.

After filing these forms, the process of renouncing your US citizenship is officially complete and you have fulfilled the last obligation to the IRS as a US taxpayer.

Navigate through complex tax situations with professional help

Consulting with a qualified tax professional specialising in US expatriation taxes is crucial before making any decisions regarding renouncing your US citizenship or even filing your first tax return from abroad. These experts can guide you through the intricacies of the US - Netherlands tax treaty, the FEIE and FTC, as well as other relevant tax provisions.

The Bright!Tax team is experienced in helping US expats with their tax-related issues. Reach out to their CPAs and tax advisors to book a consultation and ensure the optimal tax-filing strategy.