There is no escaping taxes they say. The impression of being taxed by two countries may unnecessarily scare some. Moving to the Netherlands under the Dutch-American Friendship Treaty (DAFT) visa is an exciting opportunity for U.S. citizens looking to start a business in one of Europe’s most innovative economies. Our clients who go through this process sometimes want help with the financial admin, especially filing for taxes as they sometimes feel overwhelmed with the complexities of navigating international tax rules, especially in the first year. Here some tips to help you along. 

A frequent question from U.S. citizens living abroad is: Where do I pay my taxes? You would almost think they love to pay taxes 😉. In this case, the short answer is that as a U.S. citizen, you are required to file a tax return in both the United States and the Netherlands. You normally pay primarily in the country of your residency, but depending on the calculations the U.S. may have a (small?) claim as well.

Yes, the U.S. makes you suffer this daft administrative process even though you live outside the U.S. This is because the almost unique U.S. tax system taxes its citizens on their worldwide income, regardless of where U.S. citizens live in the world. This means that as a U.S. citizen living in the Netherlands, you still need to report your global income to the U.S. Internal Revenue Service (IRS). But not to worry too much, yes a daft hassle, but there is a tax treaty with the Netherlands to avoid paying double.

Since you live and operate your business in the Netherlands under the DAFT residence permit, you are also subject to Dutch tax laws. Typically, you will be considered a resident taxpayer in the Netherlands if you spend more than 183 days in the country or have a permanent place of residence there. As you register yourself as resident in the Netherlands there is little escaping this. As a resident taxpayer, the Dutch government taxes your worldwide income as well. Unlike the U.S. the Netherlands only taxes residents living in the country over their worldwide income. Better become Dutch quickly 😉.

As said, fortunately, both countries have measures in place to avoid double taxation. This is often a key concern for U.S. expats/migrants. The U.S.-Netherlands tax treaty and certain tax credits/exemptions ensure that you don’t pay tax twice on the same income.

Here are a couple of key tools to avoid double taxation:

• 1. The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens to exclude up to $120,000 (2023 amount, subject to change) of foreign-earned income from U.S. taxation if they meet the physical presence test or the bona fide residence test. If you are also a lot in the U.S. then be careful and seek advice.
• 2. Then there is the Foreign Tax Credit (FTC). If you pay taxes in the Netherlands, you can often claim a credit on your U.S. tax return for the taxes paid abroad. This reduces your U.S. tax liability.
• 3. The U.S. and the Netherlands also have a totalization agreement that prevents you from paying double social security taxes. If you’re self-employed in the Netherlands, you’ll contribute to the Dutch social security system, and you can apply for a certificate of coverage to avoid U.S. social security tax.

As a U.S. citizen residing in the Netherlands under the DAFT visa, you will file taxes with the Belastingdienst, the Dutch tax authority. The process may feel daunting at first, but once you familiarize yourself with the forms and procedures, it becomes manageable.

If it’s your first year in the Netherlands, you’ll need to fill out the M Form. This form is used by individuals who have only been living in the Netherlands for part of the tax year. It allows you to report both your Dutch and foreign income. The M Form is crucial because it helps determine whether you qualify as a resident or non-resident taxpayer. Most Americans under the DAFT visa will likely be considered resident taxpayers after the first year.

After the first year, you will typically file the annual income tax return (IB form) each year with the Belastingdienst. This form is where you report your worldwide income and claim any applicable deductions or credits.

As a DAFT visa holder, you’ll also need to pay social security contributions in the Netherlands. The Dutch social security system is comprehensive, covering healthcare, pensions, unemployment benefits, and more. If you’re self-employed, you will be responsible for paying both income tax and social security contributions (part of the overall tax burden) in the Netherlands.

The U.S. tax system requires all citizens to file Form 1040 every year. On this form, you’ll report your worldwide income, including income earned in the Netherlands. If you qualify for the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), you’ll also need to file the appropriate forms.

Form 2555 is used to claim the FEIE if you qualify based on residency or physical presence.

And form 1116 needs to be used to claim the FTC for taxes you’ve already paid in the Netherlands.

Conclusion Your first year in the Netherlands under the DAFT residence permit brings exciting opportunities. But also daft new challenges, including understanding and complying with the tax obligations in both the United States and the Netherlands. Although you are required to file tax returns in both countries, the bilateral tax treaty and other tools help prevent double taxation. The process may seem more complex, especially the first year, but keeping the above in mind is manageable.

More on the DAFT immigration route here.