U.S. citizens employed in the Netherlands who have been taxed under the 30% ruling, the abolition as of 1 January 2025 of partial non-resident taxpayer status brought significant changes. These employees, like others taxed under the 30% ruling, can no longer choose to be considered partial non-resident taxpayers. As a result, their income in Box 2 of the Dutch income tax return (income from a substantial interest, meaning a holding of at least 5% of the shares in a company) and Box 3 (income from savings and investments) will be fully taxed in the Netherlands.
But this change particularly affects employees who are U.S. citizens, because they are considered U.S. tax residents based on their nationality. This group should consider how the changes will affect them. it is important to anticipate well in advance of the tax change that will take effect since January 1, 2025. For those who were already being taxed under the 30% ruling in 2023, a transitional law applies that delays the change to 1 January 2027.
To determine whether a jurisdiction has the right to tax a person, it is necessary to determine where that person is a tax resident. Tax residency in the Netherlands is determined based on a person’s facts and circumstances. An individual is a tax resident in the Netherlands if the circumstances indicate that there is a sustainable bond of personal and economic interests with the Netherlands. That bond does not have to be stronger than the bond with another country, which means that someone can be considered a tax resident in both the Netherlands and another country.
The U.S. tax system, on the other hand, is based on the taxpayer’s citizenship. This means that U.S. citizens (individuals born in the U.S. or who hold a green card, regardless of their parent’s nationality) remain subject to U.S. taxation even if they reside in another country.
Employees taxed under the 30% ruling were previously able to opt to be treated as partial non-resident taxpayers for Netherlands tax purposes. Under this option, their income from both a substantial interest (a direct or indirect interest of 5% or more in a company or partnership) and income from savings and investments is reportable and taxed only if it stems from Netherlands sources (such as real estate in the Netherlands and substantial interests in Netherlands entities). These taxpayers did not have to report their worldwide income.
In many cases, U.S. employees who live and work in the Netherlands are considered tax residents of the Netherlands. This means that they are taxed on their worldwide income in the Netherlands based on domestic law and are also liable to tax in the U.S. based on U.S. law. The tax treaty between the Netherlands and the U.S. aims to prevent double taxation by allocating tax rights over income sources such as employment.
For purposes of the U.S.-Netherlands tax treaty, an individual who is a partial non-resident of the Netherlands (a resident of the Netherlands with the 30% ruling who opted to be treated as a partial non-resident payer) is not considered a Netherlands tax resident under the treaty, even if the individual is a tax resident of the Netherlands on the basis of Dutch national legislation.
Since the option to elect the status of partial non-resident has been abolished as of 1 January 2025 (or as of 1 January 2027 if the transitional law applies) an individual now might qualify as both a Netherlands tax resident and a U.S. tax resident, for purposes of the U.S.-Netherlands tax treaty. In those cases, the tax treaty uses a tiebreaker provision to determine the tax residency of an individual who is considered a tax resident of both countries. The tie breaker determines the person’s tax residency for purposes of the tax treaty, but it will not have any impact on the person’s status under domestic legislation.
When a U.S. citizen opted for partial non-resident status, the Netherlands’ right to levy tax on employment income was generally limited under the tax treaty to remuneration that could be allocated to work conducted in the Netherlands. Remuneration allocated to work completed outside the Netherlands was not subject to taxation in the Netherlands.
As a result of the repeal of the option to choose partial non-residence status, the worldwide income of a U.S. citizen in principle becomes subject to taxation in the Netherlands, including remuneration that can be allocated to the days the U.S. employee worked outside the Netherlands.
Furthermore, a U.S. citizen working in the Netherlands now must declare their worldwide income in the Dutch personal income tax return. That includes passive income, including balances of all bank accounts and stock portfolio, properties, and other assets (such as 401k or IRA accounts). Without the protection provided by the partial non-resident option, the employee must pay taxes in the Netherlands based on their worldwide income, but may be able to claim tax relief if the tax treaty allocates taxing rights to the U.S. Any further tax relief for any double tax incurred should be claimed in the U.S.
Thus, if a U.S. citizen employee cannot opt for partial non-resident status, this will not only affect the employee’s personal income tax return in the Netherlands, but also their U.S. tax return. Moreover, in case of compensation agreed under tax equalisation or under tax protection arrangements, this may have an impact on the employer’s employment costs.
For more information on the new rules, please consult your regular BDO contact or the author of this article.
Robin Schalekamp
BDO in Netherlands
But this change particularly affects employees who are U.S. citizens, because they are considered U.S. tax residents based on their nationality. This group should consider how the changes will affect them. it is important to anticipate well in advance of the tax change that will take effect since January 1, 2025. For those who were already being taxed under the 30% ruling in 2023, a transitional law applies that delays the change to 1 January 2027.
Determining Tax Residency
To determine whether a jurisdiction has the right to tax a person, it is necessary to determine where that person is a tax resident. Tax residency in the Netherlands is determined based on a person’s facts and circumstances. An individual is a tax resident in the Netherlands if the circumstances indicate that there is a sustainable bond of personal and economic interests with the Netherlands. That bond does not have to be stronger than the bond with another country, which means that someone can be considered a tax resident in both the Netherlands and another country.The U.S. tax system, on the other hand, is based on the taxpayer’s citizenship. This means that U.S. citizens (individuals born in the U.S. or who hold a green card, regardless of their parent’s nationality) remain subject to U.S. taxation even if they reside in another country.
Partial Non-resident Taxpayer
Employees taxed under the 30% ruling were previously able to opt to be treated as partial non-resident taxpayers for Netherlands tax purposes. Under this option, their income from both a substantial interest (a direct or indirect interest of 5% or more in a company or partnership) and income from savings and investments is reportable and taxed only if it stems from Netherlands sources (such as real estate in the Netherlands and substantial interests in Netherlands entities). These taxpayers did not have to report their worldwide income.
Double Taxation for U.S. Employees in the Netherlands
In many cases, U.S. employees who live and work in the Netherlands are considered tax residents of the Netherlands. This means that they are taxed on their worldwide income in the Netherlands based on domestic law and are also liable to tax in the U.S. based on U.S. law. The tax treaty between the Netherlands and the U.S. aims to prevent double taxation by allocating tax rights over income sources such as employment.For purposes of the U.S.-Netherlands tax treaty, an individual who is a partial non-resident of the Netherlands (a resident of the Netherlands with the 30% ruling who opted to be treated as a partial non-resident payer) is not considered a Netherlands tax resident under the treaty, even if the individual is a tax resident of the Netherlands on the basis of Dutch national legislation.
Since the option to elect the status of partial non-resident has been abolished as of 1 January 2025 (or as of 1 January 2027 if the transitional law applies) an individual now might qualify as both a Netherlands tax resident and a U.S. tax resident, for purposes of the U.S.-Netherlands tax treaty. In those cases, the tax treaty uses a tiebreaker provision to determine the tax residency of an individual who is considered a tax resident of both countries. The tie breaker determines the person’s tax residency for purposes of the tax treaty, but it will not have any impact on the person’s status under domestic legislation.
Tax Consequences for U.S. Nationals
When a U.S. citizen opted for partial non-resident status, the Netherlands’ right to levy tax on employment income was generally limited under the tax treaty to remuneration that could be allocated to work conducted in the Netherlands. Remuneration allocated to work completed outside the Netherlands was not subject to taxation in the Netherlands.As a result of the repeal of the option to choose partial non-residence status, the worldwide income of a U.S. citizen in principle becomes subject to taxation in the Netherlands, including remuneration that can be allocated to the days the U.S. employee worked outside the Netherlands.
Furthermore, a U.S. citizen working in the Netherlands now must declare their worldwide income in the Dutch personal income tax return. That includes passive income, including balances of all bank accounts and stock portfolio, properties, and other assets (such as 401k or IRA accounts). Without the protection provided by the partial non-resident option, the employee must pay taxes in the Netherlands based on their worldwide income, but may be able to claim tax relief if the tax treaty allocates taxing rights to the U.S. Any further tax relief for any double tax incurred should be claimed in the U.S.
Thus, if a U.S. citizen employee cannot opt for partial non-resident status, this will not only affect the employee’s personal income tax return in the Netherlands, but also their U.S. tax return. Moreover, in case of compensation agreed under tax equalisation or under tax protection arrangements, this may have an impact on the employer’s employment costs.
For more information on the new rules, please consult your regular BDO contact or the author of this article.
Robin Schalekamp
BDO in Netherlands