Our international tax expert answers a reader's questions concerning tax issues between the US and the Netherlands.

I would also like to know if I have to declare the value of my house here in the Netherlands – for which I pay Dutch property taxes – as an asset on my US tax returns?

Tax lawyer Frank de Bats  answers:

Dear Sir,

These questions are not at all easy to answer, as the first question addresses three sets of legislation applying to three different taxable items.

Court settlement amount:

Generally speaking, US national tax law requires US nationals to declare worldwide income, whereas Dutch national tax law requires any Dutch resident to declare worldwide income. Therefore, you are required to declare worldwide items of income in both countries.

However, the right to tax items of income and net wealth is assigned by the US-Dutch double taxation agreement (DTA) to one state only, which should prevent double taxation. This assignment of the right to tax sometimes depends on which country regards you as a resident (relevant in the last paragraph).

Assuming we are talking about proceeds from the sale of real property located in the US, the DTA assigns the right to tax a capital gain (if any) exclusively to the US. You will have to include the capital gain in your US tax return according to US tax rules.

As you probably qualify as a Dutch resident, the next question is what you have to report in The Netherlands. I am assuming that the US real property never qualified as an owner-occupied home according to Dutch tax law (which would be a highly exceptional but also interesting situation).

Consequently, the real property itself would appear as an asset (mortgage debt would appear as a debt) in box 3: fictitious income from net assets. Capital gains as such are not taken into account in the Netherlands, merely fictitious income from net assets. This system resembles a net wealth tax.

However, as the DTA assigns the right to tax the value of US situated real property to the US, you can subsequently claim double taxation relief for the same amount in the appropriate section of the Dutch tax return. On balance, the US real property value remains almost fully exempt in The Netherlands.

However, if according to Dutch law the sale of the property has been completed in the past already, it would not be the real property itself but a receivable that would appear in box 3.

The DTA assigns the right to tax receivables to the country of residence, I assume that to be the Netherlands. The receivable should appear as an asset in box 3 and you have no subsequent right to claim double tax prevention. I am not fully aware of US taxation of net assets or net wealth, but in principle, you should firstly report the value of the receivable as a taxable asset and subsequently claim double taxation relief in the US tax return.

The fact that upon payment into your bank account, the receivable is replaced by a bank account balance, does not affect the treatment as in the previous three paragraphs.

Finally, if you have a so-called 30 percent tax ruling, it provides for a full exemption of box 3 income (Dutch tax treatment). If that is the case, you report nothing in box 3 in the Netherlands at all. In the US return however, the 30 percent tax ruling changes the picture completely. US nationals with a 30 percent tax ruling are treated as residents of the US for DTA purposes.

Consequently, unlike the above, you will not be able to claim double tax relief for either the receivable or the bank account balance in your US tax return (if so required by US tax law).

Dutch house:

I am not fully aware of US national tax law, and therefore I can advise only on tax treaty issues. The DTA assigns the right to tax income and capital gains from real property, as well as the right to tax net wealth consisting of real property to the country where the real property is situated. Therefore, if you are required to report real property situated outside the US in your US tax return, you should also be able to claim double tax relief for same.

I trust the above is of appropriate guidance, and please do not hesitate to contact me should you require further assistance.

Regards,

Frank de Bats - Tax Lawyer

De Bats Beheer BV - 27155273
Herberg 63 - NL-2264 KP Leidschendam

Telephone: +31 6 201 29 830
Fax: +31 84 728 729 6
Email:   info@frankdebats.nl

If you have a question about taxation in the Netherlands, send an email to our experts via feedback@expatica.com.

15 March 2007

Disclaimer: This column is for informative purposes only, is general in nature and is not intended to be a substitute for competent legal and professional advice. Dutch and international rules and regulations regarding taxation are subject to change.

[Copyright Expatica 2007]