Our international tax expert answers readers'questions related to capital gains, the 30 percent ruling, wage tax refunds and the date of tax responsibility.

Question on Capital gains

I am in the process of rebalancing my portfolio of US stocks. I am currently a US resident with a Green Card; however, I am scheduled to return to the Netherlands in the next half year and will take up residency there. I work for a Dutch company.

The repositioning of my portfolio will require me to pay taxes on long-term capital gains under US law.

Is there a difference between taxes on capital gains between the US and the Netherlands? Would the US law prevail, even if one’s formal residence is The Netherlands?

Regards,
(Name supplied)

Frank de Bats answers: 

Thank you for sending an interesting question. There are numerous tax (and social security) effects of your scheduled return and change of residence, but I will focus on your tax on income from a net assets situation.

As a Green Card holder, the US national law will subject you to US taxes and US tax rules, independent of your residence. As soon as you take up residence in The Netherlands, Dutch national tax rules will subject you to Dutch taxation over your worldwide income. The Dutch tax system, as you may know, does not have a capital gains tax, but merely “box 3 taxation”, which can be summarised as income tax at 1.2 percent of the average value of net savings and investment assets. US dividend tax withheld at source can be offset against Dutch tax payable.

The result of the above is taxation in two countries. Most of such a double-tax burden will be prevented by the Dutch-US tax treaty. In short, security savings and investments income may only be taxed in the country of residence. Therefore, as of the moment you take up residence in The Netherlands, you should be able to claim double tax relief for US tax purposes, according to US tax rules.

I am not fully aware of US tax rules on long term capital gains tax for non-residents, but I would expect that the treaty would leave room for the US to levy long term capital gains tax at least over the period you have been a US resident. I further understand that the US double tax relief method allows a credit of Dutch taxes paid rather than an exemption of items of income. You may wish to consult a US tax expert to find out details on such taxation and the US rules on double tax relief.

I trust to have informed you appropriately but do not hesitate to contact me if you need further assistance.

Regards,
Frank de Bats - Tax Lawyer

 Question on paying tax on "box 3" items when on the 30 PC ruling

I heard / read somewhere that people on the 30 percent ruling do not pay any tax of “Box 3” items (investments)? Is this true? Because when I called the tax office they knew nothing about it. Please help.

My second question is, besides buying a house, what, if any, other strategies can a person in high tax brackets (paying approx. 30,000 per annum in tax) use to reduce their tax.

Regards,
(Anonymous) 

Frank de Bats answers: 

It is indeed a known fact that the tax authorities’ call centre is not equipped to answer such tax questions. You will find better-trained personnel if you call the Foreign Residents Tax Office (+31 55 5385 385 ) or the special information team for Cross-Border Work (+31 800 024 1212).

It is true (except for Dutch real estate as an investment in box 3), that the 30 percent regulation is meant to attract foreign highly skilled employees, by, generally speaking:
a) reducing their effective tax rate on employment income by way of accepting 30 percent of their income package as exempt remuneration for extra expatriation costs, and
b) Not scaring them off by taxing their assets, and therefore regard them as “fictitious non-residents”, leading to an almost complete exemption of “box 3” income (from savings and investments).

To answer your second question, in the past decade, the subsequent tax reforms have quite effectively ruled out effective tax planning strategies for employees, except for smaller wage tax exemptions for mixed private and business expenditures. But apparently you are looking for something with more impact on your tax burden. Usually, you will have to engage in cross-border activities or entrepreneurship, and strategies further highly depend on your personal circumstances and your flexibility to change these.

I trust to have informed you appropriately for this moment. If you need more assistance, please do not hesitate to contact me.

Regards,
Frank de Bats - Tax Lawyer

Question on wage tax refund

I worked for four months in the Netherlands in 2006, and then moved back to Finland. How can I get the wage tax refund?

Thank you very much for your help!

Regards,
Petra Niiranen

Frank de Bats answers:  

There is only one way to claim the refund: file an income tax return. Indeed, you are referring to the effect that if you have worked not all of the months in your first year, wages tax will have been withheld in a higher pace than you are due income tax. And that very often (not always) gives rise to a refund.

The income tax return form that you need is most probably type M, which stands for Migrants, but also for Most Complex. The tax authorities seem to agree on that, as practice tells us they take a long time to process such returns and produce the assessment and refund you have been waiting for (the refund attracts 5 percent interest). Probably therefore, they have opened the possibility of requesting a preliminary refund upon emigration.

You are a migrant for Dutch tax purposes if you have shifted your tax residence from Finland to here. But if you have kept your home, partner, friends, family etc in Finland during your stay in The Netherlands, you have remained a tax resident in Finland. In that case, you need income tax return form C (for non-residents). Please note that registration at the city town hall is not decisive, but merely a firm indication of Dutch tax residence.

I trust to have informed you appropriately. Please do not hesitate to contact me should you need further assistance.

Regards,
Frank de Bats - Tax Lawyer

Question related to date of tax responsibility

I applied for a verblijfsvergunning in March 2006 to start a business under the terms of the Dutch-American friendship treaty, because my Dutch wife of
11 years is self-employed and cannot sponsor me here.

There have been numerous setbacks and the case has been on appeal for 10 months, meaning I can stay in the country legally, but cannot work and do not have to pay inkomstbelasting on my “box 3” income, which is a fairly substantial amount.

I have been told that if my application is approved (which will only happen
soon if I demand a hearing), I will have to file a Dutch tax return for 2006, because if I get the VV I will be considered to have been a resident for tax purposes from the time of the VV application. With “box 3” income running at about EUR 8000 per year, I have been considering cancelling my application when I travel to the US for the summer, and staying away three months and starting a new application.

My question is, is it true that I will be retroactively taxed from the date of my application here. Will the Dutch tax be deductible on my US tax return? Due to the number of dependents and the nature of my investments, my US income tax due has been zero for the past three years. Since there is not tax in the US to offset, does that mean I will be paying the Dutch tax and getting no credit at all?

Regards,
Peter Lochtefeld

Frank de Bats answers: 

I understand from your question that you are currently the holder of a temporary residence permit, probably a sticker in your passport, allowing you to stay here legally pending your application for a longer term residence permit and a work permit. [Note from the editor: for any questions regarding work permits you may contact our immigration experts Patrick Rovers and Hans van Velzen.]

Based on the information that you have provided, I conclude that you are socially insured as a factual resident of The Netherlands. However, this need not directly lead to social security premiums payable. Employee insurance premiums are only due in case of employment, which I understand is not the case, and National insurance premiums are only due over income qualifying for “box 1”, income from labour, enterprise profits and owner-occupied homes, which may very well be absent for the time being.

With regards to Dutch taxes, there is no rule excluding you from taxation depending on your residence permit status. Therefore, the main rule is applicable; that you are subject to Dutch taxes if you are a resident of the Netherlands taking into account all circumstances. The relevant circumstances can be very briefly summarised as having the centre of your vital interests in the Netherlands. You say that you are married, and your Dutch wife lives here. Your residing with her points in the direction of Dutch tax residence. There may be other circumstances pointing in the opposite direction. But if you qualify as a Dutch tax resident you are subject to Dutch taxes as from the date you qualify under this rule.

From a practical viewpoint, there may be serious obstacles to duly report Dutch taxable income. It is very complicated to file a Dutch tax return without having a Dutch tax registration number (sofi-nummer). Such a number is normally issued more or less automatically when you register as in inhabitant at the city town hall, otherwise you will have to apply for one (complex procedure). I am not fully aware whether the city would allow you to register as an inhabitant based on your temporary residence permit, or perhaps you have not yet registered at all. That may be the reason why you have not yet been bothered by the tax authorities yet. Which does not exclude that you have legal obligations to fulfil: if you are a Dutch resident for tax purposes and if you are due taxes and/or premiums, you will have to request a return form to report your taxable income within 6 months after the relevant calendar year. Therefore, you need to act somewhat earlier than you seem to have expected.

The picture is not all black though: there are basic exemptions and dependents allowances in “box 3”. If you have not yet taken those into consideration, your tax burden may be lower than expected.

With regards to your US tax situation; if you are a Dutch resident, you are taxable in the Netherlands for your worldwide income in accordance with Dutch rules. As a US national, you are also obliged to report your income in the US according to US rules. A tax treaty aims (and in almost all cases succeeds) at protecting you from double taxation. Very generally speaking, the tax treaty assigns the right to tax “box 3” income to The Netherlands as the state of residence; therefore, you should be able to claim double tax relief in the US for these items of income.

However, I understand that US national rules grant this relief in the form of a tax credit. This indeed means that if there is no US tax to offset, that indeed your double tax relief credit remains ineffective under US national rules, in the first instance. You may wish to find out whether you may use such “excess credits” in later tax years, and render them effective in second instance. But please note that on balance, you have only paid tax once in this case, in the Netherlands.

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.

14 May 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]