Our tax expert answers readers' questions on USA/ UK dual citizenship, property gains taxation, 30 percent rule influence on the mortgage tax return and social security contributions.

I am a USA born native citizen, with dual citizenship in the United Kingdom.  I am thinking of accepting a position in Amsterdam and want to understand the impact on my earnings.  Would I pay tax in three countries?

(Name withheld)

Frank de Bats answers:

Different countries have different basic taxation principles. You may distinguish between, in general:

• The US taxes US nationals and Green Card Holders, irrespective of their residence;
• The UK taxes UK residents and some UK sources of income of non-residents;
• The Netherlands taxes Dutch residents and some Dutch sources of income of non-residents.

Indeed, overlap of taxation scope is very well possible. To prevent double taxation (and taxation vacuums), countries have concluded tax treaties, in which the right to tax defined types of income is exclusively assigned to one of the countries, depending on residence. If you can be regarded as a resident of both treaty countries, the treaty generally provides for a solution to uphold the treaty’s aim: prevention of double taxation.

In your case, the following treaties may apply to your situation:

• The US-UK tax treaty;
• The US-Dutch tax treaty;
• The UK-Dutch tax treaty.

Very generally speaking, the right to tax employment income (in treaty terms: dependent labour income) is assigned to the working state. So prima facie, your income from a position as an employee in the Netherlands would be subject to Dutch tax only. The Netherlands may unilaterally give tax relief to employees with special skills that are recruited from abroad (30 percent rule). Further, you may have to report the same income in the US tax return according to US national rules, and subsequently claim double tax relief deriving from the US-Dutch treaty.

About the same applies to the UK: if you have retained UK residence, you may have to report the same income in the UK tax return according to UK national rules, and subsequently claim double tax relief deriving from the UK-Dutch treaty. If you have retained UK residence, other types of income will be assigned for taxation in accordance with the US-UK tax treaty. On balance, each type of income would be subject to one countries’ taxation only (however tax treaties generally prevent not all, but almost all double taxation).

But your tax treatment is subject to numerous personal circumstances. For determination where you are a tax resident, it is important where your partner and children live and where you have the centre of your vital (personal and economic) interests, and for your tax treatment there are various relevant factors, such as whether you have an independent tax status in the UK, whether you are appointed as a managing director/Board Member in The Netherlands, the length of your stay and work, and for social premiums purposes, whether you can be regarded as being seconded from the UK or from the US to The Netherlands.

Therefore, without those details, it is not doable to describe the tax impact on your earnings in a useful manner, except in the above, very general way.

Pease do not hesitate to contact me should you require more detailed information.

Kind regards,
Frank de Bats - Tax Lawyer

Subject: Property Gains Taxation

We (Americans) are selling our home in the Netherlands. We've heard that if you've occupied the residence for two out of the past five years, then up to EUR 250.000 can be excluded from taxation. But, what if we haven’t lived in the residence for two years, but only a year and a half? What percentage will we owe on the gain of our property?

Regards,
Shelby Carr

Frank de Bats answers:

I do not know where you heard this, but the rule is certainly not about Dutch taxation. It may very well be about US taxation, but I will have to refer you to an American tax expert. This, as you must be aware that as American nationals, you remain subject to US taxation. In the case of your house, you must be able to claim double tax relief against US tax, as the house was located in The Netherlands. Because in such cases, the tax treaty assigns the right to tax capital gains on houses in The Netherlands (as well as income thereof, including fictitious income) to The Netherlands only!

But how is the Dutch tax treatment of a sold owner-occupied home? Since 2001, The Netherlands has done away with a net wealth tax as such. Instead, there is income tax in box 3, taxation at 30 percent of a fictitious return of 4 percent on savings and investments, leading to an effective income tax of 1.2 percent over net wealth.

Neither does the Netherlands have a capital gains tax (except a specific one with regard to at least 5 percent shareholdings (box 2) and finance thereof). But The Netherlands takes the owner-occupied home into account for income tax purposes, exceptionally in box 1 (whereas you might have expected this asset to be taxable in box 3). The legislator explained that this is done in order to tax the income from the house in box 1, in most cases a negative amount due to mortgage interest deduction. Thanks to placement of this deduction in box 1, mortgage interest can be offset against progressively taxed labour and profits income. Box 1 does not provide for rules calculating capital gains on owner-occupied homes, they are not taxable.

But they can have tax consequences: For houses with mortgage finance sold after 2004, measures have been taken so that one can not increase his mortgage interest deduction by increasing the mortgage debt when buying a new house of equal or lower value. A sale or status change of the house is tracked for five years for this purpose. If the mortgage debt is increased in the described case, the costs and interest over the increase is not deductible.

Please do not hesitate to contact me if you need further assistance.

Regards,
Frank de Bats - Tax Lawyer

30 percent rule influence on the mortgage tax return

I have lived and worked in Holland for two years. I have a permanent contract, the 30 percent rule granted and the status of "kennismigrant".

I'm interested in buying a house in Holland, and I would like to know what the influence is of the 30 percent rule on the interest tax return.

Regards,
Mihai Sfetcu

Frank de Bats answers:

You are describing a very common situation. You have of course noticed that if you bear housing costs yourself, it is generally more financially attractive to buy rather than to rent a dwelling in The Netherlands. But among the reasons why house prices are high compared to directly neighbouring countries, are the efficiency of Dutch mortgage banks and their willingness to finance high percentages of the purchase price, in many cases up to 100 percent or over, and the tax deductibility of mortgage interest.

Basically, there is no mutual influence between mortgage interest deduction and the 30 percent regulation. Both regulations derive directly from the law and are not interconnected (except perhaps where cost of housing is reimbursed by your employer, and then only temporarily. You are beyond that period now). But upon a closer look, there may be financial ratios to observe, see below. And in the following, I have assumed that you have not sold an owner-occupied house after 2004, that you are also subject to the Dutch social premiums system and that you do not have other substantial deductible items.

The 30 percent rule can be interpreted in two general ways:

• If your salary is in the highest Dutch tax brackets, the 30 percent rule is a way to decrease the tax burden in the highest bracket from 52 percent to 36,4 percent effectively;
• The 30 percent rule shaves off 30 percent of the top of your salary for tax (and pay-related) purposes. It may have as an effect that only a minor part of the 70 percent remainder is in the higher tax brackets (42 percent and 52 percent).

The first interpretation may lead to the false impression that mortgage interest deduction leads to tax savings amounting to only 36.4 percent of the mortgage interest. In fact, the second interpretation is what happens in your tax return. Mortgage interest deduction is taken off the top of the 70 percent remainder of your salary. Salary after deduction may reach only into lower tax brackets, and in that case, your tax savings may be less than 52 percent (fourth bracket rate) but still, as you have knowledge migrant status, around 41.4 percent (second bracket rate).

Mortgage banks are usually happy to make a more exact calculation for you, please inform them of your taxable salary (the 70 percent remainder) as well as your 30 percent ruling. The 30 percent ruling might be taken into account to determine your ability to pay, but not to determine your tax savings.

Please also remember that (generally speaking) costs incurred to secure finance of the house are also deductible (but not the costs incurred for the purchase of the house itself).

Do not hesitate to contact me if you need further assistance.

Regards,
Frank de Bats - Tax Lawyer

Taxation in Holland and social security contributions

I have a five-year resident permit here as I have bought a house with my boyfriend, who is Dutch and we have a child. I work for a British airline in the UK and pay National Insurance contributions. I am due to pay tax here in Holland as I stopped paying in the UK.  However, do I have to pay social security? I already paid this in the UK (EUR 6000) and obviously cannot afford both, nor should be liable for both.

The Dutch tax office says I must pay Social Security contributions here in Holland and claim back from the UK. This is not possible as it is part of my state pension and NHS contributions, where I currently pay a small 'top-up' for health insurance cover in the Netherlands. Is there a 'treaty' where you pay once in either country? My wages are paid into a UK bank account by law. Also is it possible to pay UK tax on my wages instead of Dutch tax as it is slightly more financially beneficial.
 
Regards,
Nikki Parker

Frank de Bats answers:

Yes, there is a treaty according to which you should pay tax and social security premiums only in one country. However, your situation is subject to detailed special provisions. Unfortunately, you have no choice but to gather further information and custom advice to sort out your situation.

If you would appreciate my custom assistance, please contact me according to the details below.

Kind 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.

12 June 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]