The Dutch American Friendship Treaty (DAFT)
The Dutch American Friendship Treaty (DAFT) is an agreement between the United States and the Netherlands. It allows American entrepreneurs and their families to live and work in the Netherlands. As a resident of the Netherlands, you would be subject to Dutch income taxation. As an American, you’re required to file a U.S. tax return, even though you live in the Netherlands.
What are the requirements?
There are several requirements for a Dutch residence permit under the DAFT agreement. Firstly, you must be a U.S. citizen. In addition, you’re an entrepreneur doing business with the United States from the Netherlands. Examples are software, consulting and management services. As an entrepreneur, you can be either self-employed or the director of a Dutch company. The Dutch company can be the subsidiary of an American company. Finally, the Dutch immigration services require an investment of at least €4,500. A Dutch DAFT residence permit generally is renewable every two years.
Self-employed or setting up a Dutch limited liability company?
When self-employed, you’re required to report your income on your U.S. tax return on Schedule C. Likewise, on your Dutch tax return, you’re subject to Dutch income taxation on your net profits. However, on your U.S. tax return, you can claim a credit for the income tax paid to the Netherlands. In other words, your U.S. income tax liability is reduced by the income tax paid to the Netherlands.
Alternatively, you can chose to set up a Dutch limited liability company (BV). The BV would be subject to Dutch corporate income taxation. Generally, the BV itself would not be subject to U.S. income taxation. However, as the shareholder of a foreign (i.e. non-U.S.) legal entity, the IRS requires you to include information about the BV on your U.S. tax return.
What’s my best option?
Overall, it’s generally much simpler to structure your business as a self-employed entrepreneur. The cost of compliance with Dutch and U.S. tax rules would be much lower. Without a BV, you would not be required to file a Dutch corporate tax return. In addition, you would not be required to include the BVs information on your U.S. tax return, which would otherwise significantly complicate your tax return.
On the other hand, the Dutch tax rate at which a BVs profits are taxed is lower as compared to the Dutch individual income tax rate. If your expected annual profit exceeds €130,000, the tax savings for setting up a BV would outweigh the additional compliance cost for setting up the BV and filing the additional tax forms.
If you are an American and would like to know whether you may qualify for the DAFT, please contact us. We specialize in preparing U.S. tax returns for Americans in the Netherlands and also prepare Dutch tax returns. We have offices in Denver and in Rotterdam and we speak Dutch and English.