How does the tax treaty between the US and Europe work?
The US has signed 68 tax treaties with several countries, including the Netherlands. The tax treaty only determines which country has a corporate tax law but not how and what a country may tax. The tax treaty doesn’t relieve US persons of their obligation to declare in the Netherlands and/or America.
One of the most important things the tax treaty regulates covers tax residency requirements. The residence of a person determines which country has the first right of taxation. In addition, only a natural person, who is a resident of either the US or the Netherlands, can claim benefits arising from the tax treaty.
As indicated elsewhere, US citizens and Green card holders are considered living in the US on the basis of their nationality, or the fact that they have a permanent residence permit on the basis of their Green card. However, if a US citizen or Green card holder lives in the Netherlands, the Dutch tax authority considers this person a Dutch resident on the basis of residence. In this situation, such a person has dual residency and both the Netherlands and the United States will recover the full tax from the worldwide income, which could result in double taxation of the same income in both countries. The tax treaty clarifies this dual residence issues by stating that the ‘real’ home will be determined on the basis of the permanent home, or personal and economic relations or where the person usually resides.
When residence is determined on the basis of the tax treaty, the decision is made as to which country has the first right to tax, and the other country should then avoid double taxation.
In this respect, the US has a unique tax system, which doesn’t consider certain advantages/exemptions obtained in the Netherlands. As a result, despite the tax treaty, it could happen in a small number of cases that you may still have to pay tax in the US.