The U.S.’ tax treaty with the Netherlands has an unusual provision in its “saving clause”: taxes on former U.S. Persons in the Netherlands cannot be imposed on Dutch citizens, only on non-citizens. Unfortunately, today this provision makes little difference, because the expatriation tax occurs on the day before expatriation, when you are not yet a former U.S. Person.
However, back in 2004, the expatriation tax was imposed for ten years after expatriation, meaning this provision indeed shielded Dutch citizens from the U.S. expatriation tax. So when Washington and The Hague negotiated a new protocol to their tax treaty, Congress expressed unhappiness that this provision was retained. In response, Treasury pointed out to them:
The provision in the U.S.-Netherlands treaty is not expected to produce significantly different results than would be provided under section 877 in practice. As described above, the special tax treatment provided in section 877 applies only in the case of individuals whose relinquishment of U.S. citizenship or long-term resident status had a principal purpose of tax avoidance.
Because the Netherlands imposes substantial tax on individuals who are resident there (and only resident individuals who are subject to Netherlands tax are eligible for the benefits of the U.S.-Netherlands tax treaty, including the provision that limits the imposition of U.S. tax), individuals who are trying to avoid tax are unlikely to become residents of the Netherlands.
General background
About ten years ago, Congress was — once again — pounding the drum about Americans abroad “fleeing the country” and “not paying their fair share”. As mentioned last time, this led to various attempts to tighten the expatriation tax provisions, including significant bipartisan support in the Senate (though not in the House) for banishment of former citizens who had tax compliance issues. It was against this background that the U.S. began negotiating its new protocol to the tax treaty with the Netherlands.
U.S. tax treaties normally result in the avoidance of double taxation (and sometimes even single taxation) for corporations, but the imposition of double taxation on human beings, thanks to the “saving clause” which says the U.S. may tax “its own” citizens (including non-resident dual citizens and even former citizens) as if the treaty did not exist. However, the Netherlands insisted in 1993 that former U.S. citizens who were Dutch residents and citizens be protected from the saving clause. For lack of a better name, I’ll call this “the Dutch saving clause”.
As far as I can see, the “Dutch saving clause” was not an object of controversy when it was first introduced in 1993. The State Department, in its letter of submittal to the president, did not consider it important enough to highlight. During the Senate Committee on Foreign Relations’ 1993 tax treaty hearings, nearly all of the testimony about the tax treaty with the Netherlands focused on corporate “treaty shopping”, and no one brought up individual taxation. There was the same lacuna in the academic discussions I found.
However, after the new negotiations in 2004 the Joint Committee on Taxation suddenly became unhappy with that Dutch saving clause, and then-Senator Joe Biden wrote to Treasury to tell them so. Barbara Angus at Treasury had the task of responding to Biden, and wrote the passage quoted above; she has since moved on to the private sector, where she keeps herself busy telling people how great FATCA is. Yet even a FATCA fanatic like her recognises that there’s nothing objectionable whatsoever about the Dutch saving clause.
Under Article 3, the U.S.–Netherlands tax treaty only applies to “the part of the Kingdom of the Netherlands that is situated in Europe”, not to Curaçao, Aruba, or the other territories making up what was known back in 2004 as the Netherlands Antilles. Despite that, I’d bet that at least some of the Joint Committee on Taxation members probably thought that the “Dutch saving clause” was a giant loophole through which thousands of American billionaires would slip out to Caribbean tax havens.
Why this provision exists
Later on in her letter to Biden, Angus mentioned why the Netherlands had insisted on this treaty provision:
Indeed, pursuant to section 877, the Internal Revenue Service has issued rulings in cases involving Netherlands nationals who relinquished U.S. citizenship or long-term resident status in order to return to the Netherlands, concluding that the individuals did not have a principal motive of tax avoidance and therefore were not subject to the special tax rules provided in section 877. Moreover, because section 877 requires the United States to provide a credit against U.S. tax for tax paid in the country of residence, the application of section 877 to a resident of the Netherlands is unlikely to result in significant U.S. tax (given the substantial tax imposed by the Netherlands on the income of individuals who are resident there).
Although the Netherlands agreed to the application of the special rules of section 877 to residents of the Netherlands who are former U.S. citizens or long-term residents, for a period of 10 years when loss of U.S. citizenship or long-term resident status had as one of its principal purposes the avoidance of U.S. income tax, the exception for Netherlands nationals contained in the 1993 treaty (and continued in the proposed protocol) was important to the Netherlands. This position reflects the underlying view that the special tax rules applicable in the case of tax-avoidance motivated changes in citizenship or residence should not be applicable in cases where the move is to go home. As noted above, the rules of section 877 and the exceptions contained therein reflect a similar perspective.
Obviously, the Netherlands is not the only country whose citizens live in the U.S. temporarily before deciding to return home. Also, as I’ll explore in more detail below, the “Dutch saving clause” did not just protect native Dutch people returning home, but also American immigrants to the Netherlands. Many other countries accept American immigrants too, and nearly every country in the OECD has higher taxes than the United States. Yet none of the U.S.’ other treaty “partners” ever responded to these obvious facts by drawing a line in the sand to protect their citizens and the immigrants who came to their country in good faith with the intention of settlement and integration.
This is a disappointing moral failure all around. I can understand why, for example, my own home Hong Kong might have been unable to get a provision like this included if we’d negotiated a tax treaty with the United States back then, but why not Canada or France or the United Kingdom or Germany? And what possible basis could the United States have had to object if those countries had asked for such a provision?
The text of the provision
The treaty provision in question, Article 24(1), reads:
Notwithstanding any provision of the Convention except paragraph 2, each of the States may tax its residents and nationals as if the Convention had not come into effect. For this purpose, as regards the United States, the term national shall include a former citizen or long–term resident, not being a national of the Netherlands, whose loss of such United States status has as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.
As mentioned above, the bolded portion — the cause of all the earlier controversy — doesn’t actually do what it was intended to anymore. The U.S. made sure of that a few years after they signed the treaty.
Back in 2004, the U.S. expatriation tax still consisted of 10 years of continued taxation on U.S.-source income, and so the part in bold actually had some effect. As Angus noted, Dutch/Americans who had been dual citizens at birth were already exempt from covered expatriate status under § 877. However, the Dutch saving clause also protected Americans who naturalised in the Netherlands, as well as Dutch green card holders moving back home (if they knew enough to explicitly abandon their green cards by filing Form I-407). Even if they met the asset, tax threshold, or missing paperwork tests of § 877(a)(2) and thus became covered expatriates, the U.S. could not impose tax on them after they gave up U.S. status, since they always were or had just become Dutch citizens.
Unfortunately, Washington outmanoeuvred The Hague — as well as all treaty partners who had not yet succumbed to the U.S.’ efforts to define the term “U.S. citizen” to include a former citizen — with the passage of the 2008 HEART Act. That act changed the timing of the expatriation tax from 10 years after the event of expatriation, to one big chunk the day before it — a day when the “Dutch saving clause” does not yet protect them from U.S. taxation, even if they are already Dutch citizens on that day.
The Dutch saving clause isn’t a totally dead letter — for example, it would have operated to protect American emigrants to the Netherlands from the tax consequences of Chuck Schumer’s Ex-PATRIOT Act. Unfortunately, I don’t believe it can protect them from immigration law consequences predicated on tax status. In simpler terms: covered expatriates are still covered expatriates even if the tax treaty protects them from the expatriation tax, and if the immigration law banishes covered expatriates, the tax treaty could not help them.
Bad faith treaty negotiations
The “Dutch saving clause” is part of a treaty. The general purpose of the treaty is the “prevention of double taxation”, and the specific purpose of that clause, as the U.S. government itself admitted, is that “the special tax rules applicable in the case of tax-avoidance motivated changes in citizenship or residence should not be applicable in cases where the move is to go home”. Subsequent to the treaty, the U.S. — by passing the HEART ACT — took an action explicitly aimed at defeating the object and purpose of the treaty: modifying an existing tax provision whose effect of double taxation had been ameliorated by the treaty, and replacing it with a new tax provision designed to cause double taxation in a way that the treaty could not mitigate.
This should have been a giant lesson to all countries seeking to negotiate tax treaties or non-treaty executive agreements with the U.S.: Washington comes to the table with bad faith firmly planted in its mind, particularly on the topic of taxation of U.S. Persons abroad. Unfortunately, it looks like the people who should have been paying attention weren’t — even in the Netherlands, let alone other countries.
Thanks Eric for this. This was one of the things on my list to email you about but thankfully you have already found it. Patric Hale who is a lover of all things Dutch will surely enjoy this.
I will also point that Biden was speaking as the “Minority” ranking member NOT the chairperson of the committee. So this appears to show that once again Democrats are more anti expat than Republicans.
Very interesting. How ironic what is blatantly obvious is overlook: If a Dutch national returns to Holland, after giving up either US citizenship or “long-term residence” (Green card) THE US HAS NO RIGHT TO IMPOSE ANYTHING ON THAT PERSON!! It is called SOVEREIGNTY!
This is what kills me about the USA and IRS – the assumption that once you have been a party to US sovereignty, the US has you for the rest of your lives whether you or your native country likes it or not!! Christ, even the Soviet Union washed their hands of refuseniks once they left for Israel! Nazi Germany couldn’t force the Swiss to give up Jews or others who stashed their cash in their banks!
And the USA also has no right to limit this just to Dutch in Europe. Once they are no longer US citizens or residents, IT IS NONE OF THE US GOVERNMENT’S BUSINESS WHAT HAPPENS TO THEM!
My wife IS Dutch with a green card. I have prevented her from getting US citizenship in case we return to Holland – OR ANYWHERE ELSE IN THE WORLD!!! – either to care for her elderly parents or just to live somewhere else, BECAUSE of this Gestapo attitude by the US government. And if we decide to sell everything in the USA and turn it into cash, since it has ALL been bought net of taxes, what right does the USA have to tax it again?!
Consider this: The US economy loses a NET of $4 TRILLION through its international investment account – this is the amount of money the rest of the world takes out of the US economy less the amount US entities bring into the country from the rest of world. And the IRS is worried about minnows?? P-U-L-E-A-S-E! This is like the Trojans being obsessed at keeping the front door locked while they wheel the big horse in the back door!
What utter nonsense! It costs more to “police” and fret about than they will ever get back, and piss off 7 million overseas Americans in the meantime – and they will NEVER, NEVER, NEVER – EVER!!! – find the fictitious billions hidden offshore because most of it IS fictitious, and the rest has been taken care of entirely “legally”.
Please tell the IRS to search for witches in Salem, MA instead – they’ll be far more successful!
@Eric, Thanks again for this great find. Two comments:
1. The Netherlands doesn’t tax capital gains or any kind of investment income directly. Instead, it taxes the value of assets at 1.2% per year, which is a 30% tax rate on an assumed yield of 4% per year, regardless of the actual yield of the investment. I don’t like this system, but it can be attractive for sophisticated investors who can get a yield higher than 4%, as the effective tax rate on the investment income would become lower.
2. Although Aruba, Curaçao and other Dutch Caribbean islands may sound like names of tax havens, they are definitely not for individuals who reside there. In fact, Aruba has the second highest individual tax rate in the world (59%), higher than the Netherlands itself (52%) (in case you’re curious, the highest in the world is Chad at 60%). Only a few Caribbean islands have no income tax.
@Patric Hale – The only way forward for Europe is to set up IBS Europe and work a case on to the European Court of Justice and have them decide whether EU citizens resident in the EU should be subjected to the ‘data discrimination’ FATCA mandates.
The banks can set up front end systems that appear not to be discriminatory, but somewhere in some back office data discrimination must take place.
Unless an EU bank sends all of its customer’s data and the ‘local tax authority’ sends everyone’s to the IRS it’s discrimination somewhere in the process.
In the EU governments have to be put in the position politically to sell the notion everyone’s data must go to the IRS. That’s harder than labeling FATCA as a US citizen problem.
Correction: Chad does have a top nominal tax rate of 60%, but it also has a very large standard deduction of 40% of income, so the highest effective tax rate there is actually less than 36%. The highest tax rate in the world seems to be in some places in Sweden, at almost 60% when adding the local income tax. France also has a 75% tax rate on very high salaries, but it’s paid by the employer as a social contribution, and it will expire at the end of this year.
@Patric, I too have not been able to figure out why the USG, knowing full well how people overseas are taxed, has decided to persecute so-called US persons. Canadian residents, for example, not only pay higher taxes than their US counterparts, but up to 25% for the same consumer goods that are found South of the border. Politicians’ faux nationalistic hubris (which they deploy for political and economic gain) certainly plays a role in the idea that US-linked persons should be punished for even thinking of leaving the stable. But I have also come across some interesting information that maintains that there are two USs: one is the country and the other is the corporation. I don’t have any specific links but have heard others comment about this informally). The US, the corporation, apparently is able to actively pledge each citizen as collateral for the ability to borrow well into the future. (Any number of countries are so in debt that one wonders how they’re ever going to pay it down. Most, the US included, in fact have no intention to do so). If this is true, it would seem that the witch hunt that has been unleashed on all US-linked individuals the world over (and partners, children, etc.) is widening the ability of the US corporation to borrow. I know that the very idea of it sounds mind-boggling. But I too cannot account for the insanity of this persecution that doesn’t even pencil out. Yes, this could also be about turf. It keeps the bureaucrats working and the funding flowing to the various agencies (including the State Dept.) It also brings USD home because Americans can’t remain abroad (no chequing accounts and savings vehicles, interference with commerce, curtailed job opportunities, etc. etc.). But surely, they must know it’s moronic to assume that everyone can “return home.” For many people, the US isn’t their home (has never been or won’t be again). And yes, whoever devised this witch hunt is banking on taking 30% off-the-top of many financial transactions that go through US banks. So there are other explanations. But Patric, as you so cogently note, “It costs more to ‘police’ and fret about than they will ever get back.” I can only surmise then that the reason for all this policing, is that USPs are more valuable to the US (corporation) as collateral than as anything else. And this is why they have widened the net.
I am coming to the realization that the only way that we as expats will ever be safe is if the United States is eliminated as a viable economic nation for the rest of our existence on this planet. We are not safe as long as the United States exists.
Don, for all countries with laws against discrimination, I agree:
I never moved out of the US to avoid US tax. I moved out of the US to avoid the US!
This could just as easily read: “Because Canada imposes substantial tax on individuals who are resident there, individuals who are trying to avoid tax are unlikely to become residents of Canada.” Since the U.S. itself is already the world’s biggest tax haven, one could just as easily substitute Canada or the Netherlands with just about any country in the world, except the US. That’s American Exceptionalism for you in a nutshell.
I hope the audience did not suffer retina damage from the blinding obviousness of this statement.
Most likely, of course, they simply closed their eyes and plugged their ears while singing “la la la la la,” so they are probably quite safe.
Where do people go who are giving up their U.S. Citizenship for tax reasons? it must be a handful of countries at best. So why do the D.C. Pukes impose the strict requirements on all expats? I will answer my own question—BECAUSE THEY ARE POWER CRAZY AND THEY CAN USE THAT POWER TO DO AS THEY BLEEDING PLEASE, NO MATER WHETHER IT MAKES SENSE OR WHETHER IT FITS THE INTENDED PURPOSE OF CITIZENSHIP TAXATION. If a good person gets elected to congress it only takes a short time until they become D.C. Pukes, just like the rest who did the bad stuff to their fellow citizens in the first place.
POWER CORRUPTS ABSOLUTELY, ABSOLUTE POWER CORRUPTS ABSOLUTELY!!!!!!!!!
From yesterday’s FT interview with the Ambassador to the Court of St. James, Matthew Barzun. The Ambassador defended the right of US corporations to avoid tax within the law, defended the right of US diplomats in the UK not to pay the congestion charge, and said about Mayor Boris Johnson’s US tax liabilities, “We have our rules and we expect people to play by them. If you have the benefit of being an American citizen, you have to pay your fair share of taxes–that’s the general point.”
.gShadowraider
I have heard that the highest tax rate in the world is in Denmark- 60%. They also have the least amount to tax evasion. Why? Because they get something for their money. If you talk to a person on the street in Denmark, they will tell you how pleased they are because their taxes are going for good health care and great schools. This was from a study done by an “ethics of taxation” specialist at the University of Zurich.
“If you have the benefit of being an American citizen, you have to pay your fair share of taxes–that’s the general point.” Well, Mr. Barzun, then state those supposed benefits that you get for your “fair share” of taxes. State the benefits that expats are entitled to, other than warm fuzzies in our hearts (note the dripping sarcasm) every time we see an American flag (right now I get the feeling it’s heartburn) or the warm fuzzy that we get every time we have to drop a 1040 plus the multitude of extra paper in the mail every April 15th. Or how about the American Air Power that we’re supposed to see the benefits of but now can’t due to sequester. Tell us what benefits we’re actually entitled to before you start snarking off about our “fair share”. Because we’re getting tired of supporting your indigent, your poor, and those unwilling to put in their “fair share” into the “American dream”. You treat us like slave-labor and we bugger off (turn in our little blue books). If you can’t show us a clear benefit from being American, then it’s extortion, plain and simple.
@qm “If you have the benefit of being an American citizen, you have to pay your fair share of taxes–that’s the general point.”
I’ve had an Irish passport squirrelled away since 1990. Benefits? Right to live and work in Ireland or EU. Cost of citizenship while I live elsewhere? $0
Canadian citizenship (living in Canada). Benefit of citizenship/passport if I moved abroad? Right to return and work in this great nation that I have grown to love. Cost of maintaining citizenship if I were to move away? $0
Benefit of US citizenship while not living in the U.S.? Right to return and work. Cost (if one is compliant while away)? $1000s in accountant fees, taxes, opportunity cost of not being able to bank/save for retirement in your home country, psychological cost of being a second class citizen in your home country, loss of financial privacy.
So, same benefit for each of these three countries. U.S., however, is the only country that makes the cost of maintaining citizenship exorbitant for those that move away. The US is truly exceptional,
@Don
“The banks can set up front end systems that appear not to be discriminatory, but somewhere in some back office data discrimination must take place.”
I’ve recently come across banks who don’t even bother to appear to be non-discriminatory. They are blatantly discriminatory.
For example: Renault Bank direkt https://www.renault-bank-direkt.de
“Bei der Renault Bank direkt können keine Konten abgeschlossen werden von Personen mit nachweislicher oder zu vermutender Staatsbürgerschaft der Vereinigten Staaten von Amerika, Steuerpflicht in den Vereinigten Staaten von Amerika und/oder Wohnort in den Vereinigten Staaten von Amerika.”
Although they ask separately if the potential customer is a US citizen or is taxable in the USA, answering these in the negative doesn’t solve the problem, with the result that non “US persons” who were born in the USA are not allowed to open an account. The sole criterium for denying banking services is the country of birth. This is clearly discrimination, plain and simple.
Another example: NIBC direkt https://www.nibcdirect.de
NIBC direkt asks for citizenship, country of birth, whether one is a US citizen and whether one is taxable in the USA. Here’s their trick: if you select USA as country of birth, the radio-box selection for US citizenship is automatically set to yes. According to their weibsite, it’s not allowable to have USA as country of birth and not be a US citizen.
There are probably other examples of banks which do this which I’ve not seen. I find this very disturbing. I am not a “US person” and am being discriminated upon solely due to my country of birth.
@notamused: I, too, am notamused by what you report.
notamused: Thank you for being such a great “watchdog” for evidence of discrimination against us in the world’s financial institutions. Again, I would like to copy the links you are finding into a possible addendum to be sent to the UN in support of our Complaint. In this regard, my German is not good enough. Would you be able to provide an actual translation of the German quote that you give from Renault Bank direkt?
@MuzzledNoMore
Sure, no problem.
“Account opening procedures at the Renault Bank direct cannot be performed by persons with demonstrable or presumed U.S. cizitenship, U.S. tax liability and/or place of residence in the U.S.A.”
The key phrase here is “presumed U.S. citizenship” (“zu vermutender Staatsbürgerschaft der Vereinigten Staaten von Amerika”). Even if you explicitly state on their form that you do not have U.S. citizenship, they “presume” that, in fact, you do.
By the way: the preceding message appears immediately after selecting “USA” as country of birth.
I am beginning to suspect that the European banks are perhaps 100% sure that no matter what they do to comply that the 30% will be withheld by the US. Really, who gets to decide that they are compliant? Their recourse is to get rid of their US citizens or those they believe have US taint. The problem is gone!
Three weeks ago, my husband and I attended our bank. I won’t say which bank for reasons that will be obvious. The individual that we deal with knows that I was born in the US. I have not been outed by this individual to the bank. Before everyone gets upset, I do believe that I have relinquished. However, I suspect this could cause the individual some problems. My profile still says “Canadian”. However, I did get some valuable information. Only new accounts being opened, accounts with US indica are receiving letters asking them to complete the W9. The bank isn’t going to except “relinquished” without a certificate of loss of nationality. It sounds like they have been told by the US that they must NOT accept this answer without prove. The US has been “clarifying” the rules. I took this to mean adding more or changing rules to suit them?I can not open new accounts. Zilch! It would be prudent to make no changes to anything as it might put me on the radar. She thinks that they maybe required in the future to start sending letters to existing clients. Basically, they maybe required to ask every client. They have already spent the money budgeted for Facta, they will spend more. I told the individual that a couple of legal challenges have been launched. the individual hopes that they are successful. She is not amused by FATCA. Of course, the individual has to be careful about what they say, so our conversation was limited.
I have talked to some friends in Vancouver. It was much easier in 2010 to attend the embassy and to be granted a relinquishment. They say not so in 2014. They are aware of individuals being denied. I am beginning to think that they are only going accept renounciation.
Re: Enjoying the “benefits” of US citizenship cited as a reason you must “pay your fair share”. As BC Doc pointed out, the benefit of US citizenship is roughly similar to holding any number of other first world citizenships.
The problem is that this latest US government onslaught has now added such massive liability to holding US citizenship that it far outweighs any supposed benefit. As a retired person the “right to work” in the US is totally uninteresting to me. The 6 month visa-free entry normally granted any Canadian who drives up to the US border is all the “benefit” I’m looking for and I’m mentally prepared to forgo that if they get stupid enough.
The weird thing is that I get a whole lot more respect traveling on a Canadian passport that I ever did on my US book. I guess they feel free to abuse US citizens because they “own” them, whereas they don’t own Canadians.
Regarding the right of return:
1. It’s not a benefit, it’s a right. In fact, it’s inlcuded in the Universal Declaration of Human Rights.
2. It doesn’t cost anything to the government. Any cost occurs only if the person actually uses that right and returns, in which case the person becomes a resident and thus subject to full taxation. So there is no reason to tax the right of return itself.
3. In the case of the US, the right of return is not due to citizenship, but nationality. US nationals without citizenship can also live in the US without restriction, but they are only subject to worldwide taxation if they actually do so and become residents.
The other “benefit” of citizenship often mentioned is voting. Again, this is not a benefit, it’s a right, and the 24th amendment explicitly prohibits the dependence of this right on taxation.