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.
